I'm no finance expert but doesn't this all seem way too good to be true? At first I was reading this and thinking "how is this not exactly like Bernie Madoff?"
Then they say "The Medallion fund has been closed to external capital since 1993 ... whatever profit they make, they pay out". So clearly it can't be a ponzie scheme?
Still, it seems too good to be true. If financial experts are stumped as well then that also seems like a red flag.
The reason is that they are highly levered with many small short term trades.
>dealbook.nytimes.com/2014/07/21/senate-inquiry-faults-hedge-funds-tax-strategy/https://dealbook.nytimes.com/2014/07/21/senate-inquiry-fault...
“Jul 21, 2014 Within these complicated financial structures, Renaissance Technologies was able to borrow as much as $17 for every $1 in the account.”
No one is stumped, they're not making any external claim and they are not raising capital. This type of drive by analysis is the equivalent of "will Brad and jennifer get back together" at the grocery store check out line.
I don't think they could keep it up for that long without slipping up at least once. Enron started around the same time and got tripped up in 2001.
If it were a one man investment shop, then maybe it leans more towards fraud. But if they obviously employ dozens of quants, and have obvious hardware outlays, it seems less likely.
It makes a lot of sense to me that they just win a bit more than they lose, play a lot of hands, and treat everything with pretty even money, so they're never overexposed in any one place.
Enron only collapsed because they intentionally destabilized major public-facing national security infrastructure (retail energy markets), and they were incredibly brazen and sloppy about it. If they didn't make as large bets on collateral damage, and they acted with professionalism, they would have been fine.
I think I have the math right here, but let's say you start with
> Capital = $100
1 time a day 5 days a week 50 weeks a year, you're going to take your capital and place that many $1 bets with it.
Let's say you net +1% on your deployed capital ever day.
After 250 rounds, you have $1215 in the bank.
Again, correct the math if I'm wrong. But scale that down to 0.57%, which is the win rate I saw, and they're making ~$600/yr, which is the stated average return.
Financial experts aren’t stumped. The article found one guy who’s trying to get attention, but in general, folks are both impressed and pretty sure it’s real.
You have one fund that is an extreme outlier in performance over decades (!!) that nobody can explain and yet 'financial experts' aren't stumped and are 'pretty sure it's real'?
I don't know what that "in economics" condition is there for.
I expect there are plenty of economics professors doing very nicely in the stock market, but it tends to be mathematicians and physicists who found hedge funds.
Successful academics who have done that and made shedloads of money in the stock market would include, er, Jim Simons, founder of Renaissance Technologies, the very firm under discussion in this thread.
The thing that got acquired by Renaissance and turned into the Medallion Fund was called Axcom. That was founded by a guy called James Ax, who before he founded that was ... a mathematics professor at Cornell, Harvard, and Stony Brook.
Another key guy at Axcom was Elwyn Berlekamp. He was a mathematics professor at UC Berkeley.
So it doesn't seem like there's any incompatibility between being an academic and being very, very good at extracting money from the stock market.
This makes a lot of sense. Sacrificing a percent of profit from other funds won't make that much of a different in the minds of possible investors, but managing a fantastically high fund must be a good advertisement.
OK, what behaves like a Ponzi scheme that lasts too long?
Money Laundering of assets on a national scale, e.g., for oligarchs who have taken 95% of a nations' wealth. Their biggest problem is to get it "legitimately" into the international money system.
If the fund owners have really discovered a technological "secret sauce", why isn't it working in their other funds?
Closed to outside funds in 1993 (shortly after ussr collapse), returns after fees (and paying everybody as well at the firm) are above 50%, assets of 10 billion and anything above the 10 billion gets paid out every year.. so roughly 5 billion plus gets paid out every year? I mean, as a wise man said “I want to believe” but yea feels / smells like you said.. oligarch money laundering... 5billion in clean money every year.. not bad..
Even without knowing the full details, their returns are quite plausible if you have less speculative knowledge of their business. The challenge for most hedge funds is that any "edge" they find decays over time, often quickly, which leaves them scrambling to find a new edge that will allow them to outperform the market. Most hedge funds go to a lot of effort to preserve an edge to the extent they can.
Renaissance focused on finding and developing novel mathematics that can be exploited to find an edge, some of which is extremely esoteric and unique, and then massively automating that. Consequently, they can find more new edges before breakfast than some hedge funds find all year. The real effect is that they don't need to milk a dying edge for returns because they are constantly generating new ones, and they can pick the best of the bunch at any point in time. The investment side of the business is mechanical. Their recruiting has reflected their deep interest in novel theoretical approaches to edge discovery.
In a sense, they are a higher order abstraction of a more typical hedge fund.
I find it really hard to believe that the fund can be generating returns so consistently by pursuing a variety of different strategies over time.
It seems very unlikely that Renaissance/Medallion constantly finds these things, whereas other operations almost never do.
The conspiracy theorist in the back of my brain thinks that Renaissance/Medallion hires a lot of eggheads so they can plausibly claim to keep finding mathematical and operational edges, but the actual money-making strategy might be something else entirely.
These eggheads (very) occasionally move to other firms and see similar returns. Of course rentech then sues those other firms for all the profits they make. And they win.
> These eggheads (very) occasionally move to other firms and see similar returns. Of course rentech then sues those other firms for all the profits they make. And they win.
Not true at all as far as I know.
Name one member of RenTech that went else where and made similar returns; I don't think you can because its never happened as far as I know.
The closest I can think of is Pavel Volfbeyn and Alexander Belopolsky leaving to join the Millenium fund.
Their performance there was so poor even not comparing their performance to what RenTech did so much so that they were let go even after Millenium settled the lawsuit with RenTech that allowed them to stay at Millenium.
Then they say "The Medallion fund has been closed to external capital since 1993 ... whatever profit they make, they pay out". So clearly it can't be a ponzie scheme?
Still, it seems too good to be true. If financial experts are stumped as well then that also seems like a red flag.