
RenTech Created the Ultimate, Tax-Free IRA Account for Employees - throwawaymath
https://www.bloomberg.com/news/articles/2019-02-01/rentech-created-the-ultimate-tax-free-ira-account-for-employees
======
throwawaymath
The backstory, for those unfamiliar with Renaissance: they have more than one
fund available. Their highest performing fund, Medallion, is the one which
made them famous in the 90s. In the early 2000s it was closed to outside
investment (likely due to capacity constraint for the strategies it uses).
It's now exclusively an investment vehicle for employees and their families,
somewhat like a large proprietary trading firm.

The really interesting thing here is that Renaissance received clearance to
roll employee IRAs into the Medallion fund. That leverages significant tax
advantages on a fund which already provides significant returns for its
employees.

~~~
perfmode
Do new employees get to participate in Medallion?

~~~
throwawaymath
Yes, but they're restricted in how much they can contribute.

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paulpauper
_The Medallion fund has been restricted mainly to RenTech employees since 2005
as the firm took steps to keep its size around $10 billion. The fund has
historically averaged annualized returns approaching 80 percent before fees,
but such gains can slump when it gets too big. Even employees face annual
investment limits, and Medallion also typically distributes its profits every
six months instead of reinvesting the gains._

How is that even possible? even warren buffett only averaged around 15-20 a
year

~~~
turingcompeteme
Most of what we know about Rentech's strategies comes from Senate hearings
regarding the sketchy things they do. The common theme is that they find
strategies with fairly low returns (~3%), and very low risk. They then use
massive (and illegal) amounts of leverage, as high as 16x, to turn those low
risk, low return strategies into outstanding returns. James Simons and Robert
Mercer are among the largest donors ever to both political parties, so it
isn't much of a surprise that these hearings haven't really gone anywhere.

Of course it isn't just that simple. Leveraging a strategy should increase
it's downside risk along with it's returns. But somehow Rentech does it while
never actually experiencing that downside risk. That's their mathematical
genius. And the fact that they employ so many brilliant mathematical minds
leads me to believe that part may be real.

The latest Senate hearing link:
[https://www.hsgac.senate.gov/imo/media/doc/REPORT-
Abuse%20of...](https://www.hsgac.senate.gov/imo/media/doc/REPORT-
Abuse%20of%20Structured%20Financial%20Products%20\(Basket%20Options\)%20\(7-22-14,%20updated%209-30-14\).pdf)

~~~
refurb
How does the leverage work considering it comes out of the returns.

If I invest $1B and borrow another $9B, my base returns need to exceed the
borrowing costs of the $9B just to break even.

~~~
tomp
For a modern hedge fund, leverage doesn’t work that way... e.g. if I buy $1000
of AAPL (Apple) and (short) sell $1000 of MSFT (Microsoft), what is my
“capital” and what is my “leverage”? My net capital use is $0 - I got $1000
selling MSFT and spent it again buying AAPL... in the end, it comes to a
combination of _margin_ required by the broker(s) - i.e. what they estimate is
the black swan scenario where AAPL goes down, MSFT goes up, you start losing
money on both trades and they can’t close the position fast enough -
ultimately it depends on volatility but can be netted across many trades, and
the overall volatility / risk of your strategy (i.e. how much you’re
potentially willing & able to lose in a year).

~~~
anonu
When you short you need to post capital as part of the repo trade. You also
need to borrow the shares which typically costs more than the interest you're
earning on the posted capital.

So no, your net capital use is not $0 in your example

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astazangasta
There was a discussion of this company the other day and the suggestion that
unlike the other outperforming hedge funds that turned out to just be insider
trading, this one is real and they are just that smart. I am skeptical; they
do not have a monopoly on brains. What they do have is some shadiness in their
history:

[http://wallstreetonparade.com/2014/07/senate-renaissance-
hed...](http://wallstreetonparade.com/2014/07/senate-renaissance-hedge-fund-
avoided-6-billion-in-taxes-in-bogus-scheme-with-banks/)

I am sure there is more like this waiting to be uncovered.

~~~
throwawaymath
I know a few people who work at RenTech. I would be very surprised if the
operation turned out to be fraudulent. It certainly _could_ be, but I very
much doubt it.

If you have your ear to the ground you can find many proprietary trading firms
which have similar or even superior returns. It's much harder to find a fund
deploying similar strategies at the same capacity.

As a corollary, every single new hire at the firm is expensive in more than
the traditional ways. They only have so much room in Medallion, and so they
tend to be both extremely secretive and extremely protective when hiring.
They've lessened up on that somewhat recently, but it's still there.

~~~
quietthrow
What are the people that you know like? Are they all multimillionaires now?
Are they genius level smart by conventional standards. Did they apply for a
job there or where they “plucked” from else where? How do they make such a
shitload of money there?

~~~
auntienomen
I can't speak for throwawaymath, but the people I knew who went there
generally were academics who had already done great things or from whom great
things were expected. I don't have much use for the term genius, unless we're
talking about Grothendieck or Witten. But yes, we're talking about people who
stood out among the crowds of extraordinarily smart people in top tier
academia, and who'd actually managed to _do something_ with their
intelligence.

I think it's fair to say they were generally recruited via social networks.
They knew what RenTec was, they knew someone who worked there (maybe an old
grad school colleague or a former student), and when they reached out, RenTec
already knew who they were. I don't know of anyone who went there who didn't
already have a reputation in academia.

So contrary to astazangasta's original claims, they do seem to me to have
something of a monopoly on brains. There are other smart people at other
firms, but I don't know of any other place that has such a concentration.
(Aside from Jeff Dean's office, I suppose. ;)

~~~
bradleyjg
I'm not one of those people that have a moral objection to making money, or
holds to crazy conspiracy theories about hedge funds, or anything like that.
But it does seem kind of sad when you lay it out like that.

~~~
lenticular
We do have rather interesting incentives in our society to induce so many
talented people to do essentially zero-sum game trading instead of science or
math.

~~~
mrchicity
Commercial work will always pay better than academia. Roles like trader/quant
where your value is measurable & portable will always pay better than being a
drone in a big machine like Google. If anything, front office finance roles
aren't underpaid: people with similar skill sets are underpaid elsewhere.

I don't work in trading anymore, so I'm not talking my book here. Trading is
zero-sum at a transactional level, but has knock on benefits beyond profit and
loss:

-Making it easy for companies to raise capital through IPOs or offerings (without a robust secondary market for securities, people will be less likely to invest)

-In commodities: Letting businesses bear the risks they want and insure against the ones that aren't their core business

-Liquid markets let real people trade in and out of investments without friction at fair prices

-Providing accurate price signals to other businesses and the broader economy

So I don't think I was saving the whales, but I don't think it was wasteful,
either.

Also, as a mildly clever OCD math guy who's semi-good at writing fast C++
code, I don't think I would have been curing cancer anyway.

ETA: At least in the case of HFT, if you accept that markets need
intermediaries of some sort, it seems more efficient to have a few dozen
tech/math guys do the same job thousands of guys in mesh vests were doing
years ago, and cheaper.

~~~
bradleyjg
I knew, or at least knew of, some of the vest guys as fathers of people I grew
up with. As in any group it’s a mixed bag, but I feel pretty confident that
none of them were missing their true calling in pushing forward the boundaries
of our understanding of hidden markov models or getting speech recognition to
work. We’ve used those kind of resources to free up people to, I don’t know
sell whole life insurance policies or something. I’m sure there’s a sense it
which it is efficient, like I said I’m not a centrally planned economy guy,
but there does seem to be something off about it.

I mean there are computational cancer models that need to be written and
optimized.

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cheriot
I suspect the reason for IRA vs 401k is entirely regulatory. For any values I
try in a spreadsheet, paying the taxes up front results in larger post-tax
amounts later (as long as the initial income tax rate is greater than capital
gains rate).

Can anyone find another reason?

Edit: yes, I'm entirely ignoring predictions of tax rates rising in the future
since that's not interesting mathmatically

~~~
Thorrez
By saying "IRA vs 401k" I think you're misspeaking. There's a Roth IRA, and a
traditional IRA. There's a Roth 401k and a traditional 401k. I think you're
trying to make a Roth vs traditional distinction, not an IRA vs 401k
distinction.

You're right that the article confuses various things. But you're wrong in
your analysis. Capital gains rate has nothing to do with this. Whether it's
Roth or traditional, and whether it's 401k or IRA, you never pay capital gains
rate, you always pay income tax rate.

You're also wrong in saying paying up front is better in terms of tax rate. In
terms of tax rates, Roth vs traditional both have the same rate (assuming you
have the same tax rate now as in retirement) (and IRA vs 401k also both have
the same rate, regardless of tax rates now vs retirement).

Roth does have several advantages though. It has a higher effective legal
contribution limit. It also allows a higher density of value per dollar, which
is useful in a fund like the Medallion fund that is limited to $10B.

------
rajacombinator
Interestingly, this private, closed fund constantly has its returns leaked, PR
articles about it, etc. You are welcome to invest in their open, and very
mediocre, funds though.

~~~
hendzen
> You are welcome to invest in their open, and very mediocre, funds though.

Are you really though? Show me how an individual can invest in any Renaissance
fund (e.g. RIEF) They are only open to institutional investors as far as I
know - i.e. those looking to invest say, 250m or more.

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hn_throwaway_99
This article highlights what I hate about financial reporting. Take this quote
"If you are expecting to earn a rate of return of 20 percent or higher, it
turns out to be a really good tax shelter." Or this one "The difference:
ordinary people don’t have access to Medallion, one of the most successful
hedge funds of all time."

It's basically insinuating that the techniques Renaissance used are somehow
unfair because Medallion has such high returns, as if those returns were
anointed by God instead of the work of the people at the fund. In addition, it
insinuates that those high returns will go on forever - well, there have been
more than few money managers who have seen their years of overperformance
decimated by 1 or 2 bad years.

It's fine to argue that a Roth IRA may not be good tax policy for the country,
but the only thing "special" about Renaissance is they appear to be better at
investing than most of their peers.

~~~
ummonk
No, they also have created legal advantages for their employees that aren't
available to most people. E.g. I cannot do any margin trades in my IRA and am
subject to settlement rules if I try to do day trading. Additionally, if I
founded my own startup I would not be able to invest my Roth IRA money in it
and let it grow tax free.

~~~
sokoloff
Via a self-directed Roth IRA, you probably could invest in your own startup.

~~~
ummonk
Looked into that back when I was founding a startup - lawyer said it was a no-
go due to self-dealing rules.

~~~
gwern
Your lawyer was wrong, then. If you look around, you'll find coverage of
people successfully doing their startup shares in their Roth IRA, and I know
one billionaire personally who did that.

~~~
sokoloff
It’s a facts and circumstances thing. Yes, it’s possible to do. It’s not
possible in some circumstances. (Not possible for S-Corp, not possible if the
company will be buying assets [inc IP] from the IRA holder, probably not
possible if the company isn’t profitable enough to pay a salary from
operations [you can’t work for free for your IRA holding, it’s legally risky
to use your IRA to funnel you current salary], etc)

GP’s lawyer could very well have been right in advising that GP couldn’t do it
under that specific set of facts.

~~~
ummonk
_> probably not possible if the company isn’t profitable enough to pay a
salary from operations_

Yeah, that was definitely the case.

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barbecue_sauce
Isn't this Robert Mercer's company?

~~~
throwawaymath
James Simons founded Renaissance in the early 80s (ish). He brought on Robert
Mercer from IBM later. Then Mercer took the helm when Simons retired around
2010, if I recall correctly. Mercer himself stepped down last year (likely due
to political blowback from the rest of the firm).

So the short answer to what you're asking: yes.

~~~
auntienomen
I think the short answer is: kinda. Mercer was co-CEO, with Peter Brown. He
was demoted when his political activities impacted recruitment.

My understanding is that Simons is still holds the majority of RenTec shares,
with Mercer around 3rd place. RenTec made Mercer rich, but it is isn't his.

~~~
throwawaymath
I agree with you. I'm responding to what I think is the spirit of the
question. These days if someone is asking about RenTech in the context of
Mercer, they're doing so because they're mostly heard about the firm as an
auxiliary topic to Mercer's political activity.

And last I was aware, yes, Simons still has the majority of shares. If I
recall correctly that's publicly disclosed though.

------
k2enemy
I thought there was an income limit for contributing to a Roth IRA? I'm
guessing all of their employees with access to the Medallion fund would be
above that limit. I must be missing something.

~~~
hendzen
'The firm initially terminated its 401(k) plan for employees in 2010, a step
that permitted them to roll the savings into traditional IRAs. Then, employees
took advantage of a rule change that year allowing affluent Americans to
convert their traditional IRAs into Roths. '

Looks like they rolled all their savings in to traditional IRAs and then
converted them in to Roth IRAs. This procedure, known as a 'Backdoor Roth'
conversion, effectively allows unlimited Roth IRA contributions beyond the
income limits. If you are scratching your head and asking, why this is legal -
so are many other people, but it appears to be accepted as within regulation
by tax experts.

~~~
sokoloff
Backdoor and Mega-backdoor Roth conversions do not allow unlimited
_contributions_. They allow an unlimited _conversion_ of (limited)
contributions.

As for whether it ought to be legal, my view is that multiplication (of which
both income taxation and compound investing returns are forms) is commutative
and taxing an amount now (the conversion) and then having it grow for 20 years
is no different than having it grow for 20 years and taxing it then
(traditional IRA), assuming growth and tax rates remain the same.

A Roth conversion is in essence a bet on your marginal tax rate at withdrawal
being higher than your marginal tax rate today.

~~~
hendzen
Your comparison assumes that the alternative to backdoor Roth is a traditional
IRA contribution. The (ab)use of backdoor Roth contributions is commonly done
by high-earning employees who have access to a 401(k)/Roth 401(k) plan. In
this situation none of their IRA contributions are actually tax deductible at
all!

So the 'backdoor' Roth contribution allows such people to invest post-tax
dollars w/ Roth benefits when the IRS income limits seemingly make it clear
that they shouldn't be able to contribute in this fashion. Why does the IRS
have income limits on Roth IRA contributions but then allow them to be so
easily bypassed in this manner?

> assuming growth and tax rates remain the same.

Big assumption.

~~~
zaroth
> _Why does the IRS have income limits on Roth IRA contributions but then
> allow them to be so easily bypassed in this manner?_

I think TFA answers this. The limits were put in originally, and then as part
of Bush-era tax cuts, as a way to raise current revenue, the conversion was
allowed knowing that billions in taxes would be paid today in order to
convert. They predicted $9 billion and got something like $30 billion instead.

Taxing the money now, when a large part of it could be passed via inheritance
tax free later, is not necessarily bad policy.

------
gammateam
> _The firm initially terminated its 401(k) plan for employees in 2010, a step
> that permitted them to roll the savings into traditional IRAs. Then,
> employees took advantage of a rule change that year allowing affluent
> Americans to convert their traditional IRAs into Roths. The following year,
> Renaissance applied for clearance from the U.S. Labor Department for
> employees to invest the accounts in Medallion, which the agency granted and
> made effective in January 2012._

This is entirely convoluted. A Roth 401K would have achieved the same thing,
10X higher annual contribution limits, and allows cheap liquidity from
borrowing 50% of it at 2 points above fed funds rate. The conversion
opportunity was nice but has very little to do with what has happened since
2010 for anyone that invested later.

Many Reg D offerings also allow for 25-30% of the fund to be held by tax-
deferred accounts. US Department of Labor wasn't necessary here.

> _In turn, the IRA money -- held by about 250 employees -- grew to more than
> 4 percent of Medallion’s gross assets from about 1 percent five years
> earlier._

So what's the US Department of Labor for again? I'm missing something.....
this must come down to the fund's structure. In any case it is nice they
pulled it off.

My approach to letting 401K/IRA/Tax-Deferred accounts make a ton of money is
to give them a separate share class. That share class gets some outside
attention and liquidity preferences sometimes. It was inspired by Bain
Capital's approach, when that was in the news during Romney's presidential run
and it became 'controversial' regarding how they circumvented tax liability. I
didn't confirm thats what Bain Capital actually did but thats what I came up
with and its passed.

~~~
JumpCrisscross
> _The conversion opportunity was nice but has very little to do with what has
> happened_

You can’t invest in a Roth account if you earn more than a fairly low level.
You can, however, convert IRA assets into Roth assets at any income level
provided you pay the tax on conversion.

 _Disclaimer: I am not a CPA. This is not tax advice._

~~~
Thorrez
There's no income limit on Roth 401ks as far as I know, where did you hear
that there is one?

>You can, however, convert IRA assets into Roth assets at any income level
provided you pay the tax on conversion.

You seem to be saying you can convert traditional IRA money into a Roth IRA.
That's true, but how do you get traditional IRA money? There's an income limit
when you make traditional IRA contributions if your employer has a 401k:

[https://www.irs.gov/retirement-plans/2019-ira-deduction-
limi...](https://www.irs.gov/retirement-plans/2019-ira-deduction-limits-
effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-
at-work)

~~~
laurencerowe
That's a tax deduction limit not an IRA contribution limit. You make an after-
tax IRA contribution (up to the IRA contribution limit of $6K/year in 2019)
not subject to any income limit and then convert to Roth IRA.

~~~
infinite8s
If your firm's 401k plan allows it, you can contribute up to 32k post tax
(it's not deductible) and then immediately roll over to a Roth 401k (google
for "mega-backdoor Roth"). People don't realize that the IRA and 401k sections
of the tax code are completely different, and they both have Roth sections,
and the limits in one don't apply to the other.

