Hedge Funds – the latest crowdsourcing industry

Good at math(s)? Then help others earn lots of money through a crowd sourced hedge fund algorithm
Good at math(s)? Then help others earn lots of money through a crowd sourced hedge fund algorithm

Good at maths? (For my American relatives, colleagues and readers, “Are you good at math?”) If you are, then the latest crowdsourcing industry might be lucrative for you… hedge funds.

Websites such as Quantopian, Numerai and Quantiacs allow anyone to create algorithms to make hedge funds more successful. When I say anyone, you’d need to be pretty good at maths and the Python programming language before even starting.

The hedge fund industry is ripe for this type of disruption because of the relatively high management fees that customers incur. There’s typically a 2% management fee plus 20% of profits. These new crowd sourced websites offer minimal charges, presumably because of the very low salary costs compared to the hedge funds.

The different platforms have different incentives for users. It probably takes a certain type of person to write an algorithm that will benefit ultra-high net worth individuals and pension companies, and earn relatively small awards (successful contributors typically earn under $10,000 per year). I would have thought budding mathematicians who find this fun would want to work for a hedge fund and earn a significantly larger salary.

However, there have been over 80,000 registrations on Quantopian so far this year. And before 2016 there were just under 100,000 since 2012.

I’d expect that some of these platforms will become a recruitment tool for hiring quants – a bit like “a LinkedIn for quants, which comes with recruitment test results”.

Most of these platforms exist in a sandbox environment. The platforms run the home-grown algorithms on a set of data rather than unleashing the algorithms with real money. And similarly to creating a successful virtual stock market portfolio, or a winning series of virtual bets on gaming sites, the home-grown algorithms could behave very differently when they are hedging tens of millions of real dollars.

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