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Renaissance Technologies (wikipedia.org)
299 points by pvsukale3 24 days ago | hide | past | web | favorite | 237 comments

A great book about RenTec and Jim Simons came out recently: The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution. Everyone in the industry worships Simons and RenTec as practically god-like. What they've managed to do shouldn't really be possible and is out of this world. According to Wikipedia over a 20 year period between 1994 and 2014, RenTec realized an 71.9% annualized return in their internal Medallion fund. And before anyone says that's a fluke, let's calculate the probability of such a "fluke" using some simplifying assumptions:

1. S&P 500 returns are log-normally distributed with a log-return of 10% and volatility of 10% 2. RenTec made a mean annualized return of 71.9% over 20 years 3. The returns of RenTec are independent from year to year

We get a P<1.64E-14. Therefore, I think we all can agree that we can reject the null hypothesis of RenTec having no alpha.

And before someone says that it's a scam, there's no outside investors in the Medallion fund anymore, so if it is a scam, they would only be scamming their own employees. And if that was the case, I think we would know.

> here's no outside investors in the Medallion fund anymore, so if it is a scam, they would only be scamming their own employees

The "it's a scam" theory that I heard had nothing to do with it being a Ponzi scheme, instead it was about laundering high-tax income into low-tax capital gains while maintaining a plausibly deniable investment cover story. It didn't have to beat the market, it just had to beat regulators.

I have nowhere near enough domain competence to comment on the plausibility of that scenario, other than to say that I suspect if it were that easy everyone would be doing it, so on those grounds alone I suspect the conspiracy theory I heard was incorrect. Someone more invested in the idea that it's a conspiracy would likely just argue that it isn't easy to be good at this or that there are economies of scale, so only one dominant player. Shrug.

> ... high-tax income into low-tax capital gains while maintaining a plausibly deniable investment cover story.

There are public swap-based ETFs (in Canada) formulated around this concept:

* https://www.pwlcapital.com/understanding-swap-based-etfs/

* https://en.wikipedia.org/wiki/Total_return_swap

The book actually covers this. What they did is somewhat complex and involved obtaining leverage as much as the tax savings but basically they turned short-term capital gains into long-term gains. That saved something like $7bn, iirc, out of the $100bn in net profit they have generated...so it is not significant.

> What they did is somewhat complex and involved obtaining leverage as much as the tax savings but basically they turned short-term capital gains into long-term gains.

That sounds like misdirection. It's very common for hedge funds to use tons of leverage. It's not like getting this level of leverage is an unsolved problem.

On the other hand reducing your tax rate from 37% to 20% increases your returns by 27%. Even that would be valuable, but the real number is probably even more than 27%.

But how exactly would this laundering work ?

I think he means that they funnel the income from fees into this "black box" fund and that's what creates the huge returns. My instinct would be that there's no way this would get past auditors, but then again, Madoff got away with cooked books, so it's plausible.

> A great book about RenTec and Jim Simons came out recently:

A podcast interview with the author:

* https://awealthofcommonsense.com/2019/11/talk-your-book-greg...

* https://awealthofcommonsense.com/2019/11/non-intuitive-lesso...

Sounds like you've assumed that rentech are running the same volatility as the S&P 500. That's very unlikely to be true - most systematic hedge funds ran crazy high risk in the '80s and '90s. But even if you assume it's a coin toss as to whether they perform well in any given year, twenty good years in a row is impressive.

My best guess is that it's a combination of luck, skill, and hindsight bias. Rentech probably had (has?) an edge. They were also partly lucky: in investment, you can do everything right and still lose money. There were also many other players: had LTCM not blown themselves up, we might be marvelling at their investment prowess now.

In the book (“The Man Who Solved the Markets”), the author actually provides the Sharpe ratios for their flagship fund (“Medallion”). Medallion’s Sharpe Ratio has almost never been below 2.0, and has been as high as 7.0 (!!!) in some years.

I’ll link to the Wikipedia page below for the math, but these figures would highly suggest that their returns are much less likely the result of luck, and more likely the result of some edge/alpha generation.


Well I'm saying it's both skill and luck, combined with hindsight bias.

They're famous because Medallion is the best performing quant fund. Even if quant funds were just chumps tossing coins, if you pick the best of a number of them, you'll get something that looks good.

Now that maths still doesn't stack up that they were just lucky - they probably had skill too. But I think it's more likely that they had a modest edge and were lucky than it is that they had a large edge and got an average result.

Given that they're selected for being the very best returns, it's probably a decent (but not completely exceptional) combination of every factor- skill, luck, laundering, connections, etc.


Thing is, with the amount of leverage they are running, it's more luck than skill.

Luck means making big returns, skill means doing it with low volatility and high Sharpe.

The point of Sharpe is that it’s invariant with respect to leverage. Anything with sharpe 3+ is extremely impressive - that’s 3 sigma, assuming normal returns that’s like 2% tail event.

Yes, but Sharpe calculated ex post is also subject to survivorship bias.

For example, you might make a (successful) bet that works only in a low-volatility environment; if it works, your ex post Sharpe ratio will look ingenious.

The point about survivorship bias is a fair one.

But, if a given fund (Medallion in this case) is able to thrive/survive during the 1998 Russian financial crisis (which felled LTCM), the 2000-2004 tech bubble bursting, the 2007 quant quake, the 2008 financial crisis, and 2010 flash crash, it would seem to suggest that their statistical arbitrage strategy performs well in all manner of environments.

After their very hefty 5/40 fees, their worst year between 2001 and 2013 was a 21% gain [1].

I understand that there are all manner of epistemic and mathematical problems that prevent us ever from completely disentangling luck and skill, but a conceptual framework like "The Superinvestors of Graham and Doddsville" would seem to apply here. I.e., after a long period of consistent overperformance, the case for skill starts to look much more likely.

[1] http://archive.is/JdQiw

Sharpe isn’t invariant with respect to leverage. Volatility drag implies that a leverage will always decrease your Sharpe, unless your volatility is 0.

Sure, but volatility is not, hence the "low volatility" part of my comment.

You really don’t know what you are saying. The leverage is to boost absolute returns. Sharpe isn’t changed by leveraging. They are automated black box strategies making 1000s of trades a day with massive undeniable statistically significant information content.

Sharpe is actually changed by leverage due to volatility drag. Your Sharpe ratio gets worse and worse the more leverage you apply

> You really don’t know what you are saying.

There's no need for the aggressive tone.

> Sharpe isn’t changed by leveraging.

Indeed, volatility is, however.

A change in volatility implies a change in Sharpe due to volatility drag. This only applies if you are compounding the returns though.

> There were also many other players: had LTCM not blown themselves up, we might be marvelling at their investment prowess now.

This is nonsense. Rentech makes 1000s+ of transactions per day across numerous asset classes. It is 99% skill. It’s black box automated.

That’s true I’ve assumed they have the same volatility. But since RenTec probably is market neutral for equities so I would imagine their Sharpe ratio is much higher than the S&P 500. And their Sortino ratio is most likely insanely high.

I'd be curious what their risk-adjusted returns are, especially in a leverage free environment. Anybody know where to find such information for RenTec (or other hedge/mutual funds for that matter)?

According to the book, they were running a SR of 2 through the 90s and early 2000s. After overhauling their strategies, they started running a SR of around 7! I’m not sure where you can get information about other funds besides finding articles in BB or WSJ, but the HFRI Index publishes return information for different classes of funds. Regardless, I don’t think you’re going to be able to access SR unless you’re an investor or work at a portfolio analytics company.

idk about medallian but capacity-capped HFAT funds can be near zero risk. I remember one HFAT firm went public and their S1 filing revealed they had lost money on like 5 days out of 5 years. It's not really 'prediction' or 'investing' in the sense generally implied

Thank you. People cling to the efficient market hypothesis like it’s a law of nature.

But how do you know these return numbers? Esp since as you say the fund has no outside investors?

Who has audited these numbers and what is your source specifically?

I‘m aware of Rentec for many years and also awed by the numbers but I‘ve always wondered where do people actually get them?

Every five - 10 years the up to date track record is provided to reputable third parties to curate publicity. For example, Bloomberg and WSJ. Generally speaking though, most firms with a track record like RenTech's prefer to keep it quiet because they don't solicit outside investment.

In particular: RenTech likes to keep a handle on this publicity for the purposes of courting extremely good talent from academia and industry. That's the only reason the Medallion returns are ever intentionally publicized. Anyone investing in RenTech's other funds knows full well they're not getting the alpha powering Medallion's returns.

Simons would probably have preferred to stay entirely under the radar, but the cat's out of the bag already and has been for decades. The most successful hedge funds (like the Princeton Alpha offshoots) don't court publicity because they don't need to pool risk with outside investors. They're not even hedge funds in the common sense of the term; they're proprietary trading firms run on employee and partner capital. Medallion can be thought of a prop shop within a hedge fund in that way.

Medallion also had a few external investors until 2010ish, who could be a source for some of the numbers. IIRC, Bill Ziemba published their returns in the mid 2000s sometime.

Also, what Princeton Alpha offshoots? IIRC, Princeton Alpha was a PDT spinoff that closed due to poor performance. Maybe you mean Princeton/Newport offshoots?

Yes, I meant Newport. The Thorpe folks and such.

Just out of curiosity, are there any successful Princeton/Newport/Thorpe offshoots aside from the usual one in Irvine?

Just the one in Irvine I think. Apparently they kept most of their staff from P/NP.

He probably means tgs and co

> We get a P<1.64E-14. Therefore, I think we all can agree that we can reject the null hypothesis of RenTec having no alpha.

The probability of my particular shuffled card deck is around 1E-68: vanishingly less likely. Therefore I think we can all agree we can reject the null hypothesis that my card deck was obtained at random. /s

Highly unlikely things happen all the time. Their occurrence should not be ascribed to alpha due to occurrence. The probability of occurrence due to occurrence is of course 1.

Well if you prrdicated such a permutation, that would indeed reject the null hypothesis. If 1.64E-24 doesn’t convince you, how do you manage to believe in anything at all? Thr world view you are positing is essentially solipsistic: there’s nothing that exists or is true except your own existence. Hopefully we all can agree that at best, such a view results in paralysis, at worst, absolute destruction.

Moreover, I don’t think you or anyone else actually applies your logic in your own life. If you did, you would be dead because of your disbelief in reality. For example, you migh conclude that eating is unnecessary, because the people who starved to death were just unlucky and that in fact, there’s been no “proof” that people need food at all. Or even proof that people exist at all!

Hold on, it's not comparable to the ~10$ CAGR of the SP500 is it? RenTec's fund is capped so it's an average return of 71.9% but not an annualized return, since the returns are not compounded. Correct?

That's right, they dividend out the profits each year (or at least they started doing that once the fund got over ~$5b or so). Otherwise if you do the math (1.66^33) they would end up with most of the money in the world!

* ~10%

The "it's a scam" angle is they're insider trading.

They probably have significantly better raw data sets than even their competitors like AQR or Two Sigma. Satellite data on parking lots. Credit card swipe statistics. Parsed and structures full financials. Supplier consumer relationships. Analyst data. Short interest data. Options activity. Fund holdings. ... Everything you can possibly think of. All integrated into a single streamline analytical and modeling technological infrastructure.

So yes to us little people it is insider trading. But I’m 99% sure it is real alpha at the core.

Not necessarily, they could be money laundering instead.

Continuing the speculation, they could be just "picking" the stocks after the fact when the returns are already known, iff there is no external record of their positions and transactions

There is an external record, 13F filings. Every quarter funds above a certain AUM have to disclose to the public their top long equity holdings. I’ve personally analyzed these holdings at my old quant job, they definately trade.

SAC Capital says hi

> And before someone says that it's a scam, there's no outside investors in the Medallion fund anymore, so if it is a scam, they would only be scamming their own employees. And if that was the case, I think we would know.

There are other possibilities. For example shifting profitable trades that occurred in their external funds to their internal funds. In which case it is partly a 'scam' and they would not be scamming their own employees.

They have massive alpha. Why is this so confusing to outsiders. Huge effort on detailed historical data sets combined with top of the world modeling techniques creates alpha, it shouldn’t surprise anyone.

They are being sued for back taxes to the tune of $6.8 billion. So this may not be as legit as it seems.

That $6.8 billion is nowhere near the total returns generated by Medallion over its lifetime. I agree the basket option scheme with Deutsche was questionable financial engineering, but the tax implications could at best augment the returns of an already profitable strategy. You cannot account for ~40% annual average returns over 30 years (after 5% management and 44% performance fees) using clever tax evasion.

> What they've managed to do shouldn't really be possible and is out of this world.

We don’t live in a world of wizards. When impossible feats are delivered on schedule for years without others figuring out is a hint that something is up.

Someday, we’ll learn about whatever combination of corruption, grift or other bullshit that was lurking behind the curtain.

Have you read the book?

My own suspicion is that they have access to some raw information that others don't have.

An example of such information would be information gathered from insiders at other corporations or industrial espionage.

It's more likely, in my view, that they've created a world-class industrial espionage outfit than that they've "solved the market" for decades where virtually everyone else has failed.

On the other hand, if they really are cheating, I'm not sure why the US government (who doubtless has penetrated them with their own spies) has let them continue operating for all these years.

I guess all the math and science PhDs they hire are actually undercover spies that finished their dissertations in order to provide a good cover?

Without getting into the validity of the gp’s post, RenTec does seem to recruit from NSA/CCR, particularly in the early days. Again, not saying this lends credence to the gp’s post, just adding an interesting bit of info.

RenTech recruited from NSA early on mostly due to Jim Simons' connections there. The recruiting they do nowadays is mostly because there are some excellent mathematicians, statisticians, information theorists, etc. there.

I have no doubt RenTech has some of the brightest out there. However, any consistently high-performing funds warrant suspicion, especially considering how many hedge funds engage in questionable activities (corporate espionage under the guise of "forensics", hacking, insider trading). Showtime's Billions isn't as far off from reality as people think.

A perfectly innocuous connection could be that intelligence community folks are good at ... drawing conclusions from intelligence? It makes sense to recruit spooks to analyze and interpret mounds of proprietary but legally-gathered intelligence then.

NSA's core competence is signals, largely making and breaking ciphers.

Intel analysis is more CIA/DIA.

My understanding is that this was generally true in the 1960s-70s as well. E.g., MINARET:


Do you think there aren’t other highly educated smart people working anywhere else in the financial industry? They’re success can’t be explained by just hiring smart people.

There's almost no firm with a bar to entry as high as Rentec when it comes to hiring, and almost certainly none with the amount of people who have cleared such a bar. Some smaller firms still hire similar quality, but RenTec has been around for so long and always has attracted the best candidates. It's not as simple as saying "they hire smart candidates" it's that they've hired the outright best in the market when possible.

You could say the same thing about Google and Facebook versus Twitter or Snapchat. Whatever strategies they did find and implement likely worked or were massively improved upon using the historic data the firm had on how to position quotes, what trades weren't liquidity constrained, what were the server response delays between exchanges, etc.

Think about the quality between Google Maps and Apple Maps when Apple maps was first launched. Apple even hired a bunch of ex-Google Maps employees to improve their product, so it likely was using similar algorithms, but with worse data. Apple though had the luxury of gathering every iPhone user's location data though to build up their dataset. In Rentech's case, a competing hedge fund would not only have to build out the team and infrastructure, they would only likely lose a lot of money at first to gather enough data to have a similar edge. There were a lot of HFT firms like Jump, Citadel's unit, Getco that generated very impressive risk-adjusted returns for a while, but I don't believe it was close to Rentech in terms of capital capacity and number of years.

> You could say the same thing about Google and Facebook versus Twitter or Snapchat.

You can't. Renaissance only hire ~100-150 people, their strategy is very much based on only hiring the best of the best. This is nothing like tech. Tech firms employ thousands of engineers, you have to employ average people if your demand is this high.

Jump and Citadel aren't trying to do what RenTech does either (it is very hard and very risky). They do a lot of HFT, afaik Jump is just a market maker, so they are more like tech companies in that they do not need geniuses. They just need competent bodies at scale who won't blow up the company.

Here's some inside baseball:

I recently graduated from Stony Brook University where Jim Simons chaired the math department in the 1960s. He left to start Renaissance Technologies which is located 1 mile down the street from campus. Their influence is everywhere. We have a Simons Center for Geometry and Physics ($150m building). I take classes in Frey Hall (Robert Frey used be managing director at Rentec). Our med school is literally the "Renaissance School of Medicine." Our athletic facility is the Walter J. Hawrys Campus Recreation & Wellness Center (named after Jim's father in law). etc. etc.

Children of Renaissance employees come to campus on weekends to train for USAMO and play chess. I met Jim a couple of times at alumni events and what stood out is how humble and normal and down to earth he seemed. He is also a chain smoker and was lighting up indoors(!) but of course no one can say a word to him lol. He's been making >$1 billion a year for like the past 20 years. To put it in perspective: an average code monkey like me making $250k at a FAANG would have to work for FOUR THOUSAND YEARS to make how much he makes in a year. It's unreal.

Don't forget the yachts in the Stony Brook marina! I always smiled as I passed the giant 'Matrix Rose'. No need to ask where the money for that one came from.

Just googled the yacht - its pretty small for someone of his wealth. Check out the late Paul Allen's yacht Octopus or MY Eclipse for what some billionaires go for.

Let's see Paul Allen's yacht...

...look at that tasteful off-white coloring, the thickness of it. Oh my god -- it even has a water mark.

Allen's Octopus was for research as well, remember. Simons funds plenty of giant expensive research things - just not in yacht form. I wouldn't expect something worthy of Larry Ellison from him.

Smoking indoors doesn’t seem like the marker of a humble person to me at all. It seems inconsiderate and arrogant

...or, an addict.

While I understand there are moral and ethical complications with the vast sums of wealth and influence attached to RenTec, the tone in these comments is disappointing...

There is no fraud at RenTec, and there is nothing magical about what they do. It's simply an amazing technical and scientific organization, operating with almost unthinkable efficiency and scale.

I haven't read the book, but I'm pretty sure this isn't in it: I've been told by reliable sources that if you pick any one strategy (however you are able to separate/define that) from the Medallion portfolio and it will not be individually remarkable--probably less than a 1.0 Sharpe (net of trading costs, gross of fees). There are countless hedge funds with equally performant models and sub-strategies.

What makes RenTec different is their ability to generate orthogonal strategies at a remarkable scale. They generate more ideas with less philosophical and empirical overlap than anyone else, by a wide margin. The software and theory required to do this for a fund as large as Medallion is absolutely as rare and valuable as their returns have proven.

Wrote more about it here: https://www.bridgealternatives.com/medallion-isnt-magic-prob...

This is really interesting, and what I'm about to say makes me feel more bleeding-heart than I feel I am most days, but there's something deeply melancholy about the fact that this collection of the best intelligence our species has to offer, working together to achieve something utterly unheard of - so unheard of that many other smart people think there's something criminal going on - is exerting its collective effort to - when you put it in plain English - hack a casino.

We're hurtling at an accelerating rate to ecological ruin, with millions (hundreds of millions?) of deaths a plausible outcome in the next 100 years, not to mention a fall in the standard of living for basically everyone, and our best and brightest are doing the Manhattan Project of cash.

As a stupid person, I can't do much other than shrug - hell, I can't even say I wouldn't do the same as these brain-genius PhDs if I had their capabilities. But it still kinda sucks, is all.

The problem is that our society is terrible at rewarding positive externalities. Even worse than we are at punishing negative externalities.

I do object to your phrasing. Quantitative finance isn't hacking a casino. It does generate actual value. The problem is that finance is one of the few fields where you can expect to be rewarded in proportion to the value you generate because the amount of value you generate is easy to measure. Cue all the smart, realistic people rushing into finance instead of having a larger impact for peanuts doing fundamental science or something.

Thanks for this. What you say about proportion of compensation makes a sort of sense, but I don't have the chops or the knowledge of the field to evaluate it. The 'easy to measure' thing is definitely insightful and useful to me as I think about it. Money does have that clarity to it.

The "hacking a casino" thing I'll defend, though: to the extent that getting better at gambling games and finance both can involve prediction, probabilities, data collection, and the like, I don't see how the analogy fails on anything but its crudeness, which I'll happily grant (while also saying I was going for a chuckle with it). I didn't mean to imply that getting good at either is something to be embarrassed about, only that it feels a little ... maybe "small", next to other concerns. I think that superlatively intelligent people do have god-given opportunities the rest of us don't have, and that while they're free to do as they please, the rest of us sometimes hope they'll use them wisely (and, selfishly in this case, to our benefit in some small way).

I'll also say that I meant "hack" in the older, more optimistic 1970's way, like "figure out what makes it tick and do cool things with it" instead of the more sinister modern sense. I don't attribute any malice or ill intent to Simons/RenTec, at least not without evidence.

I guess I could reinterpret/update my comment in light of what you've said to now say that "whatever value these men and women are creating inside this secretive firm, there's a strong case to be made that it's not the most urgent or needed kind these days".

I'm curious and sincerely so, though, when I ask: what actual value does quantitative finance create?

My experience is limited, so take with a grain of salt: my sense so far is that it helps stamp out any statistical/numerical inefficiencies in the markets that humans would otherwise be inefficient/slow to adjust to. For instance, if a straight up arbitrage opportunity exists across exchanges, automated strategies ensure that it goes away very quickly, much more quickly than discretionary human traders would. If there are proven statistical trends to the markets, then those should be acted on as well, because it means we'll arrive at the fair price of an asset sooner rather than later. A simple example: if a stock closely tracks the price of oil, and there's a quick uptick in the price of oil, it's better for the price of the stock to get immediately adjusted upwards rather than after a delay (and purely quantitative, automated strategies make this happen). I think the name of the game is that you have a bunch of people acting in their best interest, and thereby giving us an efficient market, which benefits the rest of the world by ensuring low slippage, fair prices, high liquidity, etc.

Basically this. I'll slightly elaborate on why an efficient market is a good thing.

It means that anyone can change money into a different currency without having to worry about being ripped off. There is one exchange rate and you'll be paying that plus a small margin.

It means that anyone can invest in publicly traded companies without having to spend an inordinate amount of time and effort trying to value them. Pension funds would be next to impossible without this. To the extent that the market is efficient, you don't have to worry about the imminent collapse of IBM. If anybody knew, the prices will reflect it even if the rest of the world has no idea why the prices are as they are. (The further markets get from being efficient, the further this gets from being true. Compare investing in the S&P 500 to the shenanigans happening with penny stocks. Be glad that your pension fund gets to invest in the former so it can pass on the latter.)

It means that companies can raise money without too much difficulty. They'll sell a part of themselves, and a legion of quants will give them as fair a price as humanly possible. If the price were unfair, someone could exploit it to make money , correcting the price in the process. Ergo the price will be fair. While this sounds far removed from the welfare of the people, this is what greases the engine that runs the jobs of virtually everyone in the developed world. It also lets people pool risk to try risky but worthwhile things. The impact this has on innovation cannot be overstated.

Of course, I agree with the above poster that finance probably isn't the best place for smart people to spend their lives. I'm just claiming that finance people aren't overpaid, everyone else is ludicrously underpaid.

This is a really good case for quantitative finance, and it's also really clear, so thanks for both. Consider my perspective changed for the better.

There's still a bit of dissonance in this for me, but it's abstract and strays a bit what you're saying, so don't feel a need to respond: I think, for example, about the friends and acquaintances I have in finance who I've often heard lament about the lack of meaning, utility, and social value in their work despite the good pay. They're smart men and women, every single one, so I'm sure they know they case you're making - so what gives? (This is clearly more a question for them than for you.)

I also wonder idly what proportion of the explosion in the finance industry since the 1970's is taken up by the sorts of plainly beneficial and useful efforts you describe, and what proportion is simply craven, greedy bullshit. Clearly the latter is more salient in the cultural and moral imagination, in no small part because of the Madoffs and the Beskys and the Milkens of the world, not to mention everyone involved in the 08 crisis. That the former isn't as salient makes me think, like, how many Jack Bogles are there for every Gordon Gekko? I know a ton of Gekkos - I went to college with them! - but few Bogles.

I feel both of your questions and have no answer for either :(

One way I think of Renaissance and some of these other quant funds is almost a retirement package for so many of these academics and researchers.

As has been mentioned elsewhere, these are some of the best and brightest people from their fields who have established reputations and are well-known in their fields. I would assume most of these people have spent the bulk of their professional lives working in academia or in pure research, so I do wonder how many of the RenTech employees are people have been working for (relative) peanuts in academia before making the switch towards the end of their careers and "cashing out" essentially. Pretty sweet if you ask me.

Thanks for sharing this, I'm diving into the 3 videos that you highlighted:

Part 1: Mathematics - https://www.youtube.com/watch?v=HVqxs0YBp4g

Part 2: Finance - https://www.youtube.com/watch?v=srbQzrtfEvY

Part 3: Philanthropy - https://www.youtube.com/watch?v=w8o-qC8E5ic

I use to service pools back in high school on the north shore of long island. And I remember doing Simons house, unbelievable property. The house keepers house was 5x bigger then mine..and the pool was massive, right on the edge of a cliff overlooking the long island sound. Sry if its offtopic but this read made me think of it!

I like anecdotes like this, thank you.

Wow that sounds like a big housekeeper's house. Do you remember anything else interesting about the house? Maybe this will be the detail we need to finally crack what's behind all that alpha.

My bet it's some Frankenstein advanced brain machine interface device using the combined consciousness of 10,000 cryogenically preserved heads in a secret cliffside bunker. /s

Simons hired "the best" people?

On who Simons hired: IIRC there is an interview with Simons where he explains that he hired good mathematicians, etc. who had published interesting work or some such. In particular, he required no MBA or business degrees, experience with accounting, reading corporate annual reports, SEC filings, or business.

So, my guess would be that at least for the early years of Simons's work, such people would not be very welcome in the rest of Wall Street and usually not considered the "best" or even good at all.

Point: That he hired "the best" has to do with what criteria one is using for goodness!

By the way, in this thread there is mention of Thorpe! So, yes, his Beat the Market had in the back that some argument was from "measure theory". So, before my Ph.D., I was working carefully through Royden, Real Analysis! I was getting through the two exercises on upper and lower semi-continuity when I went to grad school. Right away I took the 700 level course in analysis (measure theory and functional analysis) and probability. The prof was a star student of E. Cinlar, long head of Operations Research and Financial Engineering at Princeton. Got to meet him once! So, that background should be of interest on Wall Street? After some good efforts, not as far as I could tell although then I didn't yet know of Simons.

It is true that the year I got my Ph.D. near DC, the ORSA (Operations Research Society of America) conference was there and I submitted a resume. I was 110% busy taking care of my (later fatally) sick wife so didn't go but some friends said that on some bulletin board I had lots of requests from Wall Street! Gee!

At one time I interviewed at Morgan Stanley and mentioned my paper on multi-variate, distribution-free anomaly detection. A computer systems management guy was a little interested. Another guy wanted me to give him an outline of the paper; I did and mentioned that I'd like to work on applied math of trading -- his reaction seemed to be that neither he nor Morgan Stanley nor anyone on Wall Street would be interested in any such thing!

Later a Bertsekas student from MIT gave me the rumor that Simons also liked hiring Russian mathematical physicists!

Point: It seems to me from a distance that Wall Street has been slow to hire people like Simons did.

On what Simons did: There's an old comment that a good casserole is like a good marriage -- only the people who made it really know what is in it. My guess is that this remark applies also to Simons! In particular I doubt that we should regard him as a quant much like the rest of Wall Street.

Bluntly, I suspect that there's no telling what the heck Simons did: E.g., there's no law that he had to have much contact with the Markowitz work, the Sharpe work, the CAPM (capital asset pricing model), econometrics, classic time series analysis, the Thorpe work, the Black-Scholes work, the Martingale convergence theorem, the Doob decomposition, controlled Markov processes, stochastic differential equations, the Brownian motion solution to the Dirichlet problem -- he could have been doing things totally different!

Heck, quite generally it's beyond super tough to be on the outside trying to know what's going on inside: E.g., I got interested in cooking, once took my wife to André Soltner's Lutèce, but never got a clue about how he did it! E.g., I made some progress with violin but never figured out how Heifetz did it! E.g., I made some progress in physics but never figured out how Einstein did it! E.g., I made some progress in math but really have no idea how Simons did it. It's a Robert Frost one?? -- "We dance round and round and suppose while the secret sits in the middle and knows."??

My approach to making money is not to try to get hired on Wall Street, out on Long Island, or near the commodity pits in Chicago or Kansas City but just to do my startup. There I don't have to know all the ways people got rich in business -- it's enough for me to find just ONE way!

I don't have to know how all the cooking, music, physics, or math of the past was done -- it's enough for me to do some math for the problem I'm trying to solve.

I don't have to know every computer operating system, programming language, memory management or concurrency algorithm -- it's enough for me to know enough computing to get the code running for my startup.

Since I'm able to be a sole, solo founder, I don't have to convince people on Wall Street or Silicon Valley that I might make them money -- I just need to convince myself and then actually DO it!

And if I'm successful, my crucial core original applied math secret sauce should remain secret!

Point: I don't believe I can figure out how Simons did it!

Note that RenTec also runs two other funds that are larger than the Medallion Fund, but both under perform the index.

On a completely unrelated note, if I were interested in creating a fund that appeared to have market beating returns for decades and I wasn't concerned about the legal consequences, here's one way I might do it:

I would create fund A and B and seed them with some initial capital. For fund A, I would create a machine learning model that took in lots of opaque parameters and hire a team of very smart mathematicians and computer scientists to optimize this model to perform profitable trades. In order to easily generate alpha, I would subtlety feed in some parameters that were correlated to the future market moving actions of fund B. Since I also run fund B, I uniquely have this information.

I would use the performance of fund A to woo outside investors into investing their money into fund B. In order to prevent fund A from overtaking fund B in asset value and thus diminishing the value of the subtle signals, I would close the fund to the public when it got sufficiently large and periodically distribute its assets to its investors.

In order to avoid any of my employees from eventually figuring out what's going on and reporting me, I'd incentivize them to avoid looking too closely by requiring that they invest a large part of their income into the fund with a long vesting date. I'd also require them to sign a long term non-compete so that they cannot work anywhere else in the financial industry if they leave.

To be frank, running this sham for 30 years sounds less plausible to me than beating the market the boring way.

How would you stop investors in your two public funds (and their accountants) from asking pointed questions about disbursements from one fund to the others? Do you plan to fool them for this amount of time, or bring them into the conspiracy?

And how will you sustain the conspiracy when your other two funds trail the market index by a lower combined differential than your other, internal fund is beating the index? Will you initiate a Ponzi, or something else?

There is a more realistic angle to attribute RenTech's returns to fraud. I don't personally believe it as I have friends there, but I believe it would technically work:

A nontrivial number of RenTech's employees have come from the intelligence apparatus of the United States; namely the NSA. Simons was particularly affiliated with them early on in his math career. It strikes me as plausible (but again, highly unlikely) that if RenTech is is a conspiracy, it is a conspiracy sponsored by US intelligence. They would have the capability to run a 30 year secretive conspiracy, and they would have they desire to attract top talent in math, physics and computer science.

But I'm just speculating for fun year. I really don't think there's any conspiracy :)

There would be no disbursements from one fund to the other. Fund A would purchase an asset slowly over time. When it has finished purchasing the asset, fund B would purchase that asset quickly at a scale large enough to increase the market price of it. As the price rose, fund A would sell its position.

The net effect is that fund A sees increased returns and fund B sees decreased returns.

And, importantly, the proportional impact in fund A is much larger than the one in fund B

This is throwing any efficient-market hypothesis out the window. Msybe this would work for a year, but why would anyone invest in fund B if it is a consistent loser. If you can figure out a way to slowly buy an asset and then quickly buy more of it and make both strategies profitable at all, then you're onto something huge. Almost as huge as Ren Tech

It assumes an efficient-market. The money is coming at the expense of fund B. It doesn't need to be a consistent loser, it just needs to make less than it otherwise would on average.

People invest in funds that under perform the market all the time. That describes the majority of the finance industry.

I mean, hedge funds on average ARE consistent losers. People invest in B through marketing and proximity to A.

Hopefully not a silly question, isn’t this just a classic pump and dump scheme?

Wouldn’t this be exceedingly traceable over time? Are trades not public over time? Especially larger positions?

Or do we only know when Berkshire Hathaway (for instance) sells off some Coca Cola stock because it’s a publicly traded firm?

A pump and dump relies on manipulating others. In this scenario, the goal of the buying/selling patterns is not to manipulate the market into believing the price of the asset is something different, but just as a mechanism for transferring money between the funds.

It's also just a simple example of how it can be done. Many assets and derivatives are correlated to each other in the market in various ways. Their correlations can be exploited to allow you to do the same thing using an arbitrarily complicated set of assets instead of just one.

Some trades are required to be public, but the majority aren't. It wouldn't be too hard to hide the transfers in trades that don't need to be public.

Huh, neat, thanks for the detailed answer. I wonder how something like this would scale. Seems like you’d hit a limit where large trades would get noticed, so I guess the key would be to spread it over time.

> running this sham for 30 years sounds less plausible to me than beating the market the boring way.

I agree that a sham seems unlikely. But to this specific point, didn‘t Madoff‘s scheme run for several decades? Wasn‘t he even made NASDAQ chairman or sth at some point?

I think multi-decade frauds are definitely possible.

My own pet conspiracy theory about Rentec is rather that Simons was a cryptographer so maybe there was/is some actual hacking involved at some point in the pipeline. I say this, of course, with zero nonpublic information and on the basis of nothing. The stated numbers are just so incredible, it boggles my small mind

I believe the newer funds were created well after the original fund and were designed from inception to have a larger trading window. I’m sure you could commit fraud front running rebalances, etc, but not to the tune of $6B a year.

It's an interesting idea, but in this case Fund B only came into existence after 15+ years of market beating performance by fund A.

A funny thing from the recent book: One of Rentech's earlier employees spent his first few months there trying to figure out what the scam was.

Thanks, I didn't know that. Do you know if there were any other funds by him at the time? I could also create a dozen funds that do randomly different things and just close the ones that didn't do well to get me started.

Simons had other investment funds, but they were mainly focused on early stage, private tech companies.

He did have about 10 years worth of poor-to-decent results running other hedge funds before he found real success with RenTech. So it's not like this all came out of nowhere.

Aren't SEC whistleblower awards setup to combat the scenario you're proposing? The first individual to defect would presumably earn vastly more money than continuing with the scheme.

Thing is, it could happen semi-inadvertently even, such that there’s nothing to blow the whistle on. Basically, the incentives are aligned to support the above scenario. If the thinking going into the public funds is geared toward how “big money” works, and the small, private fund is designed to exploit features of “big money” moving around the market, and you get some cross-pollination of those hypothesis about what “big money” should do, the scenario described above emerges naturally. No grand conspiracy in a smoke-filled room is necessary.

"The SEC has now awarded approximately $376 million to 61 individuals since issuing its first award in 2012."

There's no way the incentives from something like this SEC program could outweigh the economics of being high up within Rentec. [No dog in this fight about theorizing fraud vs. legit, just saying the SEC gap is multiple orders of magnitude in incentives here.]

In the scenario you're outlining, the Medallion Fund's yearly returns would be capped by the underperformance of the other RenTec funds. There are two problems with this scenario: 1) The Medallion fund has been outperforming since the 90s, while the other funds opened in 2005. 2) The Medallion fund has extracted vastly more than would be available from RIEF/RIFF underperformance.

Not necessarily. Using the weight of the big funds to put your thumb on the scale of the market could absolutely shift market prices in a way that can be exploited to reap more reward than is lost. In fact, it is a good explanation for why the medallion fund is size-limited.

Also, as someone else noted, there is a 10x size difference between the two pools of money. So the big fund can “lose” 1% which generates a 10% increase in the small fund. Then you advertise that you are capable of incredible returns to induce people to invest in the big fund. Another reason why the small private fund is limited in size.

> Note that RenTec also runs two other funds that are larger than the Medallion Fund, but both under perform the index.

Citations needed: last time I checked, their outside funds beat the index.

As for your conspiracy theory: their outside funds didn't exist until recently.

Front running external money with the internal fund is a big no-no and a well known possible conflict of interests.

I don't see a way this would go on for such a long time.

Just to make sure I understand you: the idea is that the excess returns of fund A above the index would be no larger than the under returns of fund B below the index?

Yes, but on a $ basis rather than a % basis.

What do you think the $ figures are? Have you tried to see whether the numbers add up for your theory?

Well reports are that the Medallion Fund is capped at $10B with a 66% annual return before fees and a 39% annual return after fees, so the other funds would need to underperform by an average of at least $3.9B per year. If we include the fees in the performance (it's not clear to me that we should, since it's just an accounting measure that RenTec claims to pay itself) then it's at least $6.6B.

Wikipedia says RenTec AUM is $110B. $10B for the Medallion Fund leaves $100B for the other two. So they would need to underperform by either >3.9% or >6.6%. I have had trouble finding exact numbers for those funds, so I can't determine if that's really the case or not.

However, this assumes RenTec is unable to beat the market at all. Maybe they really can beat it, but by only 2-3% per year. They can still funnel that outperformance into the smaller fund to turn it into 66%/39%.

The other funds have not had $110B in AUM for most of the time period in question. Probably less than half that. RIEF shrunk to ~$7B at one point, during the post 2009 period.

Next step is to look up RIEF, RIFF, & RIDA's dollar returns to see if you can match the figures.

I mean if you want to not go to jail all you really need to do is beat the market by N% and take that as your fee. If N is sufficiently low you can probably do it by aggressively balancing the portfolio every 2-3 years, such that it functions like an index fund but with adjustment to cut out losers.

There are plenty of folks out there that will do this for you. Just don't get greedy.

Uh, if all it took to beat the market was consistently rebalancing your portfolio everyone would be doing it. It takes more than that to consistently beat the market.

A lot of money managers are doing that. It's a tiny percentage, something like 2%. The reason that it isn't as common is because the time table is like 15-20 years, not 3-5.

If you beat the market for 3-5 years, that's not consistently beating the market. That's flipping a coin.

That's 100 people flipping coins, and being impressed that someone got 4 heads - all in a row.

Someone's going to say this eventually, so it may as well be me.

Rentech is not the only hyper successful fund. There are others, like TGS management (https://www.google.com/amp/s/www.cnbc.com/amp/2014/05/09/mys...) that are just as successful and who you've never heard of.

What rentech has done is to have built an excellent data processing engine that automatically extracts signal from noise. Other, much more secretive, funds have done this too.

Very cool. Do you have any info/resources on how the signal extraction works?

Signal processing, information geometry and information theory mostly. You can read the papers rentech authors publish before they leave

Do you have any examples?

whenever i heard of stuff like this, i think of ligo, the gravitational wave detectors. from what i understand, their signals are just huge amounts of noise, other signals, and then finally the actual signals (gravitational waves) that thy are looking for. but it so happens the gravitational waves is a miniscule amplitude compared to the other signals and noise. so what they do is model all the possible types of noise that is happening in the world, and then they have many models of the type of physical situations that can generate gravitational waves (like a black hole - black hole collision). so they do fancy dsp and filtering and do matches against expected events.

my naive assumption and pure guess would be that a lot of trading schemes looking for patterns do this thing to. they model what shows up as noise and other signals and also model what determines value, and then look for the signals that point to or away from value.


Yes, you're 100% correct. In fact, if I remember correctly that David Donaho was a co author on many of the papers for the LIGO detection technique

Think there are many others (you mentioned one of them e.g., TGS) but they are not in the same league as RenTec's medallion fund.

TGS is comparable to Medallion. The two have competed for talent in the past, and TGS actually spreads higher AUM over fewer people. TGS just doesn't have satellite funds, so they're quieter.

hmm, I did not know that. Do you have some external links or returns to back this claim?

TGS is famously secretive. They went prop in the early 90s; no external investors. You won't find their returns anywhere.

The only public data available (that I know of) is related to their charitable giving.


No public data in recent years but if you dig a little deeper you can find bits and pieces here and there about their past. Not sure what name they trade under these days because I can't even find a 13-F.

There was a book published last week on Jim Simons and Renaissance Technologies:


The author was interviewed on the Masters in Businesss podcast:


Simons is a serious mathematician:


He won the Oswald Veblen Prize in 1976:


He's still an active mathematician, too, for example a 2018 pre-print: https://arxiv.org/abs/1803.07129

I’m not a bot but I am always posting relevant and recent (2017) New Yorker articles that are worth reading:


And this interesting theme:

> Foundations are not taxed, so much of the money that supports them is money that otherwise would have gone to the government. Scientific mega-donors answer to no one but themselves. Private institutes tend to have boards chosen by their founders, and are designed to further the founders’ wishes, even beyond their deaths. Rob Reich, a professor of political science at Stanford University and an expert on philanthropy, told me, “Private foundations are a plutocratic exercise of power that’s unaccountable, nontransparent, donor-directed, and generously tax-subsidized. This seems like a very peculiar institutional and organizational form to champion in a democratic society.”

I'm not a bot either, and why would you start your post by saying you're not a bot?

Many of my comments are links to relevant NYer articles

reddit transplants would be guess.

It blows my mind how much RenTech does with some ~300 employees. I recently had a phone screen with them (no offer otherwise I wouldn’t be writing this) and all of my communication was with this MIT math PhD. No HR, just the PhD.

Compare them with a Big N that has 10,000s of SWE’s. It’s a safe assumption that each engineer is individually less talented but even so, how do they iterate/experiment with such few employees?

What kinds of questions were asked during the interview process? I don't think I'll ever have the chance to work there, but I'm extremely curious about the vetting process for a place with such a notorious hiring bar.

> how do they iterate/experiment with such few employees?


Upon hearing this, the student achieved enlightenment.

> I recently had a phone screen with them (no offer otherwise I wouldn’t be writing this) and all of my communication was with this MIT math PhD.

What were you applying for? A software position? If yes I am curious as to what programming questions did he ask.

> This article is about the American hedge fund management company. For technical advancements during the European Renaissance period, see https://en.wikipedia.org/wiki/Renaissance_technology

Thanks, something like that is what I expected and what piqued my interest from the title :)

I have to say, the first time I read about Renaissance I felt sadness at the thought that this much ability and such resources were put into essentially making money out of thin air, with very limited (if any) social benefits. I can't escape the feeling that the world would be a better place if maths and physics phd's would get to live a good life doing maths and physics, rather than being lured into quant finance.

How do you feel about them working on nuclear bombs & working for the NSA? Cause for many years that was the standard way to live tr good life.

working on nuclear or military technology is double-edged as it is serves both national security interests and advances technological knowledge.

Rentech is an absolute technology black box that will both take its money and knowledge into its grave with virtually no productive outcome for society at large.

The NSA and US nuclear science at least drives innovation.

The US economy (to which RenTech contributes with profits made on foreign markets) is a national security interest. Working to be very rich and then donating a large chunk of money to promote science - and maths education, also advances technological knowledge. Those depricated CRUD apps I wrote a few years back served neither.

We'd all like our opponent Poker players to play with their cards open, but if they did, they'd never win. Have to accept that you don't get to see the cards of winning players (which includes military technology until declassified).

I find this "Financial trading does not do any good for society" to be rather simplistic, romantic, and envious. The carpenter who turns wood into a chair is said to be producing value, but the investor who turned uncertainty into a profitable hardwood trade is not.

trading is largely a zero sum game. Companies like rentech earn money through speculation. If a craftsman makes a chair you have a char in the economy. If renetch extracts a few billion by betting on the stock market someone else has lost a few billion. The only hypothetical benefit is some liquidity but that is pretty meaningless in today's economy and there's even some evidence that high-frequency trading has negative net effects on volatility.

So no this has nothing to do with envy or romanticism. It's just a bad idea to have people with PhDs who could be changing the world play zero-sum gambling games on the stock market. These guys could be reinventing physics or bring us to mars. That's what makes people criticize these activities.

And as far as charity is concerned. Yes, Simon has done a lot of good. However, the other famous rentech guy is Robert mercer, and he is in the business of funding climate denialism. So whether you get a good philanthropist or a bad one is pure luck and has nothing to with the discussion on financial speculation.

Pretty sure the zero sum game trope is overplayed/inaccurate.

That is not the only possible alternative employment, though many would sugest it's both an accurate statement regards the past, and an undesirable alternative.

False dichotomy, regardless.

About as bad. Although, as has been pointed out, military research can have benign applications as well.

The tone of many comments here is disappointing. I'm really surprised at the number of people suggesting illegal activity.

Why is it so hard to accept that someone did the math?

I should add that Renaissance Technologies is hiring!


My group is looking for very strong Java/Kotlin developers.

I know this is not likely, but you should consider setting up an anonymous email in your HN profile to at least receive questions about the company as an employee. Not to answer anything proprietary or to give anything away under NDA, but so that people can speak candidly with someone not in HR without having to rely on HN comments.

Denise is great, but I wouldn't say she's the best source to answer harmless but very important questions prospective Java programmers might have that you can answer, for example :)

Here's an example question for you: do you want candidates to also have tax and accounting experience, or is deep Java/Kotlin enough?

Something to consider.

I'm sorry for missing the key point of your question. It's been a busy day.

Deep java/kotlin experience is far more important. Note that as a developer you might start working with tax accounting, but then shift to risk management or investor relations, etc. as business needs shift, so specific knowledge in one area isn't that important.

Tax and accounting experience is nice, but any development work done in those domains would be done at the direction of our existing tax and accounting teams. It's beneficial to have the domain experience (ie what is a trial balance) but not required.

It's a small world. Denise used to sit outside my office until I moved moved to a new location. ;-)

She has forwarded requests that people may occasionally send directly to me in the past and I generally try to respond. I prefer all communication be done through proper channels to avoid any "issues" that might arise.

I have a son who is a CS major in college now. I completely understand how challenging (and borked) the hiring/interviewing process is now as I speak with him about the frustrations he experiences. Which is why I try to be approachable when people have queries.

Can't say I had the most favorable phone interview with you guys, but I did appreciate the incredibly responsive process even through the "proper channels".

Would you consider applicants that started off with a bad GPA in math and computer science courses but then made significant improvements as they progressed?

The answer is Yes. People have things going on in their lives, so I prefer to not look at a college transcript until after I do a phone interview and have a sense of who they are now. I have passed on people who did OK in everything but the transcript was a mess. I have overlooked a weak transcript if someone has some years of experience or other significant skills. I hired a coder who didn't go to college and is largely self taught.

Life is complicated and a transcript alone captures none of that complexity. As an example, I married someone whose father died of ALS while she was a college student. Helping care for her Dad, and comforting her Mom through his passing, had an impact on her college experience. I look for the A- candidate who perhaps worked during school, took challenging classes and has a passion for their craft, over the A+ candidate who coasted along and who has done nothing. Steel sharpens steel. Resilience in face of challenges is important. If the poor GPA is because you were partying and half-assing your work and couldn't be bothered to apply yourself, then please be honest with yourself and don't send a resume.

For the interview in our group, we will sit you at a keyboard with the OS, language and tools you selected, and we'll give you a coding project that exercises the skills you reported on your resume. And then we'll see how you work. If you are unproductive in that environment or spend all your time using google and stack overflow, then you are not our candidate.

Do you consider candidates from outside the US?

It's simply surprising that they continuously find an edge in an ever increasingly competitive market.

It's not a fair comparison to say they just "did the math" when there are thousands of other, highly qualified, highly intelligent people trying to "do the math" at the same time, all the time, yet RenTech has managed to always come out ahead and not just barely, but massively ahead.

I don't believe RenTech is doing anything illegal. I think they have a extremely significant edge that they've managed to maintain for a significant period of time and that should be suspicious to anyone who participates in the market.

Like seven standard deviations better than their competitors. Maybe they're just that good, but normally when something is that far out of the norm it invites suspicion.

It is right and proper to doubt the results as published in that new book.

It's the tone though that surprises me on what I expect is a more technically oriented site. I'm now half expecting an accusation that Renaissance uses witchcraft, or alien technology from the History Channel.

What’s hard to believe is the immense success, something on the order of 70% annual returns for a couple of decades, the secrecy, and the fact that it’s size is capped. That and the convenient smokescreen of “they did the math,” and the fact that nobody else, given the immense incentive to do so, has matched their “math.” I don’t know if it’s illegal, but my gut says that if it isn’t, it would be if people knew about it.

This fund consistently performs in the extreme long tail of statistical likelihood. Generally when something is that extreme we don't think "welp, statistics! someone is bound to occupy that spot in the distribution!". It's far more likely, given the industry and history of misadventures in it, that there is missing information. And, given the industry and the shenanigans that go on, it is also likely there is something less than above-board related to that missing information.

Mundane explanations, like (legal) information access advantage or superior model execution times, give fleeting advantages that are extremely unlikely to be unreproducible by others for very long, much less years or decades.

The answer to this is in Peter Thiel's Zero to One. Most people believe that universal competition has made it so there's no edge.

Some people have done economic history.

Renaissance Explores Settlement as IRS Seeks Billions in Taxes


Related HN discussion from 9 months ago: https://news.ycombinator.com/item?id=19063977

This made me remember this interview with James Simons on Numberphile: https://www.youtube.com/watch?v=sB_OdGGA450

the full length one is very good. it gives an understanding as to why simons has been so successful.


Who audits their returns? They have not had any outside investors for over a decade. I had not seen an update on their yearly performance for quite some time, and was surprised to see an updated table published in this book. So I'm curious, where did these numbers come from, and did RenTec confirm them, and did an independent party confirm them?

So much negativity in this thread. We fear or doubt what we do not understand I guess.

You must have some nice ruby-tinted glasses to be able to put a positive spin on "secretive hedge fund with black-box trading algorithm hires scientists to makes rich people lots of money"

I think you've been drinking too much of the Warren coolaid. If you are American, vilifying wealth and building companies is quite a silly endeavour. This blame game mentality is counterproductive and will only restrict and impede your own financial success.

I mean what is the end effect of this though? Basically some smart people get very rich. Due to zero-sum game, other people lose. No benefit is derived in the real economy. The only possible benefit is increased liquidity... which really isn't that beneficial past a point right? I don't see the benefit. If you have a different angle I'd be glad to hear it.

> Due to zero-sum game

Wealth is not zero-sum, it's created. Real GDP (i.e. adjusted for inflation) in the world has increased from ~$3.4T to ~$110T since the 1900s.

Yeah, but what does that have to do with trading? When you create something that physically benefits people/the world, you usually extract your own value (profit) by providing even more value and selling it. When you trade like this, what net value are you providing? It seems like they are just extracting value.

Also, if all the smart minds were doing advanced trading in 1900, would the GDP have risen as much? Instead people were creating aircraft, fighting disease, creating the internet, etc.

Agreed. And as you mentioned above, many believe the “real value” or whatever of liquidity is indeed capped and has diminishing returns. Trading financial instruments doesn’t just perform the capital allocation task that we were told it does in Econ 101. It’s also a fantastic way to take other peoples money. Why is that so hard to believe? And to those feeling a need to deny such behavior as an attack on capitalism, I’d suggest that it’s the purest expression of capitalism. The goal of investors or capitalists isn’t to do anything useful other than acquire more money. To the extent useful stuff happens, that’s just a side effect of acquiring more money. There’s no altruism involved. So it should be something that a true capitalist would embrace.

The parent comment is talking about hedge funds. It does not seem likely that they are responsible for the increase you are talking about.

I generally agree that there are some really bad effects of funds like this. But wealth is not zero-sum.

Wealth is not zero sum in the long term. But it is in the short term. When a fund makes a billion profit in one day, do you think that was just the natural creation of wealth? No, other market participants collectively lost that much.

Inequality is.

Thermodynamics has some interesting implications regards wealth.

It’s perfectly reasonable to think that whatever strategies they are using are being shielded from scrutiny at least in part because of a concern that it would be regulated out of existence, i.e., made illegal, if public. That’s just good capitalism there.

Do they still outperform? I can imagine 10 years ago they were ahead of everyone but now quant investing is everywhere I would be surprised if they have a big edge.

I would read the recent book. Competition really started in the mid-1990s (and quant funds existed way before that point), and Renaissance actually picked up steam far later than everyone else (and had trouble raising capital because everyone thought the space was already tapped out).

Btw, the point to investing isn't an absolute level of knowledge but relative knowledge. If you keep moving ahead because you are smarter then you will keep outperforming. The view of most investors, not just in quant, is: I went to X university, I am very smart, anyone who does better than me is cheating/insider trading/committing fraud/etc. But the majority of people won't outperform regardless of "intelligence".

AHL has been doing quant for nearly four decades now, they only hire the elite, they even have their own quant finance institute at Oxford...results? Still shit because it isn't as easy as just hiring a ton of "intelligent" people. For some reason, smart people tend to believe that the real world is like university or government where success is achieved by other people thinking you are smart...it isn't like that. Obtaining results is the combination of many things (i.e. most quant firms churn and burn employees, most quant firms have trouble retaining staff, etc.).

Companies like AHL and Winton have completely different goals and ways of making money... they got into the “quant” (a.k.a. trend following) industry very early and still reap the benefits, they have big AUMs, scalable strategies, etc, but (AFAIK) their actual performance isn’t that amazing (compared to RenTech, Two Sigma, Citadel, ...).

I only interviewed at AHL so I cannot speak of the quality/intelligence of people working there, but judging by the difficulty of the interview, compared to some other companies, my conclusion is that their hiring bar isn’t that high. I also wonder how limited these companies are in their investment strategies - either they cannot invest into more sophisticated strategies (limited by investor agreements), or they don’t want to, because poor known returns are easier to justify (“trend following just had a bad year, nothing we can do about it”) than poor unknown returns (“we tried thes completely new thing that we have no experience in, and it didn’t work and we lost a lot of your money”).

Winton is fundamentally dissimilar to AHL. Winton have a reputation for skill and outperformance. AHL have a reputation for blundering incompetence (that is why the 'H' in AHL left to start Winton, and became a billionaire doing so).

The only goal is to make money. I understand your point in that AHL are dissimilar to RenTech but I didn't say any way was correct. The right way is whatever makes money. You have firms that look like AHL and do better.

I would look at who they actually hire. From what I know, there is almost no-one in their quant team who didn't go into Oxbridge (at least for PG). That is not a low bar.

Btw, I have seen this elsewhere. I know of non-quant firms that only hire from Oxbridge, and they get the same result as firms that don't have a specific analyst program (i.e. everyone rotates through admin/sales/marketing).

The point isn't that this doesn't work. RenTech have a high bar, it works. The point is that you have to really understand why you are doing it. Hiring "smart" people without thought only results in a higher wage bill.

And if we are going to get into it: one big issue with AHL has been the management (that is why David Harding left). They have got better but I don't think they are totally out the woods (I have heard they are trying to do momo in illiquid and esoteric markets...which won't work).

Saying it is the clients is one of the worst excuses in investment management. That is actually true one time in a hundred (BlueCrest is one). It is like the crap football teams complaining about good teams having all the money. Good fund managers have good clients because they don't fuck up all the time. The issue is AHL, for whatever reason, kept trying to do the same thing for decades, and expected to print money.

Thanks, interesting and insightful comment.

Regarding analyst/graduate rotations, what do you think is the actual value there? To me it seems just a way for the team to lose a potentially decent employee just as they’re done training him/her. If the idea is to familiarize juniors with the firm, what it does and how it works, wouldn’t a shorter program with direct lessons work better (e.g. what some investment banks do - send everyone to the HQ for a few weeks - or Jane Street, where everyone first learns OCaml)?

The value is that they hire a ton of people with a very low bar. The smartest go into investment research, the next lot go into sales, the next into marketing, the rest into admin.

The effect, I believe, is two-fold: one, these guys are cheap. And two, you don't have to rely on someone's education, you can see if they actually can function in the workplace.

But this places a huge burden on actually being able to train people who aren't particularly intelligent to do a complex job and creating a team-based culture (i.e. where the sum is greater than the parts).

One example of this is Aberdeen Asset Management. They went from one guy in an office to one of the largest asset managers in the UK (and the world) by hiring this way. A big part of their growth came from acquiring firms with lots of lazy Oxbridge types, firing them all, and moving in their low-cost team of guys.

This isn't like what IBs do, it isn't what Jane Street. Both are highly selective, and hire into specific jobs. IBs will do a big training program over a few weeks to get everyone up to speed (i.e. on accounting, whatever) but what I am talking about is 3-month rotations through every part of the business.

HR at IBs hire "geniuses", they hire the best of the best...if you do this, it makes no sense to pay them a big salary and then stick them in the back office (they will probably get poached). Now most of these people aren't actually any good, most will get promoted up to VP because they have been there X years, and then get laid off during a recession...but the hiring culture is totally different (and btw, massively overstates the ability of HR too). And btw, it is semi-efficient because most IBs understand they will end up with a bunch of overpaid turnips...it is worth it to find the next rainmaker (but the rainmaker in asset management never pays off because they get poached).

Interesting.. yeah you're right, AFAIK better banks (Goldman, BAML) hire for specific roles even for non-IB teams... All in all, I often wonder if/how it's possible to improve on both of these approaches, how to figure out both if someone is actually intelligent (as opposed to just booksmart, or got the interview questions from the recruiter) and whatever else is needed to perform (drive, common sense, not IYI, ... I'm probably not experienced enough even to know, let alone to judge...), particularly for computer developers or generally researcher types.

Btw, I'd love to meet and chat about this. If you're in London, feel free to email me tom.primozic at gmail

I would argue its because academic success is more related to having a great memory than having novel intelligence

I am sure I have no idea why this it is the case. But I would characterise the "novel intelligence" as a combination of creativity and common sense.

RenTech aren't hiring smart people. They are hiring people with technical ability and with a proven track record for solving very open-ended problems.

AHL is mainly hiring grads, definitely very smart people with strong postgrad quals but with no real track record. This can work if your model is technology-based like a Citadel or Jump. But you will get creamed in the world of RenTech.

All I can say for sure is that I have definitely seen this in non-quant investing. Firms that hire people from worse academic institutions, focus heavily on training, and have a culture that encourages teamwork do way better than firms that hire the "genius" types.

Right, I've worked at quant funds and met a ton of people at different funds. The weird thing about hedge funds, is that until recently, prestige and outward appearance have been traditionally more important than returns. This is changing now, especially with ETFs and the explosion of passive management and the media exposure/public discussion about how finance has really been about money managers making themselves rich, at the expense of institutional investors and pension funds. Its a business, where the model is not returns, but instead the appearance of a coherent brilliant investment philosophy.

For example, AQR (which is more of a mutual fund I know, but its a prime example) is known for hiring based on academic prestige, and the returns have been absolutely dismal. But they have a specific "investment philosophy" and a brand name, so the game is to never admit that their strategy is a failed one. They cant outwardly say their strategies dont work. Its the same with replacing a bad portfolio manager, funds whos portfolio managers are well known cannot switch them easily, as soon as investors discover a big internal change (like high up management/PMs leaving) they know something is wrong and may pull their money.

This all ties in to how they hire, with school prestige usually the most important criteria. I worked at one place where everyone on my team went to either princeton, yale, or wharton. They were all intelligent, energetic, on the ball. None of them were "exceptional". Whats worse, none of them could program, none really knew statistics, etc, but they were all "Data Scientists". I was appalled at the amount of money being made and how much these guys were being paid.

This is in contrast to places like Citadel or Two Sigma. Whose business model still holds prestige, but is basically already a well oiled machine. Citadel doesnt need a brilliant mathematician like Jim Simmons, they need a smart guy that can crank out work, who fits as a cog inside their money printing machine. Citadel is better at things like HFT, some alternative data etc, but its a calculated better, they know where to get their edge, how to get it, and who to hire for it. Its a business where the employees can be plugged in.

Thanks. That is very useful. I come from the other side i.e. looking at funds so it is great to get an idea from the inside.

I can only add that I have seen the same thing with prestige outside hedge funds. A fun example is Andreessen Horowitz: no-one feels stupid underperforming with these guys, I mean look at Marc's head...he has to be a genius, right? Lul.

Yes table in article and cropped here on Twitter, which might have spurred this post: https://twitter.com/justindross/status/1193737152997183488?s...

Their returns have been as good or better in the last 10 years even after doubling the fund size

I can't find any recent numbers but the last number I can find is 36% after fees of like 5%/45% in 2015. I would assume they are still killing it, but can't find any info.

10 years ago „quant“ investing was already everywhere

Either really good math or really good insider trading.

Heres Numberphile interviewing James: https://www.youtube.com/watch?src_vid=gjVDqfUhXOY&v=QNznD9hM...

He's a MIT/Berkley Math professor.

I met him a few times when I was a grad student at Stony Brook (Physics). I can't speak for his particular math skills, but he's in possession of an incredibly sharp mind.

The Simons Center for Geometry and Physics has an art gallery and an associated lecture series, and James often shows up to participate in these events. Luckily, these events are free to enter for all graduate students. At one of these events, I'd commented that a particular piece reminded me of a crystalline structure I was interested in studying (as a li-ion cathode). James overheard me and came over to quiz me on some of my group's work. About 8 months later, I ran into him at another lecture. While he didn't remember my name, he asked how my hollandite simulations had turned out.

This anecdote doesn't really prove anything, other than that Dr Simons is a pretty cool dude.

If you watch Billions it seems to be a combination of the two in some firms.

The hedge fund featured in Billions is entirely unlike typical quant trading firms in culture and operation, let alone RenTech.

It seemed that all hedge funds in Billions were trading in insider information. It does seem prevalent, but I am not personally in the industry at all: https://medium.com/@malwarwick_98471/insider-trading-in-the-... https://en.wikipedia.org/wiki/Steven_A._Cohen

You can also see them trading on non-public information they get trough other channels. I think that's more normal.

In real life you can't run a fund by finding insiders willing to commit crimes routinely. But you often can get the same information by other means by collecting intelligence. Observing traffic, the flow of materials, following people and finding who meets who.

Yes^. RenTech and lots of other funds routinely source non-financial data to back out nonpublic information. It's not illegal and it's not unique to them. Examples are things like real estate documents, weather data, public activities of executives, satellite imagery, credit card transactions (Second Measure), DNS data, location data (Thasus, Foursquare), etc...

> Observing traffic, the flow of materials, following people and finding who meets who.

IANAL, but I’d imagine that then it’s no longer non-public information (at least in the US).

Recently published book on this topic:

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman

Nobody really knows how RenTech makes their money. There have been some interesting data points over time, mainly through lawsuits where interesting tidbits of info were divulged.

There are indications that the main rentech fund is a combination of high leverage and some potentially risky tax plays through structured products.

Correction: nobody who knows, if they've talked publicly, have been taken as seriously credible.

Someone, I suspect, knows.

A decent book about Jim Simons just came out last week


I'm most of the way through it, it's an interesting read

A related promising company in this field is Numerai: https://numer.ai

Building a meta model from predictions submitted by the community (based on encrypted training data provided by Numerai).

More info in their video below. Also Howard Morgan the Co-Founder of Renaissance Technologies too is talking about them and a group of investors led by him invested $1.5m in the company:


Their performance is not public, the only hint you can find about it is in their recent video about some backtests (which doesn't mean it's their real-world performance):


I'm very skeptical about numer.ai. I participated in their contests for quite some time (made a significant chunk of change), but I have huge doubts that any of our predictions are actually useful to them, for a multitude of reasons.

Do they produce/create anything? or do they simply trade finacial assets in a way such that they accumulate profit?

and by "simply trade" I really mean "trade in an incredibly sophisticated and clever way"

In an interview I watched on youtube Jim Simons says their trades provide liquidity and efficiency to financial markets, as to say they are effectively contributing to the economy, and not just earning money.

Performance of the 100bln fund is given at


So, assuming nothing against the law, how would they do it legitly? I am guessing:

- Treat the markets as a complex dynamical system and use the tools from statistical physics such as the Gibbs Ensemble, to derive internal states from input and output.

- Treat the markets as an encryption algorithm and use the tools from cryptanalysis, such as differential cryptanalysis: Even when unable to decipher the full algorithm (total break), one may still derive details and a subset of system functionality.

- They were probably the first to heavily use Hidden Markov Models (see Baum–Welch algorithm and the IBM speech recognition recruitment) and keep on the frontline with new machine learning algorithms (their deep learning revolution would have started 10-15 years before industry).

- They'd have an extremely solid backtesting pipeline, where any new feature can be stress-tested for signal. Features could be very arcane (% of mentions of the currency on neighboring state television) and are constantly (re-)added and removed: concept drift and market competition would gradually weaken signals, but fresh signals are added to keep the performance.

- All features are fed into a single final model (which may be an ensemble of many different forecasting techniques as to lower the variance). This model is very dynamic year-by-year (with just a few long-term signal features).

- Finally, I suspect there are strategies that only become available when you have 1 billion under control. In a physics sense: That is a lot of energy / control theory experimentation budget. Normally, hedge funds would like to avoid feedback loops and their trades moving the markets, but I suspect there is a lot of money to be made when you can calculate in which direction the market would move when the system is deprived of - or infused with a jolt of energy. More hands-off: Buy for 1 billion in stock at market open, sell at market close. Buy signal will take a few hours to converge and result in a higher price, so you make a profit when you sell your portfolio to the very buyer's market you created, causing a drop in price to complete the loop.

- The extreme returns for 2007/2008 could be due to the increase in volatility of the crisis (you can make more money when there is a lot of action, and competitors suffer from human herd bias / hysteria), but also, in part, due to them being the first to effectively exploit signals in growing social media platforms and search engines. A few years later it was public knowledge that gauging frequency and sentiment on Twitter was once a valuable signal.

- The NSA/CIA type recruits would not work on industrial spying, but on cryptanalysis, (graph) data mining, OSINT, HUMINT, IMINT, and for the security of the firm (which probably runs a tighter security than the intelligence agencies of smaller countries).

> Treat the markets as a complex dynamical system and use the tools from statistical physics such as the Gibbs Ensemble, to derive internal states from input and output.

No. This is what people like LTCM believe. It does not work, the underlying processes driving markets constantly change.

> - Treat the markets as an encryption algorithm and use the tools from cryptanalysis, such as differential cryptanalysis: Even when unable to decipher the full algorithm (total break), one may still derive details and a subset of system functionality.

- They were probably the first to heavily use Hidden Markov Models (see Baum–Welch algorithm and the IBM speech recognition recruitment) and keep on the frontline with new machine learning algorithms (their deep learning revolution would have started 10-15 years before industry).

Yes, and as a fun note, Peter Brown, their current CEO, was Geoff Hinton's grad student.

- They'd have an extremely solid backtesting pipeline, where any new feature can be stress-tested for signal. Features could be very arcane (% of mentions of the currency on neighboring state television) and are constantly (re-)added and removed: concept drift and market competition would gradually weaken signals, but fresh signals are added to keep the performance.

- The extreme returns for 2007/2008 could be due to the increase in volatility of the crisis (you can make more money when there is a lot of action, and competitors suffer from human herd bias / hysteria), but also, in part, due to them being the first to effectively exploit signals in growing social media platforms and search engines. A few years later it was public knowledge that gauging frequency and sentiment on Twitter was once a valuable signal.

- The NSA/CIA type recruits would not work on industrial spying, but on cryptanalysis, (graph) data mining, OSINT, HUMINT, IMINT, and for the security of the firm (which probably runs a tighter security than the intelligence agencies of smaller countries).

All correct.

We all know of market manipulation, like the story of the high school kid spamming stocks to Yahoo message boards [1], but what of competitor, - industry - or country manipulation? You find out that your competitor is trading on search trend signals, so manipulate the signals and bet against them. Model predicts high uncertainty for the British Pound, so bet against the Pound, and promote a Brexit. Model predicts copper will see long-term uptrend, so go long on copper futures, invest in heavy copper-use industry to expand their operations, strategically advise them to go long-stock on copper so they have an advantage over competition, later stage investors will notice the positive industry news and growth - and the uptrend in copper. All of demand and scarcity for copper will rise and your investments profitable.

BTW: RenTech made a fortune when they were long on oil futures and the Iraq war happened. Another possible legit use for the NSA/CIA type recruits could be for geopolitical intelligence.

[1] https://www.nytimes.com/2000/09/21/business/sec-says-teenage...

Access to superior information under the disguise of math and science.

I wish I was good enough to work for them. It must be fascinating.

You can’t separate Renaissance from Bob Mercer...the guy who helped fund Brexit, helped create Cambridge Analytica, the major founder of Breitbart news, and who got Trump elected mostly to avoid paying taxes.

He and his firm did more than anyone I know to make the world a more unstable place.

they talked about this on the Masters in Business podcast on Oct 30th. pretty interesting stuff.

Jim Simons and David E. Shaw are legends who should have some HBO series about them. Both were researchers who left academia to beat the scumbags of wall streets in their own game with no finance background and they made unbelievably so much money in a very short of time that they would have been jailed or killed if they weren't in the US.

I have seen more scumbags in academia than i have in WS btw.

Back in late 2017, RenTec made an unusual move of raising capital to capitalize on "market opportunities arising from Trump’s presidential victory":


By Occam's razor, it is more likely that Robert Mercer made use of his close ties with Trump administration to gain insider knowledge, than RenTec consistently having superior quantitative analysis than their competitors in an extremely competitive and saturated industry.

I dunno, I would take reliable weather reports a year out and try to predict crop prices. I am assuming demand will be linear. Maybe you can do this within the US, maybe not.

Here is a link to the book recently written about Jim Simons and RenTech https://www.goodreads.com/book/show/43889703-the-man-who-sol...

A 66% annualized return over 30 years - from a completely opaque investment strategy. Extraordinary result for sure, how did he do it?

Run by Robert Mercer, the money man who associated with prominent money launderers.

Based on my priors, Occams Razor says Rentech is a laundromat, not a hedge fund.

It's not run by Robert Mercer. He's no longer a co-CEO. And if that's your conclusion, you should probably reexamine your priors.

Right, it's run by his designated successor, whose wealth comes from Mercer's "trading strategy".

because they were on the same IBM speech/nlp team...

Strange that I had to scroll to the bottom of the page to see Mercer's name mentioned. I think is high time we stop idolizing companies that enable scum people like Mercer to make tons of money and to negatively influence the lives of millions.

Strange that I think that a sarcastic reply that goes a bit further in moral punishment would be indistinguishable from a real reply these days. Mercer was practically forced to resign due to the backlash that his democratic political views generated against RenTech, but you deem the company as beyond redemption. You speak as if commenters here are idolizing, while being black-and-white religious and faux-cult-collective yourself, prescribing what others, we, should or should not worship. Take that to the street corner. If you gather a large enough audience, I will tell you that you are the one negatively influencing the lives of others. By my and your definition, companies and institutions would then be forced to disable you, your business, and your platform. But first let's go after Mercer.

I can only call “idolizing” the act of speaking good of someone only because he has had “outsized financial returns”. Where’s the “hacker” spirit in that? Why is that important for the alleged audience of this website?

Cry me a river for poor Mercer who was “forced” to resign. Was that comment satire? Had Simmons not known who his CEO was before the “backlash”? Of course he did.

I didn’t get the corner part, must be an US thing. Apparently if you demand some intellectual decency you’re “religious” (?!?)

66% CAGR is impossible. That would mean every million dollars you invested turns into $4 Trillion.

The strategy is capacity constrained, they’ve returned all outside investor capital and distribute profit to employees to keep capital within accessible levels. The $1mm wouldn’t be able to compound as you’ve described as much of the profits will be returns, not reinvested.

Well, the thing is that they cap the size of the fund at $10B so it's not really a CAGR per se as the original capital isn't appreciating at that rate.

It's just they have $10B invested and then they distribute $6.6B per year and that's it (i.e., the fund doesn't become $16.6B next year).

Still take your point that it's an insane figure!

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