The hedge fund contains weighted long and short portfolios. Each portfolio contains 500 equities. They claim using long and short portfolios reduce risks. Numerai claims 80% of the funds returns come from stock selection. Numerai claims the fund is market neutral.

Numeraire (NMR) or Numerai is an effort to use machine learning to predict the stock market. Moreover, Numerai’s creators hope to use machine learning to build what they call the “world’s last hedge fund.”

Numerai runs a tournament in which data scientists submit machine learning scripts that control Numerai’s hedge fund. In exchange, for the scripts data scientists receive a stake to earn Numeraire (NMR) cryptocurrency.

Numerai claims to have paid data scientists’ $45.378 million worth of NMR as of 13 January 2023. They claim Numerai paid stakers a three month average return of 16.55% on 10 January 2023.

The Last Hedge Fund

To explain, data scientists build machine learning models using abstract financial data. The models’ goal is to predict stock market movements.

Each model predicts targets using live features that correspond to current stock market performance. Data scientists build the models in the Python and R Scripts computer languages.

Machine learning is teaching algorithms and artificial intelligence to perform tasks. Hence, Numerai is trying to teach algorithms how to predict the stock market and run a hedge fund. They use historical data to train the Meta Model to make predictions.

They will combine the machine learning models to create the Meta Model that will run the Numerai Hedge Fund. Numerai claimed they were using 5,154 staked models to create the Meta Model on 13 January 2023.

The Numerai Hedge Fund

They claim the Numerai Hedge Fund was offering a 10.53% annualized return, 7.42% annualized volatility, a Sharpe Ratio of 1.42, and a Sortino Ratio of 3.64 on 13 January 2023.

The Numerai Hedge Fund works by researching and combining an enormous amount of data from many services. They transform the data into regularized features and targets to create a pure dataset for Numerai’s data scientists.

Numerai makes the datasets available to thousands of data scientists. The data scientists build predictive models using that data. Notably, Numerai gives this data away free to data scientists so they can build models.

Data scientists stake the best models with the Numerare (NMR) cryptocurrency. They reward better models with more NMR and burn the stakes of poor models.

Numerai uses the latest predictions to create a Stake-Weighted Meta Model Signal. This signal uses the predictions from the tournaments to create signals for each stock.

Numerai claimed it had $16.592 million staked on 23 January 2023.

A Market Neutral Hedge Fund?

The hedge fund contains weighted long and short portfolios. Each portfolio contains 500 equities. They claim using long and short portfolios reduce risks. Numerai claims 80% of the funds returns come from stock selection. Numerai claims the fund is market neutral.

The Numerai Funds had $120 million in assets under management (AUM) in January 2023. However, they claim the Numerai Fund has the structure to manage $500 million in assets.

They use convex organization to turn the Meta Model into a portfolio by adding risk factors such as country, sector, and market risks. This creates a diversified asset for institutional investors. They claim Numerai’s returns uncorrelated with the market and traditional quant funds.

The Numerai Funds

There are two Numerai Funds. Those funds are Numerai One and Numerai Supreme.

Numerai One is a flagship market neutral fund. Numerai One seeks to deliver consistent returns in any market by creating a high diversified portfolio. They diversify the portfolio by market, country, sector, and factor.

The Numerai Supreme Fund is an unconstrained expression of the Meta Model. Numerai Supreme seeks to use higher volatility to deliver higher returns. They achieve higher volatility through a concentrated portfolio of the Meta Model’s highest conviction selections while trying to remain market neutral.

They claim the Numerai Funds never trade crypto. Instead, they are building an institutional grade market neutral hedge fund using crypto incentives. They claimed 5,154 staked AI models powered Numerai on 13 January 2023. Numerai claimed they had staked $16.592 million in the funds on 13 January 2023.

The Numerai Tournament

They hold a fresh round of the Numerai Tournament every Tuesday, Wednesday, Friday, and Saturday to get new models. Numerai releases new tournament data on those days.

Tournament participants can download Numerai’s data set and upload predictions through Python, Numerai’s Graph QL API (application programming interface), or an R api. They score submissions to a live target using criteria that include correlation, true contributions, feature neutral correlations, and more. Numerai places scores on the model profile page for all to see.

Participants can stake NMR cryptocurrency to earn payouts they base on correlations and true contributions. To get paid, data scientists need to stake before each the round’s submission deadline.

Staked NMR will remain staked until participants release it. They base payouts on stake value and scores. The maximum score is 0.25. There are some multiplier options they explain here.

The Numerai Team

Numerai’s founder, and Chief Executive Officer, is Richard Craib. Before founding Numerai, Crabi built a machine learning fund for Prudential.

Dan Spier is Numerai’s Chief Operation Officer (COO). Spier runs Numerai’s day-to-day functions. Before working at Numerai, Spier was head of Portfolio at Aperio Group (now Blackrock). Before Aperio Spier was a head trader at the Standard Pacific Capital hedge fund. He also worked in Morgan Stanley’s Private Wealth Management division.

Rich Allen is Numerai’s Managing Director. Allen leads fundraising, investor relations, and business development. Before Numerai, Allen was (COO) at Mission Value Partners. Allen began his career at Nomura Securities in Tokyo.

Rui Tang is Numerai’s Director of Portfolio Management. Tang is in charge of research and the portfolio. Before Numerai Tang was a portfolio manager at Acadian Asset Management and MacKay Shields. In those jobs, Tang responsibilities were alpha research, strategy development, and portfolio management. He received economics and statistics degrees from Harvard.

Hence, investment industry professionals run Numerai.

Can Numerai (NMR) make money?

Hedge funds are notoriously risky investments. For example, Bloomberg some stock hedge funds suffered losses of 40% in 2022.

The Tiger Global Management hedge fund suffered a $42 billion drop in assets in 2022, Yahoo! Finance alleges. Tiger Global Management saw its long-only fund plunge by 60%. In response, Tiger moved $58 billion into private portfolios to prevent losses.

I cannot see how Numerai can avoid such losses. One problem Numerai tries to avoid problems with Machine Learning is to eliminate human guesswork. Most hedge fund managers use educated guesswork to base decisions. Only time will tell if Numerai is building a better hedge fund with machine learning.

What Value Does Numeraire (NMR) Offer?

Mr. Market thinks the Numeraire (NMR) cryptocurrency offers some value. For example, Numeraire was CoinMarketCap’s 13th most trending cryptocurrency on 10 December 2023.

In contrast, Numeraire was CoinMarketCap’s 190th ranked cryptocurrency with a $16.80 Coin Price on 13 December 2023. CoinMarketCap gave Numeraire an $98.919 million Market Cap, a $184.731 million Fully Diluted Market Cap, a Total Locked Value of $3571 million, and a 24-Hour Market Volume of $18.731 million on 13 December 2023.

There was also an $18.437 million Centralized Exchange (CEX) Volume and a $220,705 Decentralized Exchange (DEX) Volume on 13 December 2023. They base those numbers on a 5.889 million NMR Circulating Supply, an 11 million NMR Maximum Supply, and a 10.931 million Total Supply.

Conversely, Numeraire was CoinGecko’s 235th th ranked cryptocurrency with a $16.76 Coin Price on 13 December 2023. CoinGecko gave Numeraire a $102.935 million Market Cap, a Fully Diluted Valuation of $184.497 million, a $3.897 mllion Total Locked Value, and a $22.497 million 24-Hour Trading Volume on 13 December 2023. They based those numbers on a 6.137 million NMR Circulating Supply, a 10.907 million Total Supply, and an 11 million NMR Maximum Supply.

I think Numeraire is a fascinating cryptocurrency and defi protocol that comes with enormous risk. I recommend speculators avoid NMR because there is no guarantee Numerai will work. Instead, I think the genuine value of Numerai is machine technology that financial institutions such as investment banks, hedge funds, or sovereign wealth funds could pay for.

Thus, my advice is to watch Numeraire and see how much money Numerai makes before buying this digital asset.


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