RenTec was covered in much depth at the Acquired podcast.
Basically algorithms from signal processing applied to huge volumes of historical and current data to determine buy and sell signals. Originally developed for national defense.
Very secretive all external partners were bought out. Only hundred or so people benefited in the billions per person. Including Robert Mercer of Trump campaign financing and Cambridge Analytica fame.
Very interesting but also disheartening episode about smart people only caring about getting richer.
Sometimes I think - what if all the smartest people that work on purely commercial things, had rather spent their time on solving problems in medicine, etc.
Of course, some will argue that
A) These people wouldn't have been equally motivated to work on such problem, compared to the ones that make them wealthy.
B) Some of the investment folks are contributing to the actual sciences, by fronting them with money.
But, still, I can't help but to think what a brain drain the finance industry is. You take some of the smartest and most motivated people out there, and make them spend all their energy on vacuuming pennies off the market, or identifying commercially successful companies.
It's been an utter cultural disaster. We've missed out on so much original science and progress because these smart idiots threw away their talents on building machines to game the casino, when they could have made game-changing contributions to fundamental original research.
Imagine if Shannon, Turing, Von Neumann, Einstein, and Dirac had done this.
Yes, they put some money back, but not nearly enough to compensate for the damage.
The real disaster has been normalising this kind of "success" as the best of all possible achievements, when in fact it's spectacularly cheap and unambitious compared to the goals of previous generations.
If anyone thinks I'm overstating the heresy here, remember - a financialised economy is optimised for short-term gain, not long-term development.
The flip side of "investment" is an economy where hundreds of millions are bankrupted by health insurance, where rents are unaffordable (never mind property), where workers are treated like spreadsheet assets and not like people, where fraud is endemic, where many people are putting off having kids because they literally can't afford them, where planes fall out of the sky, and where the entire machine regularly demands government bailouts because it's stuck in a manic depressive cycle of overconfidence and opportunism followed by collapse.
That's not even looking at the incredibly toxic political effects.
>We've missed out on so much original science and progress because these smart idiots threw away their talents on building machines to game the casino, when they could have made game-changing contributions to fundamental original research.
The vast majority of people who succeed in finance are very ambitious; if finance wasn't an option they'd just have found some other way to make money, not suffer as a peon doing fundamental research for mediocre pay in a lab somewhere. Just be glad they didn't go into politics where their ambition could have done even more damage.
Eh, it's hard to call it much of a "brain drain" when getting a research job is so difficult. There's no shortage of smart people interested in working in research for less than they'd make at any professional role, much less in the highest-paid industries.
PhD programs pay basically nothing, are selective, require candidates to jump through all sorts of hoops and still have no trouble filling out. Later on, becoming a professor—or some other sort of researcher with similar scope, autonomy and funding—is basically impossible, harder than making a bunch of money in quantitative finance. And yet each opening has hundreds of realistically qualified applicants. (Realistically qualified in the sense that they'd be able to do good research, anyway.)
Ya, "brain drain" is probably not the right metaphor. But you get the gist: Smart people have more opportunities in finance.
As you know, funding for academics, scholastics, and basic research has been on a decades long decline. The West's investment in knowledge production peaked in response to Sputnik. As the Cold War wound down, neoliberalism and the "peace dividend" replaced that commitment.
Too bad.
Maybe climate crisis, our new existential threat, will be another Sputnik moment.
The are various models from textbooks now that seem (or are presented as) too naive to be applied to financial markets, and too slow (eg gradient descent/expectation maximisation) on 1980s computers with "big data".
And then, the academic perspective is that prices should be modelled as random walks, though you may talk/learn about things such as "trend" and volatility. Suggesting that hidden variables/states/transitions can be learned from historical data is usually considered pseudo-scientific.
Meanwhile it so obviously worked for RenTec, with relatively miniscule computing capacity, for decades.
Repeating the academic perspective just seems disgenuine. If prices are not random walks, then financial markets are actually games.
I think this is one of those cases where conflating "unpredictable" with "random" breaks down. As a matter of simplification, we treat many unpredictable processes as random if making the process at least somewhat predictable is sufficiently intractable. While this can change very quickly e.g. breaking encryption algorithms, for many data models the gains in making a process less unpredictable are more incremental and are largely dependent on having both better math and more efficient compute.
Unpredictability is as much a computational intractability frontier as it is a math problem. We know how to do approximately optimal prediction, but if you have to throw a supercomputer at the calculation and wait until the heat death of the universe to get an answer (which is the essential reality) then it has no value. But if you can grind out small improvements at the prediction frontier on a tractable amount of computing hardware due to algorithm advances and mathematical improvements in more narrow cases, then you have an almost unbounded greenfield to work with and these improvements will generalize well across diverse markets.
Predictability is defined in terms of probability distributions, and a price X is typically defined to be drawn from something like Xₜ₊₁ ~ Xₜ + N(μ,σ). The purpose might be to quantify some property of μ or σ or something like that. It means "X₀.ₜ does not hold any information about Xₜ₊₁". The assumption is that any price move reflects new information. It might be a reasonable model for various purposes.
But if this model was "true", RenTec would not work, and the "efficient market hypothesis" is invalidated. Which seems plainly obvious.
Ok, so if the market is not efficient, then it's actually a game (poker-like?) and zero sum. Academically, unthinkable thoughts.
> And then, the academic perspective is that prices should be modelled as random walks, though you may talk/learn about things such as "trend" and volatility.
The math involved in finance and economics always seems way behind that of other fields. The problem is that the other fields with more advanced math are so deep in theory that the people working in those areas are often either unaware of the potential real world applications of their work, or they are simply not interested in it (I’ve noticed there seems to be little overlap between the type of personality inclined to explore abstract theories as its own reward and the type of personality that prefers to apply existing knowledge to a real world problem).
> Suggesting that hidden variables/states/transitions can be learned from historical data is usually considered pseudo-scientific.
I mean, there’s a definitive answer to the question of stock market predictability. Unfortunately, it’s also uncomputable: if the conditional Kolmogorov complexity of a stock price time series given relevant auxiliary data is less than the size of the time series data (roughly speaking), then the stock price is predictable to some degree. Otherwise, it’s not.
I would be extremely skeptical if anyone claimed that stock price is truly Kolmogorov-random. However, I also think no single trading group’s algorithms (and data) are sufficiently more advanced than any other group’s to the point where algorithmic arbitrage is obvious to the market (or maintainable over a sufficiently long time period). I would not be surprised though if a sudden ML breakthrough destabilizes the entire market at some point in the near future when one group does in fact realize a step function improvement in their algorithms.
To educate a man in mind and not in morals is to educate a menace to society. -- Teddy Roosevelt (I'm speaking generally and not saying that Jim Simon was bad)
IIRC, their ELI5 testimony to the Senate (not the one you linked elsethread) is that RenTec's long-term strategy is to make a small profit over many many transactions. Versus buy and hold, or value invest, or whatever.
I don't understand anything about finance. That said, it sounds to me that RenTec is (or portraying themselves as) a classic volatility based hedge fund.
(A good friend is a hedge fund trader. He has tried to explain the maths to me a few times. Something something about Brownian motion, NPV, predicting herd migration. Alas, I am but a simple bear.)
But all their data collection gives me pause. I do think they they're better at spotting market signals. Like using FourSquare check-in location data to predict retail performance. Like using a VPN to spy on users to spot emerging competing startups.
My pet theory is that RenTec's play is restraint, to be patient slow capital. Even though they (probably) have data for bonanza predictions, like your NVDA example, they some how have the discipline to eek out modest profits, preferring consistency over riding the tiger.
And yeah, it’s not remotely surprising they’ve made trades like selling NVDA at $700. Judging a fish by its ability to fly etc. RenTech doesn’t work by picking stocks based on industrial trends or anything — as far as we know that sort of stuff is literally not even an input.
“Predict the market” is an insufficiently defined phrase to argue over. Strictly speaking, of course they cannot “predict the market.” You’re describing a time machine or a crystal ball, and no, they don’t have either.
What they can do, as demonstrated consistently since approximately their founding, is eek out tiny, repeatable edges on the market and exploit them at rather large scale in a variety of market conditions for dramatically longer periods than anyone else.
That is in practice the most consistently-slightly-correct market prediction anyone has ever achieved.
Maybe then it's real magic. Everybody knowns The Goetic Circle of Solomon cannot have more than 72 different demons. :-)
Are you familiar with "Fooled by Randomness" by Taleb? Here is one of the simple tricks discussed there. The details are of my own writing, the mechanics of it are as described.
How you can easily implement a Hedge Fund to beat the market and become a rich investment manager, that will show up every day on CNBC.
Step 1: Choose randomly 20 stocks from the hundreds in the NASDAQ and the SP500. Do this hundred times and create 100 funds.
Step 2: Let the funds run for a while and keep closing the worst performing
Step 3: At the end you will end with one or two that beat all market indexes
Step 4: After 3/5 years publish a full announcement page on the FT and Wall Street Journal, explaining how your Hedge Fund has consistently beat the market.
Step 5: Invite people to give you more money to manage, due to your amazing expertise.
Make sure to charge a 5% management fee. Show up on CNBC once in a while
for free, for increased exposure.
Step 6: Setup a Foundation to make sure you enjoy your billions tax free...
Another way to do, if you morals are let's say, more flexible, is setup several funds, trade your main ( profitable fund) again the other funds ;-)
Okay, so is that what you’re claiming they’re doing?
If so, please share your evidence.
If not, then I’m not sure what is the point of this conversation.
There are plenty of hypothetical ways to beat the market and they make for the same quality of conversation as a drunk uncle’s “brilliant” day trading strategy that he just needs a few bucks to execute. Carry on all day if you wish, no one will be better off for it.
:) If I crack the Renaissance Technologies fund algorithm I don't think you will be the first one I will notify...:-)
However, I know where I would start to investigate. The employees of the fund, do some of biggest political donations in the USA. Astute investigative journalists could start to look there. Are they doing to avoid scrutiny of their activities? If you cracked the market why such a high level of donations? Philanthropy? Then open your fund...
...this is another misintepretation. You're looking at a list of donations by employees, who presumably don't fall under the same political persuasion. We know this for a fact given that Jim Simons and Robert Mercer are themselves on opposite ends of the spectrum (and each was very politically active).
Anyway yeah, I'm sure RenTech is just lacking scrutiny. Surely no astute investigative journalist has thought to look their way.
> this is another misintepretation. You're looking at a list of donations by employees.
They have only 300 employees, and they are all partners apparently.
Financial investigative journalism is dead in the US. Journalists are paid badly, and work for the multinationals they should scrutinize.
In Europe the FT tried to pretend they were still a respectable financial publication, but shit their pants when the German financial regulator threaten them. They learned to be quiet since...
If you're accusing RenTech of something, be direct about it.
This is a typical conspiracy theorist style. Always pointing out "look there..." without ever saying what they're talking about, because there is actually nothing there.
> If you're accusing RenTech of something, be direct about it.
Oh now trying to explain the algos, of a fund of 300 employees, who never has losses, and makes some of the biggest political donations in the US...Is accusing?
What happened to intellectual curiosity? Don't look up?
And 13f's only show their long positions on that day, delayed by up to 45 days. And from my understanding intraday was primarily what medallion did, 1 day to 2 weeks. No high frequency, no long term.
Great book about his that is mentioned in the article, well worth reading. I read it and recognized a lot of interesting things in the evolution of his thinking, in terms of strategies. I think most of what they do will be recognizable to someone in the business.
In the end though, it's not about the specific strategies. If I steal the recipe of a Michelin chef, I will still not be able to make a sufflé, since I don't have the prerequisite skills. I might be able to give it to someone who does, and maybe he will make something similar to the original, but even this person would not be able to follow the evolution of the original chef into making new, innovative dishes.
In the end it seems that this highly technically proficient guy actually succeeded in building something as nebulous as a winning culture.
> In the end though, it's not about the specific strategies. If I steal the recipe of a Michelin chef, I will still not be able to make a sufflé, since I don't have the prerequisite skills.
This is a great point.
But even the pre-requisite skills should not matter in this case (you could always higher 100's of math/physics phDs?).
The key element of RenTec's success is execution and it was mentioned in passing in the book by the WSJ reporter. RenTec does not need a super duper algorithm that predicts with 80 or 90% accuracy. A 2% edge is sufficient, provided they can place tens thousands of bets that are less correlated, day in day out. Then they are guaranteed to make a ton of money over the year by the law of large numbers.
The ability to find and execute trades in that scale is a key part of RenTec a success.
Assembling a team and keep working on something for 10 years when you are unsure whether it will work or not, requires a huge amount of passion, dedication and patience. I think most people would quit early if they don't see a rapid pay off.
I listened to a talk to that Jim Simons gave at San Francisco State University about a decade ago in which he mostly recounts his life and career. Towards the end when he was describing the state of the fully realized RenTech firm, he mentioned that they collect approximately 7TB of data per day, and that the #1 investment rule is that a human never, under any circumstances, intervenes with what the model (he said "the computer") decides.
Which in those days was absolutely staggering. But I think they were looking for similar patterns in historical data to current data, not trying to fit current data into a set of predefined patterns or algos from historical data.
We know exactly how he made his money because there are decades of audited financial statements and a thorough review by the SEC after the Madoff fiasco
Royal We does not know exactly how he made his money. You are making up another Hero Worship happy story.
It took until 2021 to settle his tax fraud case inspite of audited financials.
What about giving cancer to others by secondary smoke inhalation, what about tongue cancer and mouth cancer and gum disease and cardio-vascular problems and breathing difficulties and eventual COPD and all the negatives of smoking that aren’t lung cancer?
I can't tell if you're joking or not but that's an interesting approach for sure. I'm surprised gene screening was accurate enough to do that 20-40 years ago?
LOL. I think he was an idiot, in that regards. Similarities to Steve Jobs, who resorted to quackery with his cancer. People can be geniuses and dumbasses at the same time.
I don't see the quackery, man liked smoking so he kept smoking. I think you're assuming some stronger claim about smoking or genetics which nobody has made.
“I did a lot of math, I made a lot of money,” he reflected on his life, “and I gave almost all of it away.2 That's the story of my life.” And what a life it was.
-
This has got to be the dream hasn’t it.
Making money not because you want a gaudy gold bathroom in a New York or London flat but because you can and because it’s fun to do.
And if you ever have to choose between the two, you can choose what you value more. But I disagree with the premise that they're mutually exclusive. For the most part your career and financial success is orthogonal to your personal relationships, and to your health.
> For the most part your career and financial success is orthogonal to your personal relationships, and to your health
Every goal takes time to achieve. The time spent seeking a career and financial success is not spent on your relationships and your health. Ask me how I know.
> > Every goal takes time to achieve. The time spent seeking a career and financial success
It's not even career and financial success, it's about competence. There are billions of activities in the realm of possible activities pursued by a person and each one takes time to get to the top percentile performace.
People think money is some magic trick card that lets you skip the process and compress time. In reality the closest thing that it does is bringing you to the front row to watch the top performers who have dedicated time to their craft do their thing.
Key word being watching. Money can buy you the most expensive suite at the Super Bowl, but it won't get the ball in your hands with 2:00 on the clock needing a TD to win it. That right belongs to the person who spent years and dedicated infinite hours to the pursuit of excellence in the realm of throwing a football to moving targets.
"Ask me how I know" is a rhetorical question that means "I speak from personal experience". It is not an actual invitation to ask, because the answer is already implicit in the question.
In this case, It happened to me and I saw the same happen to several coworkers as well.
This is wise, another angle on this that your reputation is the best investment. It is in your control and can't be devalued as easily as a house, car, portfolio.
Yeah, well, that's the kind of thing you say once you have so much money that effectively "giving most of it away" won't quite change your quality of life.
It still feels very fishy to me that a closed capped fund has insane returns while the public fund that investors can invest in, has lukewarm results (not even beating the market from what I recall).
Seems like too many people, especially those that have no experience in the industry bought into the myth that genius mathematicians beat the market etc. The truth is that the market is mostly a zero sum competition between its participants. If RenTech is so good, they should have people that are a class above everyone else. Does someone claim that RenTech has more smart traders than Jane Street, Citadel etc? All of these people hire IMO Gold Medallists etc, and after a point there are diminishing returns on intelligence, someone who won IMO gold is not that much better than someone who got silver in intelligence. Even assuming RenTech got the cream of the cream, only golds while Jane street got the Silvers, I doubt there is enough alpha there for RenTech to have the insane spectacular market performance that they show. But that is likely not the case, they have people of similar caliber to Jane Street, Citadel etc which makes their outsized performance even more intriguing.
The only possibilities I can think of, is 1 they are cooking the books, this would be insanely risky but not something unheard of in this industry. 2 they have discovered a few trading strats that they have maintained as a closely guarded secret all these years that allows them to get their edge on the market. Or similarly, some of their founding team are just godlike traders who always beat the market and once they’re gone RenTech will also fall. This feels even more unlikely, considering employee attrition and such but might be possible.
For what it’s worth, I’ve had friends that interviewed with RenTech mention to me that it was an okay interview, heavily focused on C++ technical details (especially latest C++11 features and above) but not harder than an equivalent Citadel interview etc.
>If RenTech is so good, they should have people that are a class above everyone else
What does this mean? All the firms you have posted do different things.
> Does someone claim that RenTech has more smart traders than Jane Street, Citadel etc?
Again this is not apples to apples. You know a bit, but not nearly enough. Citadel is actually two companies. Citadel Securities (Ken G's + managments prop capital, no external investors) have a tonne of strategies with extremely high sharpe ratios and returns (triple digits in some cases), but ultimately they are capacity limited. Jane Street too (prop capital) fits this mold. Citadel the hedge fund (external capital) has much lower sharpes, but a much higher capacity (65 or so billion) and looks roughly similar to RenTechs public funds (external capital).
The idea is you keep as much of the juicy stuff to yourself as you can justify, and then trade on the public image + free option on management / performance fees to grow an external asset management business and rake that in parallel.
I dont see any contradiction. In fact its the rational profit maximising thing to do.
Also being "smart" isnt even a half of the formula to running a successful markets/trading/investing business. Alot of it is culture (as the article points out) and other hard to replicate edges.
Hedge Funds by and large are not quantitative (and even when they proclaim to be, actually are not terribly sophisticated). What they really are is expert marketing / narrative machines enticing asset allocators to lend them AUM. Once you understand this, it begins to make sense that those who are truly quantatively gifted operate on another plane.
> All of these people hire IMO Gold Medallists etc, and after a point there are diminishing returns on intelligence, someone who won IMO gold is not that much better than someone who got silver in intelligence.
Being an IMO gold medallist doesn't make someone a good mathematician; there's a very big difference between the kind of math in the IMO and the kind of mathematical research a successful mathematician does. Jim Simons was an extremely successful mathematician, who won a Millenium Prize, and hired mathematicians and physicists with a strong publication history. There's a quote from someone at Rentech like: "We hire the A-grade mathematicians. Other firms hire the B or C-grade mathematicians, and don't even know the A-grade mathematicians exist". It's like, if a startup hired a bunch of fresh CS Olympiad Gold Medalists straight out of university, do you think they'd be able to compete with Google (especially Google of 10 years ago, when its search was still so dominant)?
According to Zuckerman's book, the Medallion fund has to be small because it would move the market too much with the types of trades it does if it was bigger. That is why they limited investment in it. The publicly available funds use different types of trades where this is less of a problem, and so the funds can be larger, but this reduces the return.
>It still feels very fishy to me that a closed capped fund has insane returns while the public fund that investors can invest in, has lukewarm results (not even beating the market from what I recall).
The point of the public funds is to be less risky than the S&P 500. Simons and co will never ever suggest anyone invest a serious amount of money into the S&P.
Madoff took in other people's money. The Medallion Fund stopped taking new outside money in 1993, and in 2005 it got rid of all outside money. The people making (or potentially losing) money are the people making the trades.
Very secretive all external partners were bought out. Only hundred or so people benefited in the billions per person. Including Robert Mercer of Trump campaign financing and Cambridge Analytica fame.
Very interesting but also disheartening episode about smart people only caring about getting richer.
https://www.acquired.fm/episodes/renaissance-technologies