Numerai : Can it Really Become the World’s Last Hedge Fund?

Via Numerai

Famous quant funds such as D.E. Shaw, Citadel, and Two Sigma brought engineers into the financial world by utilizing complex mathematical models to guide investing decisions.

Numerai, like Citadel and the like classifies itself as a quant fund. However, what differentiates it from the rest is how it obtains its models and predictions.

The Hardest Data Science Tournament on the Planet

Calling all data scientists…

The Numerai Tournament is where data scientists build machine learning models on abstract financial data to try and predict the stock market. The models can be staked with the NMR cryptocurrency to earn rewards based on performance.

The staked models of Numerai are combined to form the Meta Model which controls the capital of the Numerai hedge fund across the global stock market.

Users start by downloading Numerai’s free dataset made of high quality financial data that has been cleaned, regularized and obfuscated.

Via Numerai

Next, they build their model and submit its predictions Numerai.

Via Numerai

Scoring and Staking

Users are scored on the correlation between their predictions and the targets where the highest correlation is best. Users are also scored on their meta model contribution.

Users can optionally stake NMR cryptocurrency on the scores of their prediction which is how they are able to earn cryptocurrency on the performance of their model. However, if their model does not preform the NMR that is locked up in their staking can be lost, or burned. User’s payouts are a function of their stake value and their scores. The higher your stake value and the higher your scores, the more you will earn.

The Meta Model

The secret sauce of Numerai is what it calls the meta model. The meta model is the stake weighted ensemble of all submissions and controls the capital of the Numerai hedge fund. The meta model allows Numerai to act as a sort of crowdsourced hedge fund where Numerai can leverage people who are talented at big data handling, artificial intelligence, and statistics yet don’t have the resources or desire to start a hedge fund. Numerai can be thought of as a mechanism that captures the intelligence of the internet crowd applies that intelligence toward the stock market. The combination of these models into the meta model is what can be ground breaking. For example one model may be great at predicting tech stocks yet woeful at predicting bank stocks but they could be combined to be superb at predicting both. Take that concept and multiply it by a few order of magnitudes and you’ll get what Numerai is trying to accomplish.

The World’s Last Hedge Fund

Richard Craib, Numerai’s founder claims that one day Numerai could be the last hedge fund. He believes that his company will through an exponential fashion gain access to the best models and the best talent. Currently the best and largest hedge funds have about three hundred data scientists who build and train hundreds of models to guide investment decisions. Numerai hopes to one day have hundreds of thousands of part-time and weekend data scientists submitting millions of models to Numerai. Craib also mentioned on Lex Fridman’s podcast that he believes too many PhD’s are working for hedge funds and not enough are working at companies and for people (his example was Elon Musk) that are fundamentally changing the world for the better.

The path for Numerai is quite clear, produce the best returns.

The path for Numeraire, the cryptocurrency is a bit more rocky.

Numeraire

Numeraire or NMR is the cryptocurrency which incentivizes the data science providing Numerai with predictions. It is this which allows Numerai to crowdsource their models. Expect Numeraire to follow a standard growth curve. Numerai is a pay to play game. To stake your models and earn you need Numeraire to do it. A good way to gage the growth of the Numeraire token is how many models are staked and how much is staked. Good thing this information is conveniently available right on their website.

In Conclusion

If you are a data scientist with an interest in quantitative finance with some money to stake behind your model this can be a great way to potentially earn passive income. For investors keep an eye on the metrics above. NMR is up 80% this month by the way. We’ll see where it goes from here.

If you found this interesting and want to learn more about the companies and people shaping the blockchain industry subscribe to my free newsletter, Hashrate.

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Trevor Grant

Trevor Grant

Musings on business, tech, and other things.

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