Source:Youtube
While going through the concept of Numerai, I had the first doubt: What exactly is a Hedge Fund?
What is the basic concept of Numerai?
After going through the blogs of @bluesky2100 and @fogzen , I decided to further elaborate few more points.
So, What basically a Hedge Fund?
[Source: Khan Academy]
Investopedia Definition: Hedge funds are alternative investments using pooled funds that employ numerous different strategies to earn the active return, or alpha, for their investors.
Read more: Hedge Fund
So, from my understanding, a hedge fund is basically funded from very rich, sophisticated and Knowledgeable investors who invest a large minimum a few of money without any regulation of SEC(Securities and Exchange Commission).
It is different from the mutual fund in a way that it does not follow regularization, no advertisement and the financial data is accessible to only a few secretly closed groups. It is a very High Risk and High an a
Return investment scheme available to only a few and sophisticated investors.
So how is Numerai a Hedge Fund management company?
Usually, unlike the mutual fund, the incentives are lucrative for a Fund manager. They receive 2% of assists and 20 % of profits.
However, if the hedge fund manager loses money, he still gets 2% of assists but the investors lose money.There are many mechanisms put into place to prevent them but it is still risky.
So the reliability and reputation of the Hedge Fund Manager matters a lot and hence, here comes the role of "Numeria".
Numeria with the help of its Data scientist community is building more accurate and predictive models of the market which over a period of time will build trust and reputation.
Visit This blog for seeing how they are planning to build trust and reputation:Numerai
What is the root technology it is using?
So, there are two basic challenges:
1. Getting the financial datasheets and stock data which is very confidential in the financial world
2. Sharing this data to the data scientist for applying their algorithm on the test data sheet. However, this data cannot be shared as the success of the investments lies in the secrecy of this data.
So, why not hire your hire a data scientist, include him in a closed circle, pay him the lump sum and use the model?
It's because the process of prediction is an iterative process which requires different perspectives and views raising to new and better modeling build on one of the other. This sophisticated task cannot be single handily be done by hired data scientists, it has to be outsourced to communities.
However, the dataset for stock markets cannot be shared openly in its "RAW "form. Therefore, the need of encryption is required. However, encrypted files are useless for the data scientists as the original pattern/structure cannot be traced back.
This is where " NUMERAL" like a " SAMURAI " slices the problem with its sword of " homomorphic Encryptions ".
What it basically does is convert the raw sheet to some type of encrypted data without affecting its pattern/structure.
Therefore, neither the data scientist will not be able to know what exact raw data they are modeling nor the Numeria.This encourages the sharing of the raw financial data.Exactly, in the same way, the anonymous data scientist gives the prediction of the model outputs to "NUMERAI" without having to disclose their algorithm.
Over a Period of time when the predictions become more and more accurate, more investors would be interested in hedge funding the company wherein the company would then charge its assets percentage and profit percentage.
1 million cryptocurrencies?
Initially, the data scientist was paid in BITCOINS for every successful prediction.
Why BITCOINS: For the purpose of maintaining the anonymity of the participating Data Scientists.
However, this would lead to a more competitive nature of participation among the participants. This would discourage the interaction and collaborative efforts of the company for better and accurate modeling. In order to encourage and motivate peer-to-peer collaboration, "Numerai" created its own cryptocurrency - "NUMERIARE" (NMR) made available to only the participating data scientist to instill a sense collaborative efforts which would then increase the value of the company. This would increase the value of the currency and thus incentivize the collaborative efforts.
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