> 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.
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).