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What you are saying applies to vast swaths of the industry, but not all of it. Consider the track record of Renaissance Technologies' Medallion fund, which had

What you are saying applies to vast swaths of the industry, but not all of it. Consider the track record of Renaissance Technologies' Medallion fund, which had annualized returns of 71.8% for 1994-2014 [1]. It's not all smoke and mirrors - there are some funds beating the markets consistently that are worth every bit of their fees and then some. [1] https://en.m.wikipedia.org/wiki/Renaissance_Technologies#Medallion_Fund https://en.m.wikipedia.org/wiki/Renaissance_Technologies#Med...

inmyunix 9y ago
By definition an outlier as one of the most successful funds of all time. Also "The firm bought out the last investor in the Medallion fund in 2005 and the investor community has not seen its returns since then"
- downandout 9y ago
  Nevertheless, it is a fund that has beaten the markets consistently. I was just saying that it is possible to do, so the entire industry is not the sham that most people think it to be. Just the vast majority of it is.
  - soVeryTired 9y ago
    Ask a million people to toss coins repeatedly and it's likely you'll find someone who gets twenty heads in a row. There's a lot of survivor bias in the industry. All the old players have made a lot of money at some point. If they hadn't, they wouldn't be old players.
    - Retric 9y ago
      It's a little worse than that as there are vast incentives to be that guy with 20 heads so people will record themselves fillping coins over and over then only talk about their best streak. Thus you end up with most companies having an 'above average' streak in a given year even if the average investment does poorly. https://m.youtube.com/watch?v=rwvIGNXY21Y https://m.youtube.com/watch?v=rwvIGNXY21Y
    - dsacco 9y ago
      There is survivorship bias, but the coin flipping analogy is a tired trope (and it implies something utterly different). There aren't a million traders, and there are more than 20 consistently beating the market. Significantly more. Do the actual math with some attempt at empirical numbers and your argument might make sense. Until people start doing that, repeating this line about coin flips and the law of large numbers doesn't add anything to the discussion. First of all, you haven't qualified who you're including in the set of "traders" and who you're including in the set of "winners." Is everyone who signs up for ETrade included? That's like major league baseball players being judged the same as way as high school baseball players. More importantly, have you done the cursory research to account for funds that consistently beat the market? How do you account for the firms that beat the market over periods that span decades? Just ridiculously lucky? What counts as a coin flip? A single trade? A trading day? Are the coins summed per trader or per fund? How are we quantifying this assessment? It's like every time someone brings up the coin flipping analogy they use these outrageous numbers without any attempt at citing a grounded source in reality. As I say every single time in threads like this: yes, it's incredibly difficult to purposefully and consistently beat the market, but that's worlds away from impossible. There is information asymmetry in the market, relatively few people/firms are capable of identifying alpha based on that, and fewer still are capable of capitalizing on it. But they exist! Stubbornly repeating the coin analogy is like insisting on proof that basketball players have inherent skill instead of luck, because most people can't make it to the NBA. We have clear examples of firms beating the market consistently for decades at a time, net of fees. I am personally familiar with people whose strategies profitably trade on small pockets of predictable events in timeseries tick data. Their strategies are smaller (~high 6 - low 7 digit accounts using personal capital), but they consistently earn 27-30% each year by trading strategies that are too capacity-constrained for larger firms (and usually they do this after being in the industry for some time). I make this point not to pick on you (it's not personal!), it's just that I see this repeated in every thread related to trading on HN. Referring to trading as coin flipping when your familiarity mostly stems from news reports flies in the face of people who are capable of developing profitable trading algorithms and who have seen it. It's as if someone told you that it's impossible to develop well-engineered software. It's exhausting. There's this weird leap from (correctly) concluding that most people in the industry can't beat the market, to damning the entire concept. If you want to say there is a lot of survivorship bias in the industry, sure, I'll agree with that. But what's the point of using Fama's coin flipping analogy if there's no rigor behind it? It precludes so much nuance in fund performance. Many funds can't beat the market at all. Many do beat the market, but they purposely decide to eat away all those gains with fees when they could run a far leaner ship. And the elite do consistently beat the market, until they eventually get large enough to diversify into multiple funds (accepting that most will be mediocre) or they return investor money because they don't need it and their strategies are capacity constrained.
    - deleted 9y ago
      [deleted]
    - imcoconut 9y ago
      But if the person who called all 20 flips properly is a math PHD who discovered the Chern–Simons secondary characteristic classes of 3-manifolds which has had a profound effect on modern physics[0] - I might think they've figured out some deep shit about coin tossing. [0]https://en.wikipedia.org/wiki/James_Harris_Simons#Academic_and_scientific_career https://en.wikipedia.org/wiki/James_Harris_Simons#Academic_a...
      - soVeryTired 9y ago
        I know who Jim Simons is. But that sounds like an argument from authority to me.
        imcoconut 9y ago
        I was citing in case anyone reading was unaware of his mathematical chops. That's a fair point. I'm not one for argument by authority. My point with his discovery is that he's empirically demonstrated a capability of uncovering understanding and deep mathematical relationships, which have practical implications. The PHD part is less relevant. In my opinion, this information decreases the probability that rentech has been consistently outperforming on the basis of pure luck. By how much, though, I can't say.
  - deleted 9y ago
    [deleted]
MichaelDickens 9y ago
> Consider the track record of Renaissance Technologies' Medallion fund, which had annualized returns of 71.8% for 1994-2014 Kind of a side point but I don't see how this can be true. Wikipedia says Renaissance had $65 billion AUM as of 2015. If we back-track this compounded at 71.8% annually, that means Renaissance must have had at most $1.2 million in 1994, which is implausibly low. And $1.2 million is a maximum, because that figure assumes Renaissance hasn't received any new capital since 1994.
- sushid 9y ago
  The fund has a very low cap and their employees can only put in a certain amount in the fund in the first place (depending on seniority and individual performance). Also, you're assuming everyone who's put money into the fund has never taken it out, which would throw off your math quite a bit.
- auntienomen 9y ago
  You're confusing RenTec with the Medallion fund, which it manages. RenTec manages other funds as well. Their AUM is the sum of the assets of the funds.
- tomp 9y ago
  Medallion fund is said to be about $10B, and at capacity - that means that returns don't compound, because they pay out the profit each year as they can't invest any more money.

inmyunix 9y ago

By definition an outlier as one of the most successful funds of all time. Also "The firm bought out the last investor in the Medallion fund in 2005 and the investor community has not seen its returns since then"

downandout 9y ago
Nevertheless, it is a fund that has beaten the markets consistently. I was just saying that it is possible to do, so the entire industry is not the sham that most people think it to be. Just the vast majority of it is.
- soVeryTired 9y ago
  Ask a million people to toss coins repeatedly and it's likely you'll find someone who gets twenty heads in a row. There's a lot of survivor bias in the industry. All the old players have made a lot of money at some point. If they hadn't, they wouldn't be old players.
  - Retric 9y ago
    It's a little worse than that as there are vast incentives to be that guy with 20 heads so people will record themselves fillping coins over and over then only talk about their best streak. Thus you end up with most companies having an 'above average' streak in a given year even if the average investment does poorly. https://m.youtube.com/watch?v=rwvIGNXY21Y https://m.youtube.com/watch?v=rwvIGNXY21Y
  - dsacco 9y ago
    There is survivorship bias, but the coin flipping analogy is a tired trope (and it implies something utterly different). There aren't a million traders, and there are more than 20 consistently beating the market. Significantly more. Do the actual math with some attempt at empirical numbers and your argument might make sense. Until people start doing that, repeating this line about coin flips and the law of large numbers doesn't add anything to the discussion. First of all, you haven't qualified who you're including in the set of "traders" and who you're including in the set of "winners." Is everyone who signs up for ETrade included? That's like major league baseball players being judged the same as way as high school baseball players. More importantly, have you done the cursory research to account for funds that consistently beat the market? How do you account for the firms that beat the market over periods that span decades? Just ridiculously lucky? What counts as a coin flip? A single trade? A trading day? Are the coins summed per trader or per fund? How are we quantifying this assessment? It's like every time someone brings up the coin flipping analogy they use these outrageous numbers without any attempt at citing a grounded source in reality. As I say every single time in threads like this: yes, it's incredibly difficult to purposefully and consistently beat the market, but that's worlds away from impossible. There is information asymmetry in the market, relatively few people/firms are capable of identifying alpha based on that, and fewer still are capable of capitalizing on it. But they exist! Stubbornly repeating the coin analogy is like insisting on proof that basketball players have inherent skill instead of luck, because most people can't make it to the NBA. We have clear examples of firms beating the market consistently for decades at a time, net of fees. I am personally familiar with people whose strategies profitably trade on small pockets of predictable events in timeseries tick data. Their strategies are smaller (~high 6 - low 7 digit accounts using personal capital), but they consistently earn 27-30% each year by trading strategies that are too capacity-constrained for larger firms (and usually they do this after being in the industry for some time). I make this point not to pick on you (it's not personal!), it's just that I see this repeated in every thread related to trading on HN. Referring to trading as coin flipping when your familiarity mostly stems from news reports flies in the face of people who are capable of developing profitable trading algorithms and who have seen it. It's as if someone told you that it's impossible to develop well-engineered software. It's exhausting. There's this weird leap from (correctly) concluding that most people in the industry can't beat the market, to damning the entire concept. If you want to say there is a lot of survivorship bias in the industry, sure, I'll agree with that. But what's the point of using Fama's coin flipping analogy if there's no rigor behind it? It precludes so much nuance in fund performance. Many funds can't beat the market at all. Many do beat the market, but they purposely decide to eat away all those gains with fees when they could run a far leaner ship. And the elite do consistently beat the market, until they eventually get large enough to diversify into multiple funds (accepting that most will be mediocre) or they return investor money because they don't need it and their strategies are capacity constrained.
  - deleted 9y ago
    [deleted]
  - imcoconut 9y ago
    But if the person who called all 20 flips properly is a math PHD who discovered the Chern–Simons secondary characteristic classes of 3-manifolds which has had a profound effect on modern physics[0] - I might think they've figured out some deep shit about coin tossing. [0]https://en.wikipedia.org/wiki/James_Harris_Simons#Academic_and_scientific_career https://en.wikipedia.org/wiki/James_Harris_Simons#Academic_a...
    - soVeryTired 9y ago
      I know who Jim Simons is. But that sounds like an argument from authority to me.
      - imcoconut 9y ago
        I was citing in case anyone reading was unaware of his mathematical chops. That's a fair point. I'm not one for argument by authority. My point with his discovery is that he's empirically demonstrated a capability of uncovering understanding and deep mathematical relationships, which have practical implications. The PHD part is less relevant. In my opinion, this information decreases the probability that rentech has been consistently outperforming on the basis of pure luck. By how much, though, I can't say.
- deleted 9y ago
  [deleted]

MichaelDickens 9y ago

> Consider the track record of Renaissance Technologies' Medallion fund, which had annualized returns of 71.8% for 1994-2014 Kind of a side point but I don't see how this can be true. Wikipedia says Renaissance had $65 billion AUM as of 2015. If we back-track this compounded at 71.8% annually, that means Renaissance must have had at most $1.2 million in 1994, which is implausibly low. And $1.2 million is a maximum, because that figure assumes Renaissance hasn't received any new capital since 1994.

sushid 9y ago
The fund has a very low cap and their employees can only put in a certain amount in the fund in the first place (depending on seniority and individual performance). Also, you're assuming everyone who's put money into the fund has never taken it out, which would throw off your math quite a bit.
auntienomen 9y ago
You're confusing RenTec with the Medallion fund, which it manages. RenTec manages other funds as well. Their AUM is the sum of the assets of the funds.
tomp 9y ago
Medallion fund is said to be about $10B, and at capacity - that means that returns don't compound, because they pay out the profit each year as they can't invest any more money.