Quantopian’s Amazon-esque Approach To Asset Management

About a year ago, I spoke to John Fawcett, the CEO of Quantopian, about his efforts to build an ecosystem of third party quants. These quants would use Quantopian’s platform to execute their trading algorithms and could earn real money if Quantopian allocated funds into their strategies. A year ago, the business was getting ready to put millions of dollars to work with different quants.

The opportunity is exciting. With over a trillion dollars allocated into quant hedge funds, Quantopian and other (smaller) startups are trying to disrupt an age-old industry that is famous for its exorbitant fee structure of 2% on AUM and 20% of all profits generated by the fund. In Quantopian’s case, quants can earn 10% of the profit generated by their strategies. However, an individual quant has relatively little overhead as compared to a hedge fund which needs to invest in management to raise capital from LP’s, its own technology infrastructure, compliance, etc.

What many people forget is that Amazon struck deals with Best Buy and other retailers in the late 90’s to power their e-commerce and fulfillment efforts. These deals helped Amazon grow, learn how to handle logistics for third parties and laid the foundation for the dominant Amazon that we know today. I see traces of that trajectory in Quantopian’s recent announcements around its FactSet partnership and a new enterprise product offering for professional quant hedge funds.

I sat down with John and FactSet’s Rich Newman recently to discuss their partnership and what it means for Quantopian. The interview is below.

Q: Thanks for joining me John and Rich. John, I have been following Quantopian closely since we last spoke, and what you have been up to and have more specific questions for that. But for readers, could you tell us what’s changed at Quantopian over the last year?

John:

The major news this year is that we’ve recently launched an enterprise product. In the beginning, we focused on being a platform that was democratizing quantitative tools and data access in finance. So we took all these techniques that were in the Ivory tower of complicated asset managers and hedge funds. We gave access to the public to create this community and be able to crowdsource investment strategies and change the industry that way. That’s still happening within our community platform.

However, we realized that the tools that we built to help democratize access are actually superior to the tools available to many professionals in the industry. We have this technology that is way past the average asset manager’s quantitative toolset. That really caught the attention of major players in the industry, including FactSet. To support an enterprise product, we needed a lot more data than we currently have, so when Factset came calling, it was just a perfect match for all those things.

Rich:

It was. From the FactSet side, we saw that the rise in new datasets and shortage of data scientists is one of the biggest inefficiencies in the investment community today – an inefficiency that is ripe for disruption. FactSet saw this as an opportunity to broaden our offerings and accelerate deployment of our content and research tools to the market, so working with Quantopian makes a lot of sense for us.

Q:  John, so in the enterprise model, I could use your tools and I pay Quantopian for access to that, but you don’t get to evaluate my performance or data, right?

John:

That’s exactly right.

Q:

What made you decide to focus on this enterprise software model as opposed to, for example, giving the product away for less money to attract more users? Or giving the tool away for free, which is the classic platform approach?

John:

It’s incredibly important to have the professionals in the community. But most professional users can’t access Quantopian from their workplace because it’s blocked due to IP concerns. if we want top-10 asset managers to be using our technology, we can’t have any access to their IP or strategy or anything similar. That would violate all kinds of responsibility they have to their own LPs. To access that community, we needed to have an enterprise offering.

This partnership with FactSet and our enterprise offering expands the universe that can use the platform.

Rich: Our partnership will make the data and software used by highly specialized quants more accessible to investment professionals in an integrated and seamless way. They need integrated data as well as quantitative tools that allow them to use that data effectively, and this is exactly what Quantopian Enterprise will deliver.

Q: In the future, do you think there’s a way for these two audiences, professionals and community, to fit into the same platform?

John:

Professionals have different needs – they are more narrowly focused on the data and platform we provide. We want to have no friction between these two audiences. That means one platform and one community. We just want to have security and privacy control for the enterprise audience.. In the future, if professional users also want us to provide capital in some form, we can help with that too. I think the key thing about the Quantopian platform is that with the push of a button, we can move investment algorithms from simulation to production trading. I think that will appeal to enterprise users as well.

Q: So you can get your early traction with these larger firms, and then, when they want more data, you can offer that too. You can say, here’s a way for you to get more data but it’s a little bit different from how you’re operating today?

John:

That’s right. Another key thing is that the revenue opportunity via Quantopian for data providers is much larger when they also have access to enterprise buyers. There are these cross-product benefits you get by having enterprise clients. It makes it a lot more attractive for data providers to integrate because they have access to a built-in set of the market.

Also, our ability to work with these larger firms makes it a lot more attractive for students to learn this technology and master it before they enter the workplace, because they will become more employable. If you’re an enterprise, it’s really hard to recruit talented, interested, fascinated people who want to be in finance. Using Quantopian, you are going to be connected to a giant global community that’s passionate about the field and solving the problems.

Q: How would you compare the potential of your community platform to your enterprise product?

John:

The reason I love the asset management business is the scale, there is no physical limit to the amount of revenue you can generate in asset management. The thing that’s most beneficial is that the revenue lines are independent but ultimately very complimentary. So the asset management business will be performance based, but very scalable, so it’s a high-variant revenue line. The software business will probably exhibit different growth characteristics, but it’s high visibility and very reliable. So having both of those is very powerful.

Originally appeared in Inc Magazine