For a couple years now, Boston startup Quantopian has been promoting the idea that with the right software and some mathematical know-how, people who don’t work in the secretive world of quantitative finance can, in fact, become quants.
Now Quantopian is actually making that happen, taking people who have jobs having little or nothing to do with stock trading and letting them become a hedge fund manager, of sorts. The startup provides software tools for its community members to generate and test new stock trading systems, using historical market data; the prerequisites for taking part are “a bit of coding skill and a mind for finance,” the company says.
Quantopian believes that its approach—to essentially crowdsource a hedge fund—is the first attempt of its kind.
Or at least it will be, when the company completes the process of raising its first hedge fund from institutional investors. To lay the groundwork for the hedge fund, Quantopian is first running a series of monthly contests to see which of its users can produce the best algorithm. The winner of each contest—there have been three so far—then gets to see their algorithm put to work in real-world stock trades, for six months. Quantopian is putting up $100,000 for each winner, and any profits that the algorithm produces after six months will belong to the winner.
“None of these three winners are traders or quants as their day job.”
“None of these three winners are traders or quants as their day job,” said Andrew Campbell, a business analyst at Quantopian who is heading up the contest, which has been dubbed the Quantopian Open. “All three of them are involved in quantitatively rigorous careers—they use math and science every day.”
The first winner, for February, was Grant Kiehne, a defense company engineer from Connecticut. He’s been followed by two software developers—March winner Simon Thornington of Vancouver and April winner Jeff Koch of California.
Thornington, in a news release put out by Quantopian, said he’s had a long-running interest in stock trading systems and has read a good deal on various approaches. The system he employed for the Quantopian contest, he said, “was an idea I’d had for a long time.”
Testing the approach
Through the contest, Quantopian is aiming to create a track record that will give investors the confidence to back its crowdsourced hedge fund idea. The company also is working to nail down how its fee structure will work—and particularly, what sort of cut of the profits will go to the individuals who contribute algorithms. Campbell said Quantopian hopes to have more details to share on the plans for the new hedge fund within a few months.
Like with most new hedge funds, Quantopian plans to start with a relatively small pool of funding and then grow the size of the fund as time goes on, he said.
Quantopian, which employs 30 and is based in the Financial District on Franklin Street, announced its plans to develop a new type of hedge fund in October, in tandem with its $15 million Series B round. The company has raised $23.8 million since its founding in 2012, from investors including Spark Capital, Khosla Ventures and Bessemer Venture Partners.
Quantopian certainly faces major challenges ahead—including proving that crowdsourcing algorithms can generate sizable returns and attracting a large community talented users. But if the company fulfills its vision of reinventing the hedge fund, that would no doubt give a big boost to Boston’s fintech sector—and its financial services industry overall.