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> Renaissance Technologies did not use algorithms to beat the market...

This is false. RenTec generated outsized returns for a decade prior to entering into the derivatives with Barclays and DB beginning in 2000.

> the bulk of their profits beyond what would have been made just investing in an index fund

This is also false. For example, RenTec generated 99% return in 2000 net of fees, while the S&P 500 lost ~8%.

From what has been published, secrecy within Renaissance is so extreme that perhaps only 2-3 people actually know what is going on. So for an outsider, I say it's pure speculation.

And I speculate that their outsized gains are due to market manipulation, front running, or other insider activities (as in, illegal/unfair).

No one is smart enough; no algorithm or model is future-proof; nobody gets returns like this unless they define the scenarios themselves.

> their outsized gains are due to market manipulation, front running, or other insider activities (as in, illegal/unfair).

as a former insider at a different, less successful-than-rentec-but-still-successful firm, I doubt it. They have better data, technology, and employees than most other market participants. So then the question is how did they get there:

> No one is smart enough; no algorithm or model is future-proof

I agree with the sentiment, but the way it worked was in the early days, it was much easier for one person or a small team to get those advantages. Then, as the market matured and simple algorithms became less profitable, they made new, more complex ones. It became harder for new entrants to jump-start the whole process from scratch. Simons started rentech in 1982. Teleport that Simons to today and his fund probably wouldn't even get off the ground. He would still be a genius, but a billionaire? I don't think so. As you say, no one is smart enough. It was right place/right time, and they built on their advantages.

Question since you are informed about them and the space...

I had read this[1] and seen some other things about his activities.

Since Mercer and his family seem deeply wrapped up in something that has some worrying ties to hostile foreign nations, a company who has been recorded saying they've done REALLY shady things along those lines, etc...

How feasible is it that RenTech used similar technology and god knows what data to directly impact the geopolitical landscape, and traded off of that? If you can for example...create major disturbances in certain areas, or draw certain attention to various things at a certain scale, could that impact markets?

I want to clarify that I know absolutely nothing about the regulations and mechanisms in place to catch such a thing with the SEC, etc., and don't want this to come off as a conspiracy theory. It's just...with what's come out so far the conspiracy is kind of writing itself, so I wouldn't be surprised if something like this were at play.

[1] https://www.institutionalinvestor.com/article/b17q91wjnnr68x...

It is feasible, although I would be surprised if it something like this were at play. For one thing the other CEO Brown and Simons himself are on the opposite side of the political spectrum. That's not any guarantee but my point is that these organizations aren't monolithic...if there were geopolitical impacts hopefully someone would leak. But even if rentech were completely amoral, they probably still wouldn't do it just because the risk/reward asymmetry is too great. Sounds like it'd fall more to the FBI than SEC; much higher penalties. Too much of the rest of the business is profitable. These people have a lot to lose. And when hedge funds engage in bad behavior, it tends to look more like this [1]. Perfectly legal, yet still harming society, in my (less informed) opinion.

What keeps me up at night is not rentech but state actors, like you said, hostile foreign nations. They have the resources to pull it off and plenty of motivation...trading profits would just be icing on the cake, really.

Here's an amateur-level manipulation example you may find interesting [2]. Could rentech do this more subtly with 10x impact? Like I was saying, it may be feasible...still kinda doubt it. If this happens my guess it would be a fund that was no longer profitable, on it's way out, they have nothing left to lose, all this computing power laying around...

[1] https://www.bloomberg.com/opinion/articles/2019-02-27/windst...

[2] https://www.bloomberg.com/news/articles/2017-04-21/german-so...

> So for an outsider, I say it's pure speculation.

And you assert this on what basis? There's enough that's been published to get some broad idea of what happens within the firm.

> And I speculate that their outsized gains are due to market manipulation, front running, or other insider activities (as in, illegal/unfair).

If they were engaging in illegal activities, it's very likely the firm, which is undoubtedly scrutinized by regulators, any such activities would have been discovered.

> No one is smart enough; no algorithm or model is future-proof; nobody gets returns like this unless they define the scenarios themselves.

RenTech constantly updates its algorithms. Alpha decay is a well known phenomenon. The firm utilizes sophisticated risk management techniques in order to avoid drawdowns, in all likelihood. Assuming this is the case, they're able to more effectively compound returns while simultaneously levering positions. Here's an example of a risk parity strategy [0], which may help explain how risk management works.

[0] https://towardsdatascience.com/ray-dalio-etf-900edfe64b05?_b...

There was a video interview with the founder where he explained pretty much how they do it. The employ a lot of bright PhD maths/physics types, get them to come up with all the algorithmic strategies they can think of, run tests with historic data and live trading to see which ones work and then scale up those.

There isn't one smart guy or one great strategy - there are dozens of smart guys and loads of strategies and they can win because they outsmart the city types.

That sounds too much like this:


As I remember, beaucoup back testing, hilarity ensues anyway.

The issue with LTCM wasn't just that they didn't test sufficiently - the problem is that traders could take positions without supervision and any accountability. My understanding is that any firms that survived that period (and I believe they were all pulling the same shenanigans as LTCM, just maybe to a lesser degree) now have risk management because unlike Lehman/Bear they can't just foist that risk off onto the public market. No one at the head of a multi-billion dollar hedge fund wants to stop being there if all they have to do to endure is pay for risk management.

*edit: I'm not a serious student of this aspect, but I recall that none of the top independent hedge funds took a bath in the 2007+ collapse (that is, those that weren't in-house funds from a major wall st. company). They all had their risk management in order and all did pretty well in buying distressed assets. Some like Bridgewater really managed to grow non-stop right through that.

As I remember the book, they back tested quite a lot. It's just that whenever they went live with trading reality changed on 'em. Go figure.

They were exposed to a margin call. Trading reality changing or no, if you can get taken out by your prime broker at the end of the day, you need to account for that too and they didn't.

One thing backtesting misses is the other market participants may see what you are up to in live trading and try to take advantage. That was a big factor with LTCM.

They could lie about that too and just use linear regression.

A linear model on a heretofore unknown predictor is basically how all hedge funds make money.

Coming up with the predictor is often the hard part. For example, take the tweets of a (sane) president and run sentiment analysis on it. If it is positively correlated with mentioning an equity, the sentiment of the tweet might be a good linear predictor of the stock price.

The math is simple once the feature is well defined.

Feature development is the current frontier, as I understand it.

That's my point. They hire the smart people so they can really abuse the simple stuff.

No mention of leverage?

I'd take leverage for granted but it only works if the underlying bet you are leveraging is in your favour.

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