Investors are increasingly pulling their money out of managed funds and taking investing in to their own hands. This article highlights one algorithmic trader’s journey in to becoming a self-directed algorithmic investor.
By day Dan Houghton helps run Chilango, a Mexican restaurant chain in London, that he co-founded. By night, he is an algorithmic stock trader, coding complex, automated investment strategies once his children are in bed.
In 2013 Mr Houghton sold an online texting company that he founded while studying mathematics at Cambridge university. The proceeds were ploughed into his restaurant and a new family home, but rather than deposit the remainder in a staid mutual fund he decided to use his maths skills to try to beat the market.
After reading books on finance and scouring the internet for articles on “quantitative” investing, he stumbled over a company tailor-made for people like him: Quantopian, an online trading platform and “crowdsourced” hedge fund. The company is designed for a new breed of do-it-yourself algorithmic traders who develop automated investment strategies. Each month, the best “algos” win trading money from Quantopian and a select few are included in its embryonic hedge fund.
“My wife thought I was crazy,” Mr Houghton says. He had to learn Python — a programming language popular among quantitative analysts, or “quants” — from scratch, and after experimenting with the platform for a few months is trying to get one of his algorithms included in Quantopian’s hedge fund.
So far he has made $7,971 after trading commissions, but making money is not the main driver. “It’s primarily intellectual curiosity but I’m fairly competitive and the chance of getting included [in Quantopian’s fund] makes me stay up for the extra hour working on a strategy,” he says.
“Burrito-Dan”, as he is known at Quantopian, is one of a swelling number of mathematicians, programmers, data engineers and physicists who are taking advantage of cheap, powerful computers and the availability of financial data to code their own trading strategies. These DIY algo traders are an updated version of the army of day-traders that emerged during the 1990s stock market boom.
Some analysts believe this new wave of amateur algo traders can be harnessed using crowdsourcing techniques to disrupt one of Wall Street’s elite professions — the hedge fund manager.
“If our model is successful there will be no need for hedge funds any more,” says Martin Froehler, an Austrian mathematician who created Quantiacs, one of several online platforms for DIY algo traders. “A smart guy with a laptop will be able to start his own hedge fund. It will be very challenging to the big incumbents. A very simple idea can prove very powerful.”
Most day traders are ultimately unsuccessful — many were wiped out when the dotcom bubble burst — and are often derided by professional money managers as “dumb money”. The new DIY algo traders may be smarter and more computer-savvy than the average day trader but many experts warn they will find it just as hard to consistently beat the market. They scoff at the idea that their industry will face any threat from nerds coding in their basement.
But Quantiacs and its rivals are emerging as the classic hedge fund model is showingsigns of strain. Investors have been pulling billions of dollars from hedge funds after a long period of underwhelming performance. And the fact that some technologists scent an opening underscores the sense of a looming industry shift, as more scientific, computer-driven approaches to investing gain favour.
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