Goodbye financiers, hello geeks: the start-up that’s shaking up the hedge fund industry

Beginning life as a tech start-up, Quantopian has come a long way in its two short years of existence. The original model was a ‘quant community’: a place where quantitative financial specialists could come together and build algorithms for trading, allowing anyone with a financial mind to trade like a hedge fund manager. Fast forward to today, and the open online network has raised $15m in a round of Series B financing from Bessemer Venture Partners, Khosla Ventures, Spark Capital and Wicklow Capital, and intends to use the resources to start its own hedge fund.

Quantopian differs from a traditional fund in many ways, but perhaps most significant is the approach it takes to recruitment. First of all, taking its recruitment process online means that Quantopian is instantly casting a wider net, and by allowing users to build and trade with their own algorithms, objective data is generated about each individual and the results can speak for themselves. A frequent obstacle for the industry as a whole is finding quantitative analysts who have a real, genuine passion for the field, and Quantopian’s online platform automatically screens for that – its users are choosing to spend their spare time building algorithms for trading stocks; they probably enjoy doing it.

Typically, hiring at hedge funds is characterised by a battle over the top students from the top universities, resulting in a fairly homogeneous applicant pool and often allowing hoards of talent to slip through the cracks. More often than not, successful candidates will have put in at least a few years at an investment bank, and references are considered imperative to the hiring process – more so at hedge funds than other financial firms.

“We don’t hire people from Wall Street. We hire people who have done good science”

Not so at Quantopian, where regardless of the university they attended or their previous experience, the highest performing quants within its user-base will be given the chance to invest capital through the fund, Quantopian Managers Programme. CEO and founder John Fawcett’s aim is to bypass the bias of Wall Street where employers are notoriously selective based on a candidate’s credentials, and to create a more transparent alternative to the secretive world of quantitative financial analysis.

Another firm crowd sourcing solutions is Upgrade Capital, which allows undergraduate and MBA students to manage virtual portfolios and share trade ideas among the community. Initiatives such as this benefit both parties: candidates are able to hone their practical skills and receive guidance, and firms gain access to a wealth of relevant data on potential hires. Businesses in other industries have been looking beyond applicants’ credentials and experimenting with recruitment processes for some time now, and financial firms are finally starting to catch on. Data-driven hiring in particular is building momentum as companies recognise the efficiency and precision it brings to the process, not to mention the time and money saved on labour.

Unsurprisingly, there’s considerable method behind what may have initially sounded like madness. “The holy grail of it all is finding a set of strategies that are not correlated to one another, or to the market,” said Fawcett. “I think diversity in the background of the people developing these strategies increases the probability that we’ll find uncorrelated ones. That’s the essence of the benefit to our customers and to investors in the fund: that we will have a much wider variety of quants, and therefore a much wider variety of strategies.”

Fawcett and his team could be onto something. Renaissance Technologies, one of the most successful hedge funds in the world with its signature fund, Medallion, earning a 2,478.6 percent return in its first ten years, takes a similar approach to hiring. Its founder, mathematician Jim Simons, insists that his secret to success is steering well clear of financial experts. Of its 200 staff, a third hold PhDs in physics, mathematics and statistics – but very few in finance. Simons told Institutional Investor in 2000: “I have one guy who has a Ph.D. in finance. We don’t hire people from Wall Street. We hire people who have done good science.”

If there ever was a time to deviate from traditional approaches to investing, there’s none like the present. Children of the digital age coming into wealth for the first time are more likely to be seeking out investment options that correlate with their digital lives, but fundamentally, funds that offer their customers transparency above all are universally appealing.