You may have heard of Numerai — the unorthodox hedge fund that crowdsources predictive stock market models from data scientists around the world. It is now seeking more brain power and announced today that it is giving away $1 million worth of cryptocurrency to Kaggle users who sign up. The San Francisco-based hedge fund incentivizes its community members by giving them digital tokens they can stake during tournaments to express confidence in their predictions. The best trading algorithms are then selected based on how they perform on the live market, and their creators are rewarded with more tokens.
Looking at most Wall Street hedge funds’ models, it’s fair to say open, collaborative efforts aren’t at their core. Movies like Wall Street, which portrays a greedy Gordon Gekko, and The Wolf of Wall Street, which highlights the derailing decadence of power and money, paint a rather unflattering picture of egocentric traders and financiers. Numerai founder and CEO Richard Craib is looking to change that.
The 30-year-old South African wants to create a more open and decentralized ecosystem for hedge funds. Rather than restricting access to trading data, Craib encrypts it before sharing it with his global network of data scientists, which effectively prevents them stealing and replicating the trades on their own. They can, however, use the shared information to build predictive models for the hedge fund.
Numerai says more than 35,000 data scientists currently contribute to its platform. To further incentivize its community, it created its own cryptocurrency last year, called Numeraire (NMR). Craib hopes to grow his network of data scientists even further, which is why he is reaching out to Kaggle users. More than one million data scientists use Kaggle, which was acquired last March by Google. The platform hosts a series of data science competitions across a variety of topics, including one around real estate that’s sponsored by Zillow. Craib is offering 30 NMR (about $500) to any Kaggle user who joins his platform.
Last year, the hedge fund gave away 1 million NMR to about 19,000 of its own users, choosing to bypass the initial coin offering (ICO) mania.
“We decided to give away some of our tokens to Numerai users,” said Craib, in an exclusive interview with VentureBeat. “If you do an ICO where you’re selling your tokens to the general public, it’s going to destroy your project, as people aren’t going to use them. We could have taken a $100 million to $200 million ICO, but we need people to use these tokens.”
Numerai says it has distributed more than $15 million worth of Numeraire in total through its online tournaments (the hedge fund holds one tournament per week). Craib says data scientists can choose to either reinvest in Numerai by staking on more predictions or cash out and exchange Numeraire for their local currency — which could prove more useful to data scientists who are based abroad (about 30 percent live in Russia, according to Craib). Exchanges that accept Numeraire include Bittrex, ForkDelta, and YoBit.
The hedge fund, which was founded in late 2015, has a series of notable investors on its cap table, including Renaissance Technologies’ Howard Morgan, Union Square Ventures (USV), Coinbase cofounder Fred Ehrsam, and Polychain founder Olaf Carlson-Wee. To date, Numerai has raised a total of $7.5 million.
Although Numerai has built a remarkable business model, it’s not the only one tackling this space. Boston-based Quantopian remains a direct competitor, as it aims to create a crowdsourced hedge fund by letting freelance quantitative analysts develop, test, and use trading algorithms to buy and sell securities. The company has a strong backing from top-tier investors like Andreessen Horowitz and Bessemer Venture Partners but faced a bit of a hurdle recently when its chief investment officer left the hedge fund after it turned in disappointing results.
Overall, Quantopian is a more established hedge fund, as it was founded in 2011 and has raised just under $50 million in VC funding. Its troubles are therefore an indication of how complicated it is to build a fund by relying on a network of external programmers.
Numerai thinks its cryptocurrency will give it an edge over the market at large, however. The hedge fund says Numeraire further incentivizes its data scientists to build better predictive models. “The token is designed to prevent overfitting and makes it possible for Numerai to filter out the best models for its hedge fund,” Numerai said, in a statement.
Craib declined to comment on his fund’s performance at this time.