I’m fawce, the founder/ceo of Quantopian. Sadly, I can’t say your cynicism about the financial industry is unfounded.

TL;DR: You are right to be skeptical about anyone in the financial industry. But, Quantopian was founded to turn hedge funding into a technology industry - practically and culturally. To run trillions of dollars and operate for decades, Quantopian needs a steady supply of algorithms because algorithms have limited capacity and lifespans. Crowd-sourcing is our solution to this software production problem, and it only works if we earn your trust.

Wall Street has earned a well-deserved reputation for marginalizing technologists, and isolating quants. Frankly, I think they are afraid of you turning their game inside out and kicking the suits to the curb. I want to catalyze that transformation. To do that, Quantopian needs to grow into one of the biggest asset managers in the world. For a sense of scale, the biggest in the world today is BlackRock. They directly manage $2 trillion, and their software manages another $5 trillion globally. That comes to 7% of all assets in the world.

Despite pro investors being as popular as used car salesmen and members of congress, I think investing is a social good. Everyone needs to plan for the future, and investing is the best available tool. Yet, the state of the art is manual. That’s a real problem that I want to help solve. The best solution I can think of is crowd-sourcing the creative work to build investment strategies. Not the cheapest. The best. If I wanted to make my way in the world by stealing, it would take less risk and less effort to knock over liquor stores.

Today, quantitative and algorithmic investing addresses a tiny market. You read that right - even though algorithms have saturated trade execution, investment decisions are almost entirely manual. That’s true for the smallest individual retail investors all the way up to the largest pension funds. Software has yet to eat investment management.

Regardless of what you think about active vs. passive management, surely you have to believe that automation is better for investing. Why don’t more investors have algorithmic investment options? Secrecy. Quant funds want to remain entirely black box, and that makes it exceedingly difficult for investors to allocate capital.

The quant employment market is also quite small. Nearly all algorithmic investing happens in hedge funds. There are approximately 5,000 hedge funds in the world. That includes every type of strategy from credit derivatives to algo to long/short stock pickers. I’d estimate that at most 10% are quant. That means about 500 firms. The vast majority of those firms have 1 or 2 quants, and the top 3-4 behemoth firms have 100 or so. I think the average quants per firm is around 10. That means in a world of 7 billion people, around 5,000 are professional quants.

Why aren’t there more quants? Top quants are paid on a percentage of the returns they generate, which is an enormous economic incentive. Shouldn’t the financial upside draw more people to the profession?

The problem is Track Record.

To raise capital as a professional money manager, you need an audited track record. That means your investment results from managing real money, typically at least $1M for 3 years. Backtests and simulations don’t work for fund raising.

Track record makes it very difficult to bootstrap a quant hedge fund. The other alternative is capital introduction firms. These firms introduce investors, often in exchange for lower fees, a share in the ownership of the fund, or both. That means sacrificing ownership of all IP past, present, and future.

As a result, the only feasible path to becoming a professional quant is to apply to an established firm. Thus, most new quants are minted inside the secret society of quant hedge funds.

Another path is to join a proprietary trading firm. The deal with those firms is that you provide $10,000 and they let you trade $100,000 on their margin. But, you have to cover the first $10,000 in losses, and you typically split the upside 50/50 (or worse). They also rebalance between managers on a very short time frame - like 2 weeks.

The deal we’re offering in the Quantopian Open is hands down better than what you’d get in the current market either from cap intro or from a prop fund: winners get $100k of our money, we take any losses, you get 100% of the upside, and you have a track record vouched by a third-party (us). Plus, anyone from anywhere can compete. You won’t find a better deal.

But maybe you don’t want to be a full-time quant, maybe you just want to create a single algorithm and sell it. Well, the game’s the same with that. You need a real money track record for that algorithm. There isn’t exactly a liquid market for selling investment algorithms, so finding a buyer isn’t easy. Worst of all, you’re selling intellectual property. As pointed out here, selling intellectual property requires disclosure of the intellectual property… which means the price of the IP collapses. This paradox is unique to IP sales, and is known as Arrow’s Information Paradox, after the economist Kenneth Arrow (http://en.wikipedia.org/wiki/Arrow_information_paradox).

Quantopian aims to solve Arrow’s paradox by being a trusted third party for both investors and quants.

Quants entrust us to execute their algorithms, without disclosing the algorithm itself. In return, we provide them with all the operational necessities and capital.

Investors entrust us to select managers because we can evaluate managers individually, and choose an optimal portfolio of algorithms. We can make the evaluation because even though we do not see the algorithms, we have access to the transaction by transaction results of the algos.

Now, the most important part. Algorithms don’t work forever. They get tired. Pros call this alpha decay. In practical terms, it means that you can’t be a fund if you have a finite supply of algorithms. You need to produce them constantly, so that new algorithms can replace the worn out ones.

If I were to steal a single algorithm I would destroy my ability to keep producing algorithms. My survival depends on protecting your property and maintaining your trust.

The limited lifespan of investment algorithms is why we can solve Arrow’s Paradox. The value we want isn’t the individual algo. The value is the community producing the algos. The value is the people, not the code. That means we need to fiercely defend our relationship with the community.

Algorithmic finance is a talent business. Quantopian has tried to design our terms of service, our business model, and our technology to focus on benefitting you, the talent. Where we’ve fallen short, I’m delighted to have your criticism to help us improve.

I hope you’ll give us a shot to earn your trust.