As a computational biologist, I'm not so confident that Simons can make a huge impact in my field. At best, I would expect his institute to find a niche and impact on the scale of a typical lab, but this pales in comparison to, say, the Broad institute which is a better peer with the Flatiron, what with lavish funding and a distinctive research philosophy than following NSF/NIH grants.
He prefers problems that aren't hopelessly complicated, but I suspect this is exactly where computational biology falls into if you don't have the ability to perform causal experiments. And wet lab experiments aren't being funded by the Flatiron.
Maybe he can help fix the process rather than provide some spectacular singular breakthrough. A common complaint I heard (from the outside, I do not work in biology) is that a large portion of scientists' productive time at many university labs is spent on finding funding.
For example, if he establishes some initial funding streams and keeps it open long enough to see commercial benefits (10+ years) and uses those to transition this setup to self sufficiency (as opposed to a few unicorns spinning off), he could have a major long term impact.
When a previous article on RenTec/Jim Simons was posted, I saw a comment thread about how Renaissance couldn't possibly be making such consistent money from Machine learning and quantitative analysis, but instead the reason they are so secretive and consistent is that they have insider info they have to hide. Do others agree with that theory? It makes more sense to me, due to a conviction on efficient market hypothesis.
Their success is based on an unusual type of information asymmetry -- they have better mathematics than everyone else. They invest heavily in development of novel mathematics that can be applied to find new types of patterns analytically that are not discoverable with existing mathematical methods and algorithms. This allows them to mine patterns that no one else has discovered yet because the barrier to discovery is anomalously high since it requires esoteric invention. Most firms just rearrange the existing methods in new ways or with new data.
It is an efficient market but they are unusually profitable because they have little competition for the patterns they exploit.
As I’ve pointed out before, there are a lot of quant firms out there. I doubt Rentech have the massive edge that people seem to think they do. I think it’s much more likely that many firms had a small edge, and we notice the luckiest among them.
That said, I don’t doubt that they’ve had an edge. Maybe they were doing trend following in the 90’s, or HFT in the 2000s. Most firms’ strategies eventually leak via lateral hires, but rentech is a small shop and no-one has managed to nab one of their employees. So there’s no way to know for sure.
They do have massive edge, but I doubt it comes from novel mathematics. My guess is it comes from very well designed systems at every stage of the process, honed over decades.
You don't notice the other firms because they've likely not been in existence as long and do not run as much money as Rentech does. Rentech has public pension money in it which by itself will attract more scrutiny. Chances are if you aren't running more than a few hundred million it could be all internal capital or a HNW individual or two.
I think you should really think about the old joke: "Two economists were walking down the street. One looked down and said, 'look, there's a $20 bill on the sidewalk!' The other, without even looking down said, 'No way, if there were, someone else would have already picked it up'"
RenTec has been successful for decades, but the are regularly shifting strategies as the $20 bills are "picked up" by the market.
A sibling post asked you which variant of EMH you are "convicted" about. You should know that if it is strong or semi-strong, you have a conviction about the financial equivalent of tequila being good for teething babies or using leeches to bleed out various diseases. And the weak form is so useless I am not sure it really qualifies as a hypothesis.
You will have to search out the old fogies in economics depts to find the true EMH adherents. Even Fama professes it, but if you listen to the substance of his speech and read his papers, doesn't really seem to believe it. (maybe he thinks he'd have to return his Nobel prize if he denounced it?)
So TL;DR the market isn’t as efficient as most would believe it is.
That makes sense since the market is ran by humans; but what if it was solely managed by a computer.
While reviewing for a final, I learned that computers are extremely fast at detecting negative cycles. An application of this? Arbitrage.
If you graph the foreign exchange market with each vertex being a currency and a directed edge being an exchange rate, applying the logarithm operator to each edge and then running a DFS transversal, it would be possible to find paths of arbitration.
What RenTec do is more akin to gold mining than finding $20 bills on the sidewalk. They expend substantial computational and intellectual resources in the pursuit of alpha. They're finding alpha in places that are non-obvious to the rest of the hedge fund industry, let alone the average investor. They're not eating a free lunch.
Quantitative trading is certainly an information game, but that does not mean that the information being used is insider information (which has a specific definition - privileged access to material, nonpublic information).
There is a large amount of public information about a company, and the source of edge in quantitative trading is
- Identifying what kind of information is likely to move prices
- Acquiring and processing the information as quickly and efficiently as possible
- Making good forecasts
- Combining the forecasts with a model for risk, financing and trading costs to form a portfolio with a high likelihood of positive returns
These are not trivial tasks. The third and fourth bullets are where traditional quant finance (what you read about in textbooks) has focused, and the difficulty of forecasting and portfolio construction should not be underestimated, but increasingly what differentiates a good from a merely average quant investment process is a relentless focus on uncovering and processing new information.
In the past it was enough to use highly structured, numerical data (market prices and volumes, accounting data, analyst forecasts) but the profit available from these sources has been diminishing, and the most important sources of information for forecasting stock prices are unstructured and non-numerical (e.g. text, speech, images).
Renaissance is a leader in its field, and has been for decades. It is perfectly possible for them to have produced the returns that they have, without using insider information.
very few people on hn actually know about quantitative finance - so they co-opt folk wisdom in order to be dismissive. all quant firms are secretive - it's not like de shaw or jane street or two sigma publish white papers. rentech has been successful for decades. if they were doing it using inside info they would've been caught a long time ago.
I disagree with respect to Renaissance in particular, but I think others will probably comment on that point adequately. Instead, I’ll address this:
> It makes more sense to me, due to a conviction on efficient market hypothesis.
I encourage you to walk back from that position, or at least reexamine which particular form of the hypothesis you believe in. Only one form of the hypothesis (the “strong” EMH) dictates that consistently beating the market is infeasible. Fama himself has since stepped away from that level of conviction, because there is no demonstrable mechanism by which the markets can price in all nonpublic information (and frankly, it’s silly to assert that the market does not have nontrivial inefficiencies at any given time, except for the most conceptually academic of cases). It’s a very hard pill to swallow, and it gets harder when you look at the number of funds that ostensibly beat the market without insider information (RenTech is the most infamous, but there are other firms comparable to it that like to stay under the radar).
The weak and semi-strong forms of EMH are much “neater” theories, both in intuition and empirical mapping to the real world. You can consider the weak and even semi-strong versions to be correct without precluding the capacity for certain exceptional firms to consistently earn better returns than the market average. It’s intuitively and demonstrably correct that public information is quickly “absorbed” into price consensus, but this is not at all clear for nonpublic information (though if insider trading becomes significant enough, it starts getting obvious to the market).
In contrast, accepting the strong form of EMH requires you to resolve two difficulties: 1) how do funds like Renaissance beat the market if strong EMH is true?; 2) what mechanism can empirically demonstrate that the strong EMH is in effect, as opposed to “merely” the weak or semi-strong EMH? You can try to solve difficulty 1 by asserting that any given successful firm is actually illegally trading on confidential information, but you still have difficulty 2. Further, you have the obvious follow up: if these firms are successful only by acting illegally, why has it gone on so long? Apply Occam’s Razor: is your explanation more reasonable than the alternative, which is that a minority of organizations are capable of accomplishing something very difficult but not impossible?
To circle back to your point about secrecy - it’s tempting to assume there is a decades-long conspiracy in play whenever rich companies are being extremely secretive, but it’s also a poor heuristic. A very simple and “Occams-compliant” explanation is that hedge funds are hyper-competitive, and go to great lengths to keep their intellectual property out of competitors’ hands.
With all due respect to Asness, the returns from his fund and quant "factors" in general are complete crap compared to what the Medallion fund has consistently experienced over the past 20 years.
Most of Asness-type funds run "rotating" strategies whereby they have 30 or so different "flavors" (one invests in small cap value, another in US low-vol, etc..). Due to probability, one of the "flavors" is usually doing very well and they put that on the front of flip books. If any of them do badly, they "fire" that strategy and therefore ensure that all their running strategies have decent histories. It's basically engineering selection bias.
Quant factor funds are barely related to Renaissance.
I’ll grant you that AQR’s actual performance is middling. This is doubly true next to the consistency of Renaissance.
However, I’d stand by the academic research they put out. Especially because Renaissance famously eschews finance PhDs, preferring pure math and physics, AQR is still an industry leader in terms of the empirical studies they do.
The original comment in this thread asked about the EMH, I don’t think Asness’s returns as an investor should necessarily reflect on the academic research he’s done.
Think about how much material insider info they would need to get their returns on their AUM. Then think about that on the timeframe the Medallion fund has been in existence.
For people who may not know the figures (these are from memory): In 30 years, Medallion has had only 1 down year, when they were down by 4.5% (this was around 1988 or 1989). In their entire 30 years of existence, they have averaged over 34.5% annual returns. Averaged.
I don't think that you would need that much insider information--you can just use more leverage. As a thought experiment, it's possible to earn similar returns by wiretapping any large business newspaper.
He spoke at my math commencement at cal - good guy, sharp as a tack.
Growing up he was one of my idols - leveraged what he learned in school to make money doing something difficult, achieving success and more importantly respect.
It's funny how much good press Simons gets and yet he is a notorious tax cheat. The Senate issued a report in 2014 about how his firm Rentech is a blatant tax fraud. Rentech also got IRA rules changed so employees could avoid more taxes.
Basically, the Senate report alleges that Rentech evaded leverage limits (6x capital) and used the balance sheet of their broker to operate basically as an unregulated market maker. So the two keys to Rentech's strategy were a) illegal levels of leverage and b) evading taxes on short term gains to the tune of $6 billion. Once you dial down the leverage and pay taxes, the alpha disappears. One firm rejected the scheme as illegal and the emails from that firm are in the report. The scheme uses the broker as an illegal front, which is what the firm lawyer immediately recognized.
> Once you dial down the leverage and pay taxes, the alpha disappears.
No, it doesn’t. The first and most obvious observation: the basket options described in the report were not utilized until 2002. Renaissance already had 14 years of ~70% average annual returns (~40% net of fees) by that point.
Second, Renaissance stopped using these derivatives in 2014 (though they’re still fighting the IRS on back taxes, last I heard). Surprise: they’ve still been up ~39% in 2014, ~35% in 2015 and ~22% for the first half of 2016 (again, net).
To be clear, I’m not saying I agree with their utilization of the Deutsche and Barclays basket options. There is a lot of creative financial engineering that happens in the industry. But like most of the other topics that come up on Hacker News, the reality is far too nuanced to be dismissed in the offhand way you’ve done here.
At best, their tax maneuvering amplified the alpha already present. The basket options provided leverage, which obviously boosted returns. However, leverage will only improve a strategy’s returns, it cannot (on its own) improve risk characteristics or increase win rate consistency. Leveraged beta is still beta, and leveraged alpha remains alpha when you decrease the leverage (though the returns will be lower).
If Rentech has a strategy which generates decent returns only with massive and illegal levels of leverage, it does not have a viable strategy, period. There are reasons why hedge funds have leverage limits, to prevent future LTCM catastrophes. If Rentech wants to operate as a market maker it can get a broker dealer license like any other firm operating as a market maker.
> If Rentech has a strategy which generates decent returns only with massive and illegal levels of leverage, it does not have a viable strategy, period.
And in my previous comment to you, literally the one you replied to, I explained that this is not the case. Re-read my comment. Their strategies have alpha distinct from the leverage (because, again, leverage is not alpha), both historically before the tax maneuvering began, and since the conclusion of its use.
Yes we are. The fact that their returns have been consistent regardless of market regime is clear evidence of alpha regardless of leverage. We don't need to know what their strategies are to know that.
That's just not accurate. If there were no alpha they wouldn't be able to support that kind of leverage without the strategy blowing up many times over the past 30 years. The fact that they are able to generate 50%+ type returns year after year (including 2008, when they were up over 75%) proves that they are doing something right. The tax and regulatory dodges obviously aren't good but they can only augment an already successful strategy.
We don't know what the strategies are so we aren't in a position to evaluate their alpha. Second, the Medallion fund cherrypicks the best strategies, so we don't know what the global return is, just the Medallion return, which is reported for PR purposes. To the extent that the strategies have been revealed, as in this Senate report, the strategies rely on fraud and illegal levels of leverage.
> We don't know what the strategies are so we aren't in a position to evaluate their alpha.
If that's the stance you want to take, it works both ways. You are no more qualified an outsider than anyone else to evaluate their strategies. But given the available evidence, your position is on shaky ground.
> Second, the Medallion fund cherrypicks the best strategies, so we don't know what the global return is, just the Medallion return, which is reported for PR purposes. To the extent that the strategies have been revealed, as in this Senate report, the strategies rely on fraud and illegal levels of leverage.
This is more complicated than you imply. Medallion uses strategies which have lower capacity constraints and risk, which is why only employees are allowed to invest in it (they don't need outside capital, and they don't need to share risk with investors). Renaissance could close up shop to the outside world completely, but the fact remains that if they are consistently developing strategies for Medallion, they are consistently developing alpha. This alpha is not nullified because they have other strategies that perform worse, because on any realistic timeline they can abandon one and favor another. They would simply not use the strategies which they feel require risk pooling (i.e. capital from outside investors).
Furthermore, the returns are reported by various news outlets which do get to audit them, even if the general public cannot. If you're willing to pay for the information from hedge fund performance indices, you can get it. Which circles back to my original point - regardless of where you stand on the strategies documented in the Senate report, Renaissance has enjoyed those returns both before and after the use of the tax maneuvering.
Leverage does not create alpha or consistency on its own, it only amplifies the returns (positive or negative) thereof. To make my position very clear: again, I'm not saying I agree with the tax maneuvering; I simply disagree with your dismissive characterization of the firm's returns.
Wait, are you saying that they created a "PR" fund that regular people can't invest in that has higher returns because it's only made up of funds that had high returns this year?
If so, where do the "loser" funds go? The clients?
Rentech clearly operates as a quasi-market maker, it's gains can't be achieved by investing, and it's risk profile is far too low for it to be achieved by trading.
If you were actually right about their tax cheating, the IRS would have been able to successfully mount a challenge to their tax returns at least once in the last 40 years. Despite his contributions to Democrats, Republicans have been in charge for much of that time.
And $6B in lower taxes for RenTech over the years is a tiny benefit in regards to their size.
Nitpick: I think you are getting confused with your reference to 6x. There is federal “guidance” that banks shouldn’t lend to companies beyond that level. That is different from margin lending limits for security trades, which based on a skim of the PDF you linked, seems to be 2x, or in certain cases, up to 7.6x.
Jim Simons has given $27 million in political donations, all to Democrats. We'll see if the Republican IRS will get Rentech to pay taxes or if the clock has run out.
Apologies if my attempt at sarcasm fell flat. I was assuming the author of the parent comment knew that Mercer was associated with Cambridge Analytica and Trump. Judging from his follow up, he seems to have picked up on the sarcasm.
Jim Simons is a super interesting person, which makes this a very interesting read. What doesn't is the writing.
"Simons has an air of being both pleased with himself and ready to be pleased by others. He dresses in expensive cabana wear: delicate cotton shirts paired with chinos that are hiked high and held up by an Indian-bead belt. He grew up in the suburbs of Boston, and speaks with the same light Massachusetts accent as Michael Bloomberg, with frequent pauses and imprecisions. He sometimes uses the words “et cetera” instead of finishing a thought, perhaps because he is abstracted, or because he has learned that the intricacies of his mind are not always interesting to others, or because, when you are as rich as Simons, people always wait for you to finish what you are saying"
I wish he invested in studying the microbiome. It is a relatively new field and requires computational powers. From the article, if I understand correctly, they study autism only in the context of the DNA. But it is now known that the disorders in the gut microbiome is related to autism.
I have more references at home but cannot reach them now. There is a also a doctor here in Turkey who tried fecal transplant on an autistic kid. She was optimistic about the results but reluctant to publish just for one patient. This was months ago. I don't know the status now.
I found it interesting that the employees of Renaissance finally convinced him to boot Robert Mercer. Simons has accomplished great things in mathematics, investing, autism research and math education. But he has also enabled a Bond villain to undermine our social fabric with disinformation, and I don't think he gets enough credit for that.
From the numberphile interviews and the article above I get the impression that Simons is a professional, wise man who doesn't let political differences devolve into hysteria.
Numberphile video: https://www.youtube.com/watch?v=gjVDqfUhXOY
Full length: https://www.youtube.com/watch?v=QNznD9hMEh0