Quantopian is launching a crowd-sourced quant hedge fund that will identify high-performing algorithmic trading strategies on its platform and construct a portfolio combining the best strategies. To select strategies, Quantopian will evaluate strategies based on quantitative metrics like Sharpe ratio, volatility, maximum drawdown and consistency of returns. Strategies will be ranked and a composite "Q score" assigned. The portfolio will be constructed considering cross-strategy correlations and risk exposures. Performance will be rigorously monitored over time. Quantopian aims to attract the best quant talent by maintaining an open community platform and transparent, meritocratic process for inclusion in the fund.

1. Launching a Crowd-sourced
Hedge fund
Jess Stauth VP, Quant Strategy
Justin Lent Director, Fund Development
12/10/2014

2. What is Quantopian?
• We are the world’s first algorithmic investing
platform built in the cloud.
• We provide the data, tools and infrastructure
quants need to research, create, test and invest
with algorithms from their browser.
• We offer a community of quants, scientists, and
hackers collaborating to find better investment
ideas.
• We are launching a crowd-sourced quant hedge
fund.

3. Quantopian is Launching a Hedge Fund
• What is a hedge fund and why do people invest
in them?
• Alternative investment strategies
• Aspire for low-correlation to general market movements
• “Hedged” against large market shock events like the Tech Bubble
burst of 2000, and financial crisis of 2008 where many stocks went
down >50% over ~3 months.
• The very best funds succeed via small gains achieved
consistently over time.
• Rarely suffering large losses allows for consistent compounded
growth of the portfolio

4. To be a Great Hedge Fund…
…is NOT…
• Hitting homeruns and making 50% per year
• Large investors actually frown on funds with huge single year gains because
it signals excessive risk taking
...but rather is…
• 12% per year annual return
• 6% per year annual volatility
• Sharpe Ratio of 2.0 is a huge achievement in the hedge fund game
• Never suffering more than a 10% loss from peak-to-trough
• Do this for 10 years straight and you’re in the top 1% of all funds
CONSISTENCY = $$$$$$

5. Running a Hedge Fund is Hard
• Typically funds generate strategy ideas from very few
people
• Built upon the few areas of expertise of the portfolio
managers
• Fundamental investing
• High-frequency trading
• Long-only investing, with simple hedging
• Sector specific investing (e.g. Tech companies, etc.)
• Very difficult to minimize your fund’s risk across various
business cycles when your expertise is limited to a few
areas

6. More Heads Are Better Than One!
• Crowd-sourcing opens a fire hose of ideas.
• Diversity of ideas will result in a diversified hedge fund
portfolio
• Quantopian has unique access to tens of thousands of
quants which allows for idea generation at an
unprecedented scale.
• Our challenge is to:
• attract and identify consistent high-performers
• construct a portfolio
• re-evaluate and re-balance strategies frequently for ongoing
CONSISTENCY in portfolio returns.

7. 1. Strong investment rationale. Quantopian is looking for strategies that are built
upon a solid understanding of financial, macro-economic and behavioral drivers in
the market. Being able to articulate a strong investment rational about why a model
works provides the framework for a rigorous research process and the potential for
a long-running successful strategy.
1. Rigorous research process. The single biggest concern we hear from allocators
looking at quant managers is the fear of data-mining, over-fitting and sensitivity to
simplistic model assumptions. A hypothesis-driven research process that explicitly
controls for model over-fitting using techniques such as "in" vs. "out of sample"
testing as well as walk-forward testing, statistical analysis of uncertainty based on
the number of free parameters fit, as well as best practices facilitated by
Quantopian's infrastructure to keep research both survivorship bias and look ahead
bias free, has the best likelihood of successful real-money performance.
1. Thoughtful risk management. Long-lived successful professional quant
managers will tell you that ‘it’s all about surviving the drawdowns’. Understanding
and controlling what risk factors your strategy is exposed to (e.g. market risk,
liquidity risk, sector risk, etc.) and how to tell when those exposures breach
historical norms is equally as important as identifying un-correlated alpha
strategies.
Identify High-Performers:
3 Core Principles of Good Quant Strategies

8. Identify High Performers:
Key Performance Metrics
• Sharpe Ratio
• Penalizes you for taking excessive risk in achieving your returns
• Annual Volatility
• Expected 1 standard deviation fluctuation in your portfolio over 1
year period
• Max Drawdown
• “peak-to-trough” worst loss suffered historically
• Consistency of Returns
• Is the volatility of your portfolio consistent over time?

9. Identify High Performers: It’s Not Just About the Returns.
2012 2013 2014
$100
$150
• Our job is to build a fund by filtering out the ORANGE algos, and investing in a lot of RED algos, as well as
hopefully some closer to the BLUE idealized line.
• After investing in a RED algo, monitor it in the event it turns ORANGE

10. Identify High-Performers:
Quantitative Evaluation Process
• Filter strategies based on quantitative metrics to select
• Consistent quants, with
• Low volatility in their returns,
• Across various market cycles (bull/bear/recession)
• Rank managers against each of the criteria, and generate a
composite ‘Q score’ for each trader.
• Construct a portfolio of strategies based on independent Q-
score AND on consideration of cross-strategy correlations and
risk exposures.
• Rigorously re-evaluate strategy performance over time to
monitor deviation from expected returns/risk
• Red flag is raised when they become inconsistent

11. 5 Example Highly Ranked Current Live
Traders on Quantopian

12. Returns to a Simple Equal-weight Portfolio of
the Same 5 Managers (where data available)
12

13. How will Quantopian attract the best
quant talent to be managers in our fund?
Align our business with the quant as our north-star
customer. This means:
• Community based platform. Build the best platform for quant
mentorship, research, algo development and trading and keep it
free.
• Independence and ownership. Quants retain ownership of their
own intellectual property and code base.
• Transparent, meritocratic capital allocation. As we formalize
the process for being selected in Quantopian’s fund we’ll continue
our open dialogue with the community with the same level of
transparency you now expect.

14. Appendix

18. Thank You.
Questions?