
A Moneymaking Machine Like Few Others - volodia
https://www.bloomberg.com/news/articles/2016-11-21/how-renaissance-s-medallion-fund-became-finance-s-blackest-box?cmpid%253D=socialflow-twitter-hedgebrief
======
gdne
I feel sad that so much brain power goes into market arbitrage. They produce
nothing usable by anyone else. Imagine if these people built companies that
made new advances and new products.

~~~
pedalpete
I completely agree with you, but think your comment should be moderated down
from 'They produce nothing usable', to 'They are paid exorbitant amounts
compared to the value the produce for society as a whole'.

"but they manage your retirement fund", really? do they? last I checked there
are algorithms running the entire show and making sure I and every other
little investor get screwed for every 10th of a cent so that a few investors
at the top who already have loads of money can have more. They've made a game
out of moving money and skimming a bit off the top all the time. Let's not
forget that they are actually taking money from your 401k every time they make
these trades. Let's not pretend the financiers care about you, the little guy.

Another comment mentioned that YC is in finance, but let's be clear, YC is
financing start-up businesses and helping them to grow. They're small finance.
When I buy a share in Facebook, I'm not helping it grow, I'm betting on it's
growth and the big finance industry is just the casino.

~~~
encoderer
Spreads on liquid stocks are a penny now. Most limit orders are price improved
by a few tenths of a cent -- a better price than you asked for. These are both
courtesy of algorithmic trading. If a HFT trader does arb between two diff
exchanges he's not hurting you. You're conflating it with front running your
orders. That is not really a problem for a retail trader who isn't moving
large block trades.

~~~
lintiness
some market players are allowed to trade at sub-pennies, others are not. when
one party can trade inside while leaning on the guy taking the risk to make
the market, something is very very wrong with the "system". over time, the
guys taking the risk are gone, and the whole market is weakened.

~~~
encoderer
Can you elaborate on this? What do you mean "sub pennies?"

------
DrBazza
I'm working in the industry, and came from astrophysics, and intend to return
to it one day. I would have stayed, but when the salary is 10x or more and you
have a family, it's an easy decision. A part of me always feels dirty doing
what I'm doing when I see news about Hubble, New Horizons, etc.

And as for 'super smart people', I'd just say quants in general are 'super
smart' at the very narrowest of mathematical problem sets, but shouldn't be
let within a mile of a compiler. And they shouldn't be invited to parties
either.

------
mrdrozdov
> Eventually the scientists went so far as to develop an in-house programming
> language for their models rather than settle for a numbercentric option such
> as ASCII, which was popular at the time.

~~~
keyle
That was a nice eye roll on that line. Sadly the whole article was pretty
pointless. It was one of those wowsa wow wow wow woop woop article, by the end
of it you know nothing more than they take speculative risks on short/medium
term using futures. Which any CFD trader does.

------
wslh
In another article [1] it says "Currently Renaissance has three funds:
Medallion, Renaissance Institutional Equities Fund and Renaissance
Institutional Futures Fund. The latter two have been open to investors, but
losses and withdrawls have left the funds wilted ($30 billion to $6 billion in
three years)."

[1] [http://www.businessinsider.com/bob-mercer-peter-
brown-2010-3](http://www.businessinsider.com/bob-mercer-peter-brown-2010-3)

------
justinsaccount
[https://www.amazon.com/When-Genius-Failed-Long-Term-
Manageme...](https://www.amazon.com/When-Genius-Failed-Long-Term-
Management/dp/0375758259)

[https://en.wikipedia.org/wiki/Long-
Term_Capital_Management](https://en.wikipedia.org/wiki/Long-
Term_Capital_Management)

> Initially successful with annualized return of over 21% (after fees) in its
> first year, 43% in the second year and 41% in the third year, in 1998 it
> lost $4.6 billion in less than four months following the 1997 Asian
> financial crisis and 1998 Russian financial crisis requiring financial
> intervention by the Federal Reserve, with the fund liquidating and
> dissolving in early 2000.

~~~
dpc59
That's the thing with high-risk high-reward financial gambling. When you're
always all-in at one point you're going to lose it all.

~~~
lintiness
they were more than "all-in"; they were levered 25*.

------
danielvf
Two Sigma, mentioned in the article is currently hosting a fun AI programing
contest at [http://halite.io](http://halite.io)

The learning code is not steep - you can really move up the ranks with simple
improvements. I've had a great time.

~~~
yitchelle
Thanks for sharing. For someone that has zero knowledge and wants to get
started in AI, which language would you recommend?

~~~
PeterisP
If there's a language that you know best and highly prefer, then use that; but
if you have no preference then Python is very suitable at the moment, as it's
both easy to get started in it and also easily extending to powerful numeric
computation and machine learning frameworks.

------
qwrusz
For those questioning the returns, it's important to remember this fund's
strategies clearly have capacity constraints. The article mentions a cap of
$10B and a decade ago it was half that amount.

Why cap the size? What this means is usually whatever strategies RenTec
employees are using in their Medallion fund likely do not work at larger
dollar amounts.

Even worse, attempting to run a quant strategy above its size constraint can
break it (this includes exposing too much about it to others). This would lead
to it not ever working again even if they went back to only using small
amounts.

if it aint broke, dont break it.

------
sixdimensional
Once while applying for jobs I had an interview for a dev job with a firm like
this. They refused to tell me exactly what they did, or even the company's
name. I had to sign an extensive NDA before I could even interview (it was
weird having to sign an NDA when it wasn't clear who I was signing it for)!

I was fresh out of school and flubbed the interview, but will never forget the
experience. All they told me was, I would work around the clock, but if I came
and did my job I would likely make a mint.

------
rezashirazian
I've been dreaming about building stuff like this (on a much simpler scale)
for a long time.

Perhaps a model that takes in past quarterly reports, commodity prices,
executive performances and news regarding a company and calculates 'tones'
surrounding a company.

(for example appearance of 'good performance', 'meeting targets', 'vast
improvements' would possibly yield a positive tone where as 'disappointing
returns', 'failed endeavours' etc would yield negative). Then gauge past price
sensitivities to various tones and see if there is any way to train the
machine to speculate merely on these 'tones'.

~~~
aantix
Sentiment analysis is pretty common in most NLP packages. The algorithms are
already in place; you're half-way there. :)

------
lordnacho
I'm a fund guy, and my take on RenTech is this.

We're lucky to even have heard of them.

RT started off as a CTA. If you look at CTAs a good Sharpe is something like
1-1.25. You can buy a book that will get you most of the way there, and it's
really simple (Author Andreas Clenow, I forget the title). I have actually
verified this myself, coding it up in Python.

If you simulate a random walk that has a sharpe of 1, you'll find there's
plenty of periods where it's down or sideways. So you need investors. They
have to pay you management fees so that you can run the thing while it doesn't
make money.

Simons then changed tack. In the early 1990s the fund industry was very
different. Most funds were discretionary funds where the boss decided what to
punt on, and investors were used to trusting them to do so. So changing tack
to another systematic strategy, in equities, could be sold to the investors.

Now this is significant, because there's a lot more stuff you can do with
equities. There's industry structure, there's individual company information,
there's analyst predictions for each firm, each firm has its own price series,
there's corporate actions, and so on for thousands of stocks. Contrast that
with CTAs where you have a couple dozen liquid things, maybe 40, in a few
categories (bonds, equities, commodities, FX).

If you find a strategy that works for a commodity and it gives you some
Sharpe, maybe 0.1, and we assume for simplicity they are uncorrelated (which
they aren't!), you can roughly sum them up to sqrt(n). So there's a big
difference between 40 and say 2000. This is just a vignette, don't take it
literally. But the point is you can find strategies that in aggregate are much
better in the equities space. Purely my opinion, I don't often talk to people
about this, so no feedback other that my collaborators.

So back to the story, Simons builds this thing and it starts printing money.
Now he's insanely rich, and the thing never loses money. So what does he need
investors for? They are getting a free ride until the fund hits capacity.

Now if he had just gone straight to the Medallion fund, the thinking is the
same. Why on earth would he need investors? If he didn't need investors, why
would he have his name out there? He wouldn't, and neither would anyone who'd
discovered anything similar. There's probably a few groups like that out
there. They're unlikely to have built out the capacity, because they never
became hedge funds. But I'm thinking they're out there.

~~~
denzil_correa
> RT started off as a CTA.

Pardon my ignorance but what is a CTA?

~~~
lucozade
Commodity Trading Advisor [0]

[0]
[https://en.wikipedia.org/wiki/Commodity_trading_advisor](https://en.wikipedia.org/wiki/Commodity_trading_advisor)

------
nl
_Eventually the scientists went so far as to develop an in-house programming
language for their models rather than settle for a numbercentric option such
as ASCII_

Wow.

It's amusing to imagine what the people at the fund told the journalist which
ended up being turned into that.

A perfect example of the "noisy channel" idea in information theory.

~~~
herge
Maybe it's some offshoot of APL, hence the ASCII quote?

~~~
nl
They are lots of IBM people. But surely not?!

------
zump
I wish I knew about this place as a kid. I would have tried my darnedest to
get in.

Frustrating how a single bit of information can alter the course of one's
life.

~~~
cconcepts
I'd agree with you if human worth was measured by how many zeros appear on
your bank statement. Thankfully, it isn't.

~~~
azatris
If you did that for altruistic causes (donating your wealth), it would make
you quite worthy of a person at least in my book.

~~~
toadi
I hope if you're that smart you would at least apply it to something more
worthwhile.

~~~
fma
Worthwhile doesnt usually bring in fame or fortune, just warm fuzzy feelings.

Unfortunately my landlord does not warm fuzzy feelings as currency.

Do something for society that makes money so that you can do something for
society.

------
scandox
Super smart people. Financial Alchemy. Computers. Secrecy.

What could possibly go wrong?

[https://en.wikipedia.org/wiki/Long-
Term_Capital_Management](https://en.wikipedia.org/wiki/Long-
Term_Capital_Management)

------
nathan_f77
A few comments:

> Eventually the scientists went so far as to develop an in-house programming
> language for their models rather than settle for a numbercentric option such
> as ASCII, which was popular at the time.

I might be missing something obvious, but this makes no sense to me. ASCII is
not a programming language. And although UTF8 has taken over, I think ASCII is
still very common.

> (To this day the company’s website, rentec.com, looks like it dates from the
> Netscape era.)

That's not very fair. I think the design is quite modern and minimalistic, and
the website has definitely had some recent updates. It uses jQuery 1.11.3,
which was released last year.

> When the bill came, they would pull out a special calculator that could
> generate random numbers. Whoever produced the higher number picked up the
> tab.

I can't figure out why the author decided to include this anecdote. I also
can't figure out why the scientists didn't just flip a coin.

Another random thought: It's interesting to think that whenever I've bought or
sold some stock in the past, that little piece of data has made it's way
through all of their millions of lines of code, and all of their neural
networks. They might have even made a few fractions of a cent based on my
behavior.

> By studying cloud cover data, they found a correlation between sunny days
> and rising markets from New York to Tokyo.

Wow. That's incredibly interesting, and that's just one example. Alright,
their code has probably read all of my tweets, too. And everything else I post
about online. Especially on all the subreddits for investments and stocks.

> I don’t know, like 90 Ph.D.s in math and physics, who just sit there looking
> for these signals all day long.

Oh geez. Yeah, they're looking at everything. Traffic, Yelp reviews, Pokemon
Go, Netflix ratings, flight delays. I don't know, maybe even newspaper
horoscopes. Maybe the newspaper prints something that says Virgos are going to
get lucky with an investment. And then they watch all of the online activity
of all the virgo investors who still read newspapers.

Oh. And all of those companies selling your data? They're buying that, too.

This sounds like a fascinating place to work. I want to know some of their
secrets.

One more random thought: They knew Donald Trump was going to win. I guarantee
it. And they probably made a ton of money on all those stocks that went up.

~~~
solotronics
flipping a coin can be rigged. I practiced and can flip a coin in my favor
about 80% of the time.

------
MrJagil
Here is another Bloomberg story about Robert Mercer, for those interested:
[http://www.bloomberg.com/politics/features/2016-01-20/what-k...](http://www.bloomberg.com/politics/features/2016-01-20/what-
kind-of-man-spends-millions-to-elect-ted-cruz-)

------
hkmurakami
Recommended reading: The Quants.

------
sixQuarks
How do we know those returns are real? $1 million invested at the beginning
would be worth $4.5 billion today at 35% return per year.

~~~
tedunangst
It's not compounding.

~~~
icedchai
If it's like any other fund, it most certainly is.

~~~
freyr
Read the article before jumping into an argument with uninformed speculation.

They distribute profits to keep the fund capped at about $10B.

~~~
icedchai
Yeah, I read that. They don't tell you how often they raise the caps.

~~~
giarc
>Renaissance currently caps Medallion’s assets between $9 billion and $10
billion, about twice what it was a decade ago. Profits get distributed every
six months.

~~~
icedchai
I can read, thanks. That doesn't answer the question. How often do they raise
the caps? What happened before 10 years ago?

~~~
giarc
If it was $5b in 2006 and $10b in 2016 then you can speculate how often they
raise it. Your prediction that $1 million would turn into $4.5b, and the fact
that the fund sits at $10b clearly indicates they distribute profits more than
they raise the cap.

~~~
icedchai
That wasn't my prediction, it was sixQuarks. All I'm saying is some percentage
of the fund is left to compound.

~~~
giarc
No. So let's say it was $5b in 2006 and they were letting it compound. By
2016, at 35% interest compounding it would be worth over $100b. So by the
simple fact that they raised the cap in 2016 to $10b (and the fund was not
worth $100b) tells you that they are not letting it compound and as the
article states, dividing the insane profits.

------
eevilspock
That we have an article that discusses people providing no value to society
yet working the system to extract billions of dollars (and the political power
that comes with it) as if it were fascinating and cool rather than obscene
tells us how fucked up our society is right now.

Imagine reading a newspaper in 1840 reporting on a group of scientists who are
making a killing in cotton because they figured out, using statistics
_Moneyball_ style, how to maximize profits by buying slaves that nobody else
wants. Imagine the article tells it as a story of smart guys who amazingly did
what no one else could do, with nary a comment or even awareness about the
evil of slavery.

~~~
pgwhalen
I'm not gonna argue that financiers are curing cancer, but it sure does bother
me that so many intelligent people who understand nothing about the industry
have just grown to assume that it provides no value to society.

~~~
chii
I don't think they don't provide value - just that the value provided isn't
commensurate with their payment. It's as if they extract every bit of surplus
value they create, which means they produce no net value to society. It's as
if they are an "employee" of Society Inc., but is paid exactly what they
produced.

------
kriro
Makes me wonder why they don't just invest all the money under management in
that fund.

Edit: They are capped and take out profits...so I wonder if the cap is the
magic or if they use better algorithms for their private fund (only natural
since it's their own money). They would have the same inputs (their data sets,
infrastructure, programming language etc.) so I wonder if they have two very
different models (<=10 billion and >10 billion) or how those are linked.

~~~
makeset
Because liquidity is finite. Profitable investment opportunities don't scale
indefinitely. When you discover that an asset is being offered for cheaper
than what you think it's worth, pretty soon either you or others buy up all
the cheap supply, and the price catches up with your valuation.

------
mdotk
These guys pay a ton of tax and also have investors like pension funds they
take along for the ride.

------
Rainymood
In the video they call him Jim Simon, is this a typo?

I think his name is Jim Simmons, was this intentional?

~~~
makeset
[https://en.wikipedia.org/wiki/James_Harris_Simons](https://en.wikipedia.org/wiki/James_Harris_Simons)

------
UhUhUhUh
Somehow this reminds me of LeGuin's "The Dispossessed".

------
known
Former D. E. Shaw & Co management

------
20161113
What did you do seven years ago?

~~~
20161114
Or didn't do, but was wrongly accused of doing.

~~~
lovich
Are these sockpuppets? Why is this chain from three usernames that look like
they were autoincremented?

~~~
ryuker16
They're AI sockpuppets.

~~~
fudged71
Why?

~~~
ryuker16
Look at their names...

------
sean_patel
This sounds like the fictitious company in the Series "Billions". How did
these guys make 98.5% in 2000 and 33% in 2001 in the depths of the .com
collapse of Wall Street?

Something smells fishy.

~~~
Lazare
They use big data techniques to find weak correlation in data and invest
moderate amounts of money in them. They never make a large return on any given
investment, but they make very persistent returns; over the long run this adds
up.

The limiting factor behind what they do is that it doesn't scale.

> How did these guys make 98.5% in 2000 and 33% in 2001 in the depths of the
> .com collapse of Wall Street?

The name "hedge fund" comes from the concept of a hedge; a strategy that will
underperform in good times, but over perform in bad ones. 2001 is the exact
time you'd expect a hedge fund to do well, especially one focused on
dispassionate data analysis.

~~~
fma
It was said before, they don't predict every word in a book. But if they see
"New York" in a sentence they will bet the third word is "City".

------
riskable
Note: This is merely my opinion...

The only way they're making money like this is by cheating the system. I
_highly_ suspect they're using their public funds to feed data into their
private one in order to siphon off profits. It's like a pyramid scheme except
the mechanism of moving money is a form of market manipulation and this
article is playing right into their hands by making them sound like geniuses
("it's all scientists!"). Clearly, if this business is run by "smart people"
(scientists) then their other two funds--which are actually accessible--must
be promising! Right!?

TL;DR: The investors in the public funds are likely being scammed.

~~~
keyle
No I think you got it wrong. They're using a lot of algorithms to filter out
the noise in the market and make speculative moves (bets, gambles) with a
certain amount of certitude (weight, size) with the goal of making money.

I believe they keep that fund private because the risk factors must be through
the roof. And frankly, they don't need that external money to make a ton of
more money.

Do they have low latency, very fast computers, yes. Is it what's making the
difference, no, I don't think so. It's the models they use to assess and
predict - current and future moves - that makes the real difference.

~~~
MaysonL
I would think they keep the fund private, and return profits annually, to keep
the size of the fund limited. The strategies they employ probably cannot work
as well at larger scale. Here's a rare interview with Jim Simons:
[http://ritholtz.com/2016/07/jim-simons-mathematician-
cracked...](http://ritholtz.com/2016/07/jim-simons-mathematician-cracked-wall-
street-2/)

~~~
keyle
That was a great watch, recommended.

