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It's funny how much good press Simons gets and yet he is a notorious tax cheat. The Senate issued a report in 2014 about how his firm Rentech is a blatant tax

It's funny how much good press Simons gets and yet he is a notorious tax cheat. The Senate issued a report in 2014 about how his firm Rentech is a blatant tax fraud. Rentech also got IRA rules changed so employees could avoid more taxes. Basically, the Senate report alleges that Rentech evaded leverage limits (6x capital) and used the balance sheet of their broker to operate basically as an unregulated market maker. So the two keys to Rentech's strategy were a) illegal levels of leverage and b) evading taxes on short term gains to the tune of $6 billion. Once you dial down the leverage and pay taxes, the alpha disappears. One firm rejected the scheme as illegal and the emails from that firm are in the report. The scheme uses the broker as an illegal front, which is what the firm lawyer immediately recognized. https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwiUkOKl0oTYAhWkmeAKHTvgD2IQFggxMAE&url=https%3A%2F%2Fwww.hsgac.senate.gov%2Fdownload%2Freport-abuse-of-structured-financial-products-misusing-basket-options-to-avoid-taxes-and-leverage-limits&usg=AOvVaw0aByhG3Uly2-0yQc7kaiAm https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...

whatok 9y ago
So the IRS and SEC took action against them because everything you're describing is surely illegal, right?
- soniman 9y ago
  Jim Simons has given $27 million in political donations, all to Democrats. We'll see if the Republican IRS will get Rentech to pay taxes or if the clock has run out. https://www.opensecrets.org/overview/topindivs.php https://www.opensecrets.org/overview/topindivs.php
  - whatok 9y ago
    So now you're claiming that the only reason why Jim Simons donates is to evade taxes?
    - deleted 9y ago
      [deleted]
  - cepth 9y ago
    And, the man who had day-to-day operational control of RenTech after Simons retired in 2010 was ~noted Democrat donor~ Bob Mercer.
    - soniman 9y ago
      Smart. Hedging their bets.
    - spolitry 9y ago
      ~noted Republican donor~ you mean. https://www.opensecrets.org/news/2016/06/a-hedge-fund-house-divided-renaissance-technologies/ https://www.opensecrets.org/news/2016/06/a-hedge-fund-house-...
      - cepth 9y ago
        Apologies if my attempt at sarcasm fell flat. I was assuming the author of the parent comment knew that Mercer was associated with Cambridge Analytica and Trump. Judging from his follow up, he seems to have picked up on the sarcasm.
neaden 9y ago
It's mentioned in the article and the author is fairly skeptical about the value of foundations like his vs. government funded research and spending.
eigenvalue 9y ago
That's just not accurate. If there were no alpha they wouldn't be able to support that kind of leverage without the strategy blowing up many times over the past 30 years. The fact that they are able to generate 50%+ type returns year after year (including 2008, when they were up over 75%) proves that they are doing something right. The tax and regulatory dodges obviously aren't good but they can only augment an already successful strategy.
- soniman 9y ago
  We don't know what the strategies are so we aren't in a position to evaluate their alpha. Second, the Medallion fund cherrypicks the best strategies, so we don't know what the global return is, just the Medallion return, which is reported for PR purposes. To the extent that the strategies have been revealed, as in this Senate report, the strategies rely on fraud and illegal levels of leverage.
  - whatok 9y ago
    How are you evaluating their alpha then?
  - dsacco 9y ago
    > We don't know what the strategies are so we aren't in a position to evaluate their alpha. If that's the stance you want to take, it works both ways. You are no more qualified an outsider than anyone else to evaluate their strategies. But given the available evidence, your position is on shaky ground. > Second, the Medallion fund cherrypicks the best strategies, so we don't know what the global return is, just the Medallion return, which is reported for PR purposes. To the extent that the strategies have been revealed, as in this Senate report, the strategies rely on fraud and illegal levels of leverage. This is more complicated than you imply. Medallion uses strategies which have lower capacity constraints and risk, which is why only employees are allowed to invest in it (they don't need outside capital, and they don't need to share risk with investors). Renaissance could close up shop to the outside world completely, but the fact remains that if they are consistently developing strategies for Medallion, they are consistently developing alpha. This alpha is not nullified because they have other strategies that perform worse, because on any realistic timeline they can abandon one and favor another. They would simply not use the strategies which they feel require risk pooling (i.e. capital from outside investors). Furthermore, the returns are reported by various news outlets which do get to audit them, even if the general public cannot. If you're willing to pay for the information from hedge fund performance indices, you can get it. Which circles back to my original point - regardless of where you stand on the strategies documented in the Senate report, Renaissance has enjoyed those returns both before and after the use of the tax maneuvering. Leverage does not create alpha or consistency on its own, it only amplifies the returns (positive or negative) thereof. To make my position very clear: again, I'm not saying I agree with the tax maneuvering; I simply disagree with your dismissive characterization of the firm's returns.
dsacco 9y ago
> Once you dial down the leverage and pay taxes, the alpha disappears. No, it doesn’t. The first and most obvious observation: the basket options described in the report were not utilized until 2002. Renaissance already had 14 years of ~70% average annual returns (~40% net of fees) by that point. Second, Renaissance stopped using these derivatives in 2014 (though they’re still fighting the IRS on back taxes, last I heard). Surprise: they’ve still been up ~39% in 2014, ~35% in 2015 and ~22% for the first half of 2016 (again, net). To be clear, I’m not saying I agree with their utilization of the Deutsche and Barclays basket options. There is a lot of creative financial engineering that happens in the industry. But like most of the other topics that come up on Hacker News, the reality is far too nuanced to be dismissed in the offhand way you’ve done here. At best, their tax maneuvering amplified the alpha already present. The basket options provided leverage, which obviously boosted returns. However, leverage will only improve a strategy’s returns, it cannot (on its own) improve risk characteristics or increase win rate consistency. Leveraged beta is still beta, and leveraged alpha remains alpha when you decrease the leverage (though the returns will be lower).
- soniman 9y ago
  If Rentech has a strategy which generates decent returns only with massive and illegal levels of leverage, it does not have a viable strategy, period. There are reasons why hedge funds have leverage limits, to prevent future LTCM catastrophes. If Rentech wants to operate as a market maker it can get a broker dealer license like any other firm operating as a market maker.
  - dsacco 9y ago
    > If Rentech has a strategy which generates decent returns only with massive and illegal levels of leverage, it does not have a viable strategy, period. And in my previous comment to you, literally the one you replied to, I explained that this is not the case. Re-read my comment. Their strategies have alpha distinct from the leverage (because, again, leverage is not alpha), both historically before the tax maneuvering began, and since the conclusion of its use.
    - 9y ago
berberous 9y ago
Nitpick: I think you are getting confused with your reference to 6x. There is federal “guidance” that banks shouldn’t lend to companies beyond that level. That is different from margin lending limits for security trades, which based on a skim of the PDF you linked, seems to be 2x, or in certain cases, up to 7.6x.
deleted 9y ago
[deleted]
valuearb 9y ago
Rentech clearly operates as a quasi-market maker, it's gains can't be achieved by investing, and it's risk profile is far too low for it to be achieved by trading. If you were actually right about their tax cheating, the IRS would have been able to successfully mount a challenge to their tax returns at least once in the last 40 years. Despite his contributions to Democrats, Republicans have been in charge for much of that time. And $6B in lower taxes for RenTech over the years is a tiny benefit in regards to their size.

whatok 9y ago

So the IRS and SEC took action against them because everything you're describing is surely illegal, right?

soniman 9y ago
Jim Simons has given $27 million in political donations, all to Democrats. We'll see if the Republican IRS will get Rentech to pay taxes or if the clock has run out. https://www.opensecrets.org/overview/topindivs.php https://www.opensecrets.org/overview/topindivs.php
- whatok 9y ago
  So now you're claiming that the only reason why Jim Simons donates is to evade taxes?
  - deleted 9y ago
    [deleted]
- cepth 9y ago
  And, the man who had day-to-day operational control of RenTech after Simons retired in 2010 was ~noted Democrat donor~ Bob Mercer.
  - soniman 9y ago
    Smart. Hedging their bets.
  - spolitry 9y ago
    ~noted Republican donor~ you mean. https://www.opensecrets.org/news/2016/06/a-hedge-fund-house-divided-renaissance-technologies/ https://www.opensecrets.org/news/2016/06/a-hedge-fund-house-...
    - cepth 9y ago
      Apologies if my attempt at sarcasm fell flat. I was assuming the author of the parent comment knew that Mercer was associated with Cambridge Analytica and Trump. Judging from his follow up, he seems to have picked up on the sarcasm.

neaden 9y ago

It's mentioned in the article and the author is fairly skeptical about the value of foundations like his vs. government funded research and spending.

eigenvalue 9y ago

That's just not accurate. If there were no alpha they wouldn't be able to support that kind of leverage without the strategy blowing up many times over the past 30 years. The fact that they are able to generate 50%+ type returns year after year (including 2008, when they were up over 75%) proves that they are doing something right. The tax and regulatory dodges obviously aren't good but they can only augment an already successful strategy.

soniman 9y ago
We don't know what the strategies are so we aren't in a position to evaluate their alpha. Second, the Medallion fund cherrypicks the best strategies, so we don't know what the global return is, just the Medallion return, which is reported for PR purposes. To the extent that the strategies have been revealed, as in this Senate report, the strategies rely on fraud and illegal levels of leverage.
- whatok 9y ago
  How are you evaluating their alpha then?
- dsacco 9y ago
  > We don't know what the strategies are so we aren't in a position to evaluate their alpha. If that's the stance you want to take, it works both ways. You are no more qualified an outsider than anyone else to evaluate their strategies. But given the available evidence, your position is on shaky ground. > Second, the Medallion fund cherrypicks the best strategies, so we don't know what the global return is, just the Medallion return, which is reported for PR purposes. To the extent that the strategies have been revealed, as in this Senate report, the strategies rely on fraud and illegal levels of leverage. This is more complicated than you imply. Medallion uses strategies which have lower capacity constraints and risk, which is why only employees are allowed to invest in it (they don't need outside capital, and they don't need to share risk with investors). Renaissance could close up shop to the outside world completely, but the fact remains that if they are consistently developing strategies for Medallion, they are consistently developing alpha. This alpha is not nullified because they have other strategies that perform worse, because on any realistic timeline they can abandon one and favor another. They would simply not use the strategies which they feel require risk pooling (i.e. capital from outside investors). Furthermore, the returns are reported by various news outlets which do get to audit them, even if the general public cannot. If you're willing to pay for the information from hedge fund performance indices, you can get it. Which circles back to my original point - regardless of where you stand on the strategies documented in the Senate report, Renaissance has enjoyed those returns both before and after the use of the tax maneuvering. Leverage does not create alpha or consistency on its own, it only amplifies the returns (positive or negative) thereof. To make my position very clear: again, I'm not saying I agree with the tax maneuvering; I simply disagree with your dismissive characterization of the firm's returns.

dsacco 9y ago

> Once you dial down the leverage and pay taxes, the alpha disappears. No, it doesn’t. The first and most obvious observation: the basket options described in the report were not utilized until 2002. Renaissance already had 14 years of ~70% average annual returns (~40% net of fees) by that point. Second, Renaissance stopped using these derivatives in 2014 (though they’re still fighting the IRS on back taxes, last I heard). Surprise: they’ve still been up ~39% in 2014, ~35% in 2015 and ~22% for the first half of 2016 (again, net). To be clear, I’m not saying I agree with their utilization of the Deutsche and Barclays basket options. There is a lot of creative financial engineering that happens in the industry. But like most of the other topics that come up on Hacker News, the reality is far too nuanced to be dismissed in the offhand way you’ve done here. At best, their tax maneuvering amplified the alpha already present. The basket options provided leverage, which obviously boosted returns. However, leverage will only improve a strategy’s returns, it cannot (on its own) improve risk characteristics or increase win rate consistency. Leveraged beta is still beta, and leveraged alpha remains alpha when you decrease the leverage (though the returns will be lower).

soniman 9y ago
If Rentech has a strategy which generates decent returns only with massive and illegal levels of leverage, it does not have a viable strategy, period. There are reasons why hedge funds have leverage limits, to prevent future LTCM catastrophes. If Rentech wants to operate as a market maker it can get a broker dealer license like any other firm operating as a market maker.
- dsacco 9y ago
  > If Rentech has a strategy which generates decent returns only with massive and illegal levels of leverage, it does not have a viable strategy, period. And in my previous comment to you, literally the one you replied to, I explained that this is not the case. Re-read my comment. Their strategies have alpha distinct from the leverage (because, again, leverage is not alpha), both historically before the tax maneuvering began, and since the conclusion of its use.
  - 9y ago

berberous 9y ago

Nitpick: I think you are getting confused with your reference to 6x. There is federal “guidance” that banks shouldn’t lend to companies beyond that level. That is different from margin lending limits for security trades, which based on a skim of the PDF you linked, seems to be 2x, or in certain cases, up to 7.6x.

deleted 9y ago

[deleted]

valuearb 9y ago

Rentech clearly operates as a quasi-market maker, it's gains can't be achieved by investing, and it's risk profile is far too low for it to be achieved by trading. If you were actually right about their tax cheating, the IRS would have been able to successfully mount a challenge to their tax returns at least once in the last 40 years. Despite his contributions to Democrats, Republicans have been in charge for much of that time. And $6B in lower taxes for RenTech over the years is a tiny benefit in regards to their size.