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Buffett's Alpha (2018) [pdf] (lhpedersen.com)
40 points by henning 18 days ago | hide | past | web | favorite | 23 comments



From what I have seen, only certain quant funds like Renaissance Technologies and TGS Management have actually truly managed to beat the market in a consistent non-random manner.

And they do exactly what you'd expect someone who has a money making machine to do- shut up and at some point kick out your external investors.


Quant trading strategy like Medallion Fund uses don't scale. That's why Warren Buffet has more personal wealth than Medallion Fund has AUM.

Outside finance, but similar business is sports betting syndicates. They can make 30-70% yearly return with low volatility. If you bet in 100 events per week and the expected return from each bet is just 0.5% (after expenses) you make consistent 30% return with very low volatility. If you make 1% per week you get almost 70%.

That's great return for the investment but the size of investment is typically limited to tens of millions. Brokers don't like it and close accounts when they notice them. There is increasing amount of work involved when the amount of money increases.


Total aum of all rentech funds is something like 110 billion and they've still managed to keep good returns on it.


> They can make 30-70% yearly return with low volatility.

Can you source this? If it was that easy to get a consistent 50% return then why aren't more people doing it?


Do you have more information about this? I thought "the bank always wins" (or the broker in this case).


Bookmakers make their profit from the margin between the odds they give.

Example. If the probability of outcome is exactly 50-50, he odds they give are 1.9 and 2.11 and they pocket the difference (completely fair odds without margin would be 2.0 both sides) It does not matter what the outcome is. If they balance the bets for and against perfectly, there is no risk. They generally try to balance their liability but having preferred winner can increase profits with some additional risk.

If people place bets on the other side more, bookmakers move the odds to balance the bets from both sides. At some point the odds can be skewed so much that professional better can make money even after the bookmaker takes his margin. That money is taken from other betters. But if the bookmaker is not fully balanced it can come from the bookmakers pocket.


Thank you.



That comment links to a Youtube video I just watched and it's interesting that he directly confirms that there is an upper bound to the amount of money their model can manage and that they are comfortable limiting the scope of the game as a result. I guess that kind of honesty is easy when you are billionaires making money off your own money.


And barely a drop about TGS on the clearnet (aside from some paywalled BBG articles). They are basically the continuation of Ed Thorps business Princeton Newport Partners.



If you have 1 billion on spare money, you can easily replicate their "black-boxes" strategies for fun. Some of my ML research work (I work for a hedge fund) points exactly on their trading behaviors and relations with different instruments during the past 25 years. Is not fraud or insider trading, is just everyone involved in the economic world benefits from this, that there is no real incentive to call it fraud.

PS: If you have 1 billion to invest, call me ;)


What sort of trading behaviors would one be looking at?


Where no one else is looking ;)


Call me if you only have $500 mil ;)


How long to get to $1 bill :p


I've read this story about where part of Renaissance Technologies's alpha is coming from: buying and selling individual financial instruments entails paying taxes on the gains of each trade. It's more lucrative to buy and hold a well-performing fund. So allegedly RT advises such a fund what to buy and sell and simply holds it - such that it would only pay taxes once it sells. I'm not working in finance and can't make an informed comment but if true, tax optimisation would be a big part of the success.


Taxes on trading profits are not paid on each trade. A losing trade cancels out some profits from a winning trade, and tax will be assessed at the aggregate each financial year. Tax optimization contributes to the financial success operationally, but not is a core part of a quant fund's business.


My understanding was that there is a tax advantage (or loophole) in this construct of having influence over a fund's trading rather than doing the trades yourself and holding the fund instead. Would you argue there is no such advantage?


Yes there is an advantage. US investors could be assessed at long-term rather than short-term capital gain rate by using such type of structures. I simply argue that this is not a core part of a quant fund's business. Any capable hedge fund could hire lawyers to set up such structures.


Actual date: 2013. And, now submitted 7 times in the past year: https://news.ycombinator.com/from?site=lhpedersen.com .


>However, we find that the alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors.

It's always easy to see how you could have made money with hindsight. I bet if you implemented the Betting-Against-Beta and Quality-Minus-Junk strategies now you wouldn't do nearly so well.


I think, for each equation in your explanation of what you've done you should have to include a picture to compensate.




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