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For financial geeks, a do-it-yourself hedge fund site: Quantopia

For financial geeks, a do-it-yourself hedge fund site

Tim McLaughlin, Reuters | 13/07/01 4:37 PM ET
BOSTON — In the secretive world of hedge funds, algorithms are not shared because they provide the juice behind market-beating returns, and are a key reason why hedge funds charge their clients “two and twenty” – an annual fee equivalent to 2% of assets, plus 20% of gains.

Now startup company Quantopian offers a tantalizing proposition for software and financial geeks who want to trade like a hedge fund manager — but don’t want to pay those steep fees. The Boston-based firm is bringing together a community of people who build algorithms used for trading stocks.Nearly 30,000 algorithms have been created from the Quantopian community. A few hundred have been made available for free on the firm’s website (www.quantopian.com).

With help from Quantopian executives, I created a simple algorithm that generated $502,900 in paper trading profits from a $1.07 million bet on bank stocks. The 47.3% return over two years (April 29, 2011 to June 24, 2013) beat the benchmark S&P 500 index by 31.6 percentage points.

Quantopian’s top-shared algorithms include one that uses Google search terms to predict market movements along with a tech stock momentum play that enters the market when prices are moving up quickly and exits when they drop quickly

Perhaps Quantopian’s most useful feature is a back-testing function that allows investors to see how their algorithms would have worked in the past. You also can do a dry run by plugging your algorithm into live stock data. Since June 25th, on that basis, my algorithm returned 1.4% vs. 2.4% on the S&P 500 benchmark.

“It appeals to the engineer in me,” Quantopian Chief Executive and Founder John Fawcett said. “Before you jump into an investment, you can do a lot of preparation and see what will happen.”

Fawcett, who earned an engineering degree from Harvard University, has experience turning hedge fund-oriented software into a big payday. Tamale Software Inc, a company he helped start, was sold to Advent Software Inc in 2008 for $70 million.

My investment strategy was a pretty basic buy-and-hold, value play. I spread $1.07 million (not real money) across a basket of about 36 bank stocks with market capitalizations between $100 million and $5 billion. I identified my stocks by using a screening function on Fidelity Investments’ website.

It took Quantopian about 20 minutes to write my algorithm in Python, a common programming language used by brokerages. Python carried out the automated instructions for my trade.

After loading the stock names and tickers on a spreadsheet, Quantopian plugged the data into an algorithm being shared on its website. We tweaked the instructions to implement my buy and hold strategy.

I bet $35,000 each on names like People’s United Financial Inc, a mid-size regional bank in Bridgeport, Connecticut and New Jersey’s Hudson City Bancorp Inc.

The theory was that these stocks were undervalued because they were trading at less than their book value (assets minus liabilities). The great thing about Quantopian’s back-testing feature is that it provides an immediate assessment of your trading smarts.

Though I was able to trounce the S&P 500 benchmark, only someone with an iron gut would have been able to stick with my strategy for two-plus years. For example, at one point in August 2011, I was down about 25%.

Then, during the three months that ended Aug. 31, 2012, my strategy caught fire, with my basket of stocks rising 13.6% during that period.

The next step for Quantopian is to create a premium service that allows investors to plug their algorithms into the software interface of a brokerage for live trading. A pilot program is underway with Interactive Brokers.

Not to worry, though. The paper trading success has not gone to my head. I’m sticking with my day job.

 

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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