Hailed as the rocket scientists of Wall Street, quantitative analysts have come to replace gut instinct as the engines of investment decisions. Virtually anyone can learn the skills necessary to become a "quant" and guide investment, but quants are largely consolidated at investment firms due to the difficulty of accessing viable capital for investment.
Quantopian is radicalizing the future of finance and trading by removing that traditional barrier to entry. Founder and CEO John " Fawce" Fawcett founded this crowd-sourced quantitative investment platform with the goal of allowing anyone with coding skills and an appetite for finance to start writing investment algorithms and making money accordingly.
Fawcett saw the substantial inefficiencies in finance and wanted to create a community of quants that could circumvent these problems. While it took five years of hard work, Quantopian is now well-established in the finance world with a clear trajectory for growth.
Quantopian has designed a loyalty agreement in which the quants are paid independently based on their performance, which is defined through the quality of their algorithms and the performance of funds invested in those algorithms.
The research, development, and execution environment at Quantopian is what makes its platform so unique. Quants, also known as authors, are provided with everything they need to create their algorithm.
Quantopian operates in an open-ended Python environment, offering free access to stock price history, consolidated databases, corporate fundamental data sets, and several APIs, among other resources, all for the purpose of empowering the quants.
The startup also provides integrated development and execution environments that allow for the quants to test their algorithms for free, then move it into a real-world setting to start informing trades.
After the algorithm has been created and deployed, Quantopian evaluates each individual's algorithm and, if the author agrees to license his or her algorithm to Quantopian, allocates funds accordingly to the best based on the algorithm's capabilities and features. Quantopian manages these algorithms for the benefit of investors in its vehicles, essentially acting as the intermediary between the quant and investor.
To incentivize their continued involvement on the platform and to make high-quality algorithms, quants are eligible to receive 10% of the net profits generated by their algorithm if it is selected for allocation. Counter to the rest of the financial world, Quantopian doesn't follow a traditional model, but rather structures its fees and loyalties to motivate the best quant authors.
Once the algorithms are accepted for investment, the quants are asked to standardize their algorithm so that they no longer need to tend to it once it's in use. Quantopian has an operations team that handles and manages all algorithm issues after their completion.
The quants need do nothing more - they can merely wait for their royalty to be awarded. Through this procedure, many quants can still focus on their full-time job while enjoying the fruits of their labor from Quantopian.
A Great Deal
Quantopian has more than 130,000 in its network and continues to grow its base, both for investors and for quants. While the startup is unable to deploy investment capital into every quant's algorithm and deliver compensation, the core draw for the community is not solely based on making money. The main reason people join the Quantopian network is because they want to learn about quantitative finance.
Naturally, a large amount of people lack experience in finance, but understand software plenty well. Quantopian allows for these engineers to build a product and gain exposure to a field previously unknown to them by offering a place to test and experiment their ideas.
According to Fawce, word of mouth has been the leading source for recruiting new quants. The community has doubled year-over-year, including finance professionals, scientists, developers, and students from all over the world.
Quantopian has soared so quickly because Fawce and his team have identified the value the company can bring to the quants writing algorithms and investors looking for an alternative means of investment. The biggest wellspring of bloat in finance is the allocation and reallocation of capital, which Quantopian strives to balance by reducing the search and transaction costs associated with finding the right investment opportunity.
Fawce envisions a time when quants can subsist from the funds delivered by their algorithms. By the end of the calendar year, Quantopian hopes to allocate up to $50 million per algorithm, which is enough for a reasonably sustainable income, especially considering that it involves very low labor in the long run.
Investing for the Future
What makes Quantopian's business model so fascinating is that it functions as a one-sided platform, a market with crowdsourced production and curated consumption. For now, Fawce is satisfied with that approach because he's focused on making the investments work out for everyone.
Will Quantopian take itself out of the matchmaking environment by becoming a double-sided platform allowing quants to market to investors? It's possible, but not a priority at the moment.
Quantopian's viewpoint on this matter is that the approach of people finding one another is not really feasible under the current regime. The quants are often software engineers and don't have many investment connections or sophisticated marketing experience.
Instead, Quantopian investment managers act as fiduciaries for the investors in its funds, handling the selection of algorithms, allocation, distribution, and execution.
Quantopian demonstrates a strong potential to alter the future of hedge fund management by carving out an original role in an increasingly tech-driven financial industry. The industry is undergoing radical changes as it transitions from a traditional discretionary model toward highly automated, systematic, quantitative investments.
This platform might create a new path for hedge funds in which outside managers participate in the Quantopian community by connecting these algorithms to the investments they can best serve.
There is a bright path ahead for Quantopian as its business model is completely unique, not found anywhere else. There are quantitative hedge funds in place, but none of them have a comparable platform community powering the decision-making. Quantopian plans to scale over the rest of the year.
Quantopian's approach isn't a platform from end to end, but Fawce and his cohort have a clear vision for where the one-sided platform should go. It'll be exciting to see what's next for the startup.