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For anyone interested in a great story about a world class mathematician who built a company that has used algorithms to beat the market for the last few decade

For anyone interested in a great story about a world class mathematician who built a company that has used algorithms to beat the market for the last few decades, James Simons has an impressive record: https://www.ted.com/talks/jim_simons_a_rare_interview_with_the_mathematician_who_cracked_wall_street?language=en https://www.ted.com/talks/jim_simons_a_rare_interview_with_t... https://m.youtube.com/watch?v=QNznD9hMEh0 https://m.youtube.com/watch?v=QNznD9hMEh0 https://en.m.wikipedia.org/wiki/Jim_Simons_(mathematician) https://en.m.wikipedia.org/wiki/Jim_Simons_(mathematician) One other thing, the Simons Foundation funds Quanta Magazine, whose articles frequently appear on HN: https://www.quantamagazine.org/ https://www.quantamagazine.org/

Kranar 7y ago
Renaissance Technologies did not use algorithms to beat the market... they used tax schemes to do so: https://www.bloomberg.com/news/articles/2019-04-10/renaissance-explores-settlement-as-irs-seeks-billions-in-taxes https://www.bloomberg.com/news/articles/2019-04-10/renaissan... When you factor in the money they saved from dodging taxes and how they managed to compound the growth on that money, their returns end up being no more impressive than any other hedge fund. Even if it turns out that what they did wasn't illegal, the bulk of their profits beyond what would have been made just investing in an index fund came from their tax scheme rather than from any kind of insight into the financial markets.
- melling 7y ago
  The article says that this scheme occurred during specific years. During the 1990’s they also beat the market. “Medallion, which is open only to current and former Renaissance employees, has generated returns of about 40 percent after fees for decades by using computers to spot market patterns. It’s distinct from the funds Renaissance makes available to outsiders, such as the Institutional Equities Fund. Medallion earns most of its money through short-term trading of securities and other assets. Such earnings typically get taxed at the same marginal rate as salary. The tax code rewards longer-term investments with a preferential, lower rate. The dispute centers on transactions the firm carried out with Barclays Plc and Deutsche Bank AG between 2000 and 2015 that had the effect of transforming short-term trading gains into long-term returns. Rather than own securities directly, Renaissance instructed the banks to buy and sell them within a portfolio of assets. It then bought an option from the banks tied to the portfolio’s performance”
  - Scoundreller 7y ago
    I’m confused. Doesn’t the recipient pay these taxes, so it wouldn’t show up when comparing fund returns?
    - simtel20 7y ago
      I'm not a finance guy, but I think the idea is this: Ren says "we bought an option and held it for a year". The option's counterparty was a bank, I guess, so they just form a company to hold the bag, and the company that is created reports to the IRS that they don't have any assets, just a basket of assets to offset the option they're responsible for. At the end of the contract (and there can be more than one of these going on at the same time) the assets can be sold, and would be sold, in order to pay for the option contract which was now held for a year. Some money would go to the broker for executing the trades over time, etc. but much less than the taxes that would otherwise be paid. So, the part that has the tax man scratching his head is that if Ren was directing the buying and selling of the assets in the basket constantly, is that really holding on to an asset, or is it just a lie? They say they got a tax lawyer to sign off on it, so it goes to court to see if it's a defensible position. If not, they'll probably pay a slap on the wrist and won't get to do it again. It's not done in isolation IIRC. This sounds a lot like how I understand swaps are done, so it may be that this is only slightly unusual.
- nickles 7y ago
  > Renaissance Technologies did not use algorithms to beat the market... This is false. RenTec generated outsized returns for a decade prior to entering into the derivatives with Barclays and DB beginning in 2000. > the bulk of their profits beyond what would have been made just investing in an index fund This is also false. For example, RenTec generated 99% return in 2000 net of fees, while the S&P 500 lost ~8%.
  - blunte 7y ago
    From what has been published, secrecy within Renaissance is so extreme that perhaps only 2-3 people actually know what is going on. So for an outsider, I say it's pure speculation. And I speculate that their outsized gains are due to market manipulation, front running, or other insider activities (as in, illegal/unfair). No one is smart enough; no algorithm or model is future-proof; nobody gets returns like this unless they define the scenarios themselves.
    - nickles 7y ago
      > So for an outsider, I say it's pure speculation. And you assert this on what basis? There's enough that's been published to get some broad idea of what happens within the firm. > And I speculate that their outsized gains are due to market manipulation, front running, or other insider activities (as in, illegal/unfair). If they were engaging in illegal activities, it's very likely the firm, which is undoubtedly scrutinized by regulators, any such activities would have been discovered. > No one is smart enough; no algorithm or model is future-proof; nobody gets returns like this unless they define the scenarios themselves. RenTech constantly updates its algorithms. Alpha decay is a well known phenomenon. The firm utilizes sophisticated risk management techniques in order to avoid drawdowns, in all likelihood. Assuming this is the case, they're able to more effectively compound returns while simultaneously levering positions. Here's an example of a risk parity strategy [0], which may help explain how risk management works. [0] https://towardsdatascience.com/ray-dalio-etf-900edfe64b05?_branch_match_id=700193339712202283 https://towardsdatascience.com/ray-dalio-etf-900edfe64b05?_b...
    - tim333 7y ago
- kolbe 7y ago
  > When you factor in the money they saved from dodging taxes and how they managed to compound the growth on that money, their returns end up being no more impressive than any other hedge fund. That's a bold claim that you should be prepared to defend. If not, you should remove it.
- mruts 7y ago
  You have absolutely no idea what you’re talking about. RenTec is the most profitable money making machine the world has ever seen (and likely will see). RenTec’s Medallion fund has an annualized return for over 30 years in excess of 35% net of fees. I’m not sure what their management fee is, but their performance fee is like 45%. This means they are making like 80% returns YoY before fees. I suspect you don’t work in the industry, because what you’re saying is absolutely ludicrous. The S&P 500 lost like 40% in 2008. Meanwhile Medallion doubled up after fees. So a total return of 145%. What you’re saying is simply not possible with a tax loophole. There’s not a single hedge fund analyst or PM on the Street who doesn’t think that RenTec is anything less than amazing. No one thinks they are as good as those guys, no one. If you want the real story about Simmons and RenTec, check out the MIT Sloan fireside chat with him on YouTube.
  - tim333 7y ago
    This is another reason individual day traders lose - it's a zero sum game and in liquid markets you are competing against outfits like RenTec.
    - mruts 7y ago
      Beta (by definition) is not a zero sum game, but alpha is.
  - RandomBacon 7y ago
    I'm not in the industry, but I wonder: did people have the same kind of reverence for Madoff?
    - ivalm 7y ago
      Madoff was a ponzi scheme that relied on new investment (since it was simple pyramid). Medallion fund limits outside investment (so there is no outside source of money) and has operated for many decades (ie more money was withdrawn from it than put in).
      - 7y ago
- mlevental 7y ago
  you've been rightfully skewered by other people but I just want to point that this is what happens when someone reads one article about a controversial thing they don't otherwise know anything about and then goes around presenting that finding as if they're some kind of expert.
4ntonius8lock 7y ago
Also, the people I've known who call themselves day traders, were inevitably people who weren't too bright and were unemployed with independent income (mostly trust fund babies, but some others who had supplemental income) - From my own personal experience, these people don't even know what EBITDA adjusted earnings are. If a world class mathematician says he will do something, I see the probability of success wildly higher. It's like when you go to a writing class, and someone inevitably is admonished for doing run on sentences, and then they say "well Charles Dickens did it". Why yes, he did. But you probably aren't going to have Charles Dickens levels of talent.
- Silhouette 7y ago
  In my entire life, as far as I know I've only ever met one person who played the stock market manually and did well at it. It was almost a hobby for him. He enjoyed analysing individual businesses very carefully, and would look for clearly financially sensible opportunities that were effective at relatively small scales but overlooked by the big players. A favourite type of investment that came up now and then would be a stock that had seen a sudden sharp drop in share price triggered by some announcement that sounded scary but actually made perfect sense if you understood the industry, so it panicked investors who were only looking at the numbers and left the price-to-book low or sometimes even below 1 at the time he bought. That's probably as close to a certain profit as you're ever likely to find trading stocks. In any case, he almost always invested in "real" businesses and for the long term. He would set stops to protect himself, but he wasn't really a day-trader in the sense we're talking about here. The last I heard, his average annual returns were something like 15-20% before taxes and fees, which is a pretty impressive record given he'd maintained it for many years and through both bull and bear markets. I doubt most people could do what he did -- the amount of patience and discipline he had were extraordinary -- but it was fascinating discussing it with him, and strangely satisfying to watch him do well by going with common sense and considered choices against a market that was temporarily confused about something.
  - lbotos 7y ago
    This is warren buffet style value investing. "Day Trading" is actively taking positions with the intent to sell in the "short-term".
inerte 7y ago
Someone will always beat the market, because that's what we're looking for. I think it was on "Thinking Fast and Slow" that I read it's pointless to analyze the stock market winners, since it's a random process. Imagine there are 30 million entities that own stocks in the US - individual, companies, funds, etc... If on a given year half of them did better than average (with some rounding liberty): 1st year: 15M better than average 2nd year: 7.5M better than average 3: 3.25M 4: 1.6M 5: 800k 6: 400k 7: 200k 8: 100k 9: 50k 10: 25k And so on... after 20 years, probably 25 traders will have beaten the market for 20 years straight. Next year, same thing, 25 traders will have beaten the market, and so on. In the US, there's always someone who has beaten the market over the last few decades - there's nothing special about them. Randomly picking stocks would give you the same end result. But since we're storytellers, we build an explanation and go with it.
- melling 7y ago
  Who said it’s a random process? Stock prices don’t go up randomly over the long term. Joel Greenblatt had 50% yearly returns for a decade. Renaissance Technologies uses algorithms. Also, I don’t think you would expect someone to beat the market every year, but over a ten year period, for example.
  - neaden 7y ago
    An important difference. You would expect someone to beat the market every year for ten years just by chance alone, you wouldn't expect it to be any specific person. I expect someone is going to win the lottery, I just don't expect that someone to be me.
  - ryandrake 7y ago
    I’ve got a roulette “system” too. Trust me, it even has algorithms and machine learning. I’ll sell you the book. The discussion reminds me of a fun exercise we did in one of my B-school classes: everyone stands up and flips a coin. If you flip heads you sit down and stop the game. Everyone who flipped heads flips again, with the new tails flippers sitting down. At the end when there’s one person left, the prof interviews him, asking “how did you become so skilled at flipping heads?” and “what advice can others take to get as good as you!” This is what we are doing when we admire stock pickers and try to figure out what their secret is.

Kranar 7y ago

Renaissance Technologies did not use algorithms to beat the market... they used tax schemes to do so: https://www.bloomberg.com/news/articles/2019-04-10/renaissance-explores-settlement-as-irs-seeks-billions-in-taxes https://www.bloomberg.com/news/articles/2019-04-10/renaissan... When you factor in the money they saved from dodging taxes and how they managed to compound the growth on that money, their returns end up being no more impressive than any other hedge fund. Even if it turns out that what they did wasn't illegal, the bulk of their profits beyond what would have been made just investing in an index fund came from their tax scheme rather than from any kind of insight into the financial markets.

melling 7y ago
The article says that this scheme occurred during specific years. During the 1990’s they also beat the market. “Medallion, which is open only to current and former Renaissance employees, has generated returns of about 40 percent after fees for decades by using computers to spot market patterns. It’s distinct from the funds Renaissance makes available to outsiders, such as the Institutional Equities Fund. Medallion earns most of its money through short-term trading of securities and other assets. Such earnings typically get taxed at the same marginal rate as salary. The tax code rewards longer-term investments with a preferential, lower rate. The dispute centers on transactions the firm carried out with Barclays Plc and Deutsche Bank AG between 2000 and 2015 that had the effect of transforming short-term trading gains into long-term returns. Rather than own securities directly, Renaissance instructed the banks to buy and sell them within a portfolio of assets. It then bought an option from the banks tied to the portfolio’s performance”
- Scoundreller 7y ago
  I’m confused. Doesn’t the recipient pay these taxes, so it wouldn’t show up when comparing fund returns?
  - simtel20 7y ago
    I'm not a finance guy, but I think the idea is this: Ren says "we bought an option and held it for a year". The option's counterparty was a bank, I guess, so they just form a company to hold the bag, and the company that is created reports to the IRS that they don't have any assets, just a basket of assets to offset the option they're responsible for. At the end of the contract (and there can be more than one of these going on at the same time) the assets can be sold, and would be sold, in order to pay for the option contract which was now held for a year. Some money would go to the broker for executing the trades over time, etc. but much less than the taxes that would otherwise be paid. So, the part that has the tax man scratching his head is that if Ren was directing the buying and selling of the assets in the basket constantly, is that really holding on to an asset, or is it just a lie? They say they got a tax lawyer to sign off on it, so it goes to court to see if it's a defensible position. If not, they'll probably pay a slap on the wrist and won't get to do it again. It's not done in isolation IIRC. This sounds a lot like how I understand swaps are done, so it may be that this is only slightly unusual.
nickles 7y ago
> Renaissance Technologies did not use algorithms to beat the market... This is false. RenTec generated outsized returns for a decade prior to entering into the derivatives with Barclays and DB beginning in 2000. > the bulk of their profits beyond what would have been made just investing in an index fund This is also false. For example, RenTec generated 99% return in 2000 net of fees, while the S&P 500 lost ~8%.
- blunte 7y ago
  From what has been published, secrecy within Renaissance is so extreme that perhaps only 2-3 people actually know what is going on. So for an outsider, I say it's pure speculation. And I speculate that their outsized gains are due to market manipulation, front running, or other insider activities (as in, illegal/unfair). No one is smart enough; no algorithm or model is future-proof; nobody gets returns like this unless they define the scenarios themselves.
  - nickles 7y ago
    > So for an outsider, I say it's pure speculation. And you assert this on what basis? There's enough that's been published to get some broad idea of what happens within the firm. > And I speculate that their outsized gains are due to market manipulation, front running, or other insider activities (as in, illegal/unfair). If they were engaging in illegal activities, it's very likely the firm, which is undoubtedly scrutinized by regulators, any such activities would have been discovered. > No one is smart enough; no algorithm or model is future-proof; nobody gets returns like this unless they define the scenarios themselves. RenTech constantly updates its algorithms. Alpha decay is a well known phenomenon. The firm utilizes sophisticated risk management techniques in order to avoid drawdowns, in all likelihood. Assuming this is the case, they're able to more effectively compound returns while simultaneously levering positions. Here's an example of a risk parity strategy [0], which may help explain how risk management works. [0] https://towardsdatascience.com/ray-dalio-etf-900edfe64b05?_branch_match_id=700193339712202283 https://towardsdatascience.com/ray-dalio-etf-900edfe64b05?_b...
  - tim333 7y ago
kolbe 7y ago
> When you factor in the money they saved from dodging taxes and how they managed to compound the growth on that money, their returns end up being no more impressive than any other hedge fund. That's a bold claim that you should be prepared to defend. If not, you should remove it.
mruts 7y ago
You have absolutely no idea what you’re talking about. RenTec is the most profitable money making machine the world has ever seen (and likely will see). RenTec’s Medallion fund has an annualized return for over 30 years in excess of 35% net of fees. I’m not sure what their management fee is, but their performance fee is like 45%. This means they are making like 80% returns YoY before fees. I suspect you don’t work in the industry, because what you’re saying is absolutely ludicrous. The S&P 500 lost like 40% in 2008. Meanwhile Medallion doubled up after fees. So a total return of 145%. What you’re saying is simply not possible with a tax loophole. There’s not a single hedge fund analyst or PM on the Street who doesn’t think that RenTec is anything less than amazing. No one thinks they are as good as those guys, no one. If you want the real story about Simmons and RenTec, check out the MIT Sloan fireside chat with him on YouTube.
- tim333 7y ago
  This is another reason individual day traders lose - it's a zero sum game and in liquid markets you are competing against outfits like RenTec.
  - mruts 7y ago
    Beta (by definition) is not a zero sum game, but alpha is.
- RandomBacon 7y ago
  I'm not in the industry, but I wonder: did people have the same kind of reverence for Madoff?
  - ivalm 7y ago
    Madoff was a ponzi scheme that relied on new investment (since it was simple pyramid). Medallion fund limits outside investment (so there is no outside source of money) and has operated for many decades (ie more money was withdrawn from it than put in).
    - 7y ago
mlevental 7y ago
you've been rightfully skewered by other people but I just want to point that this is what happens when someone reads one article about a controversial thing they don't otherwise know anything about and then goes around presenting that finding as if they're some kind of expert.

4ntonius8lock 7y ago

Also, the people I've known who call themselves day traders, were inevitably people who weren't too bright and were unemployed with independent income (mostly trust fund babies, but some others who had supplemental income) - From my own personal experience, these people don't even know what EBITDA adjusted earnings are. If a world class mathematician says he will do something, I see the probability of success wildly higher. It's like when you go to a writing class, and someone inevitably is admonished for doing run on sentences, and then they say "well Charles Dickens did it". Why yes, he did. But you probably aren't going to have Charles Dickens levels of talent.

Silhouette 7y ago
In my entire life, as far as I know I've only ever met one person who played the stock market manually and did well at it. It was almost a hobby for him. He enjoyed analysing individual businesses very carefully, and would look for clearly financially sensible opportunities that were effective at relatively small scales but overlooked by the big players. A favourite type of investment that came up now and then would be a stock that had seen a sudden sharp drop in share price triggered by some announcement that sounded scary but actually made perfect sense if you understood the industry, so it panicked investors who were only looking at the numbers and left the price-to-book low or sometimes even below 1 at the time he bought. That's probably as close to a certain profit as you're ever likely to find trading stocks. In any case, he almost always invested in "real" businesses and for the long term. He would set stops to protect himself, but he wasn't really a day-trader in the sense we're talking about here. The last I heard, his average annual returns were something like 15-20% before taxes and fees, which is a pretty impressive record given he'd maintained it for many years and through both bull and bear markets. I doubt most people could do what he did -- the amount of patience and discipline he had were extraordinary -- but it was fascinating discussing it with him, and strangely satisfying to watch him do well by going with common sense and considered choices against a market that was temporarily confused about something.
- lbotos 7y ago
  This is warren buffet style value investing. "Day Trading" is actively taking positions with the intent to sell in the "short-term".

inerte 7y ago

Someone will always beat the market, because that's what we're looking for. I think it was on "Thinking Fast and Slow" that I read it's pointless to analyze the stock market winners, since it's a random process. Imagine there are 30 million entities that own stocks in the US - individual, companies, funds, etc... If on a given year half of them did better than average (with some rounding liberty): 1st year: 15M better than average 2nd year: 7.5M better than average 3: 3.25M 4: 1.6M 5: 800k 6: 400k 7: 200k 8: 100k 9: 50k 10: 25k And so on... after 20 years, probably 25 traders will have beaten the market for 20 years straight. Next year, same thing, 25 traders will have beaten the market, and so on. In the US, there's always someone who has beaten the market over the last few decades - there's nothing special about them. Randomly picking stocks would give you the same end result. But since we're storytellers, we build an explanation and go with it.

melling 7y ago
Who said it’s a random process? Stock prices don’t go up randomly over the long term. Joel Greenblatt had 50% yearly returns for a decade. Renaissance Technologies uses algorithms. Also, I don’t think you would expect someone to beat the market every year, but over a ten year period, for example.
- neaden 7y ago
  An important difference. You would expect someone to beat the market every year for ten years just by chance alone, you wouldn't expect it to be any specific person. I expect someone is going to win the lottery, I just don't expect that someone to be me.
- ryandrake 7y ago
  I’ve got a roulette “system” too. Trust me, it even has algorithms and machine learning. I’ll sell you the book. The discussion reminds me of a fun exercise we did in one of my B-school classes: everyone stands up and flips a coin. If you flip heads you sit down and stop the game. Everyone who flipped heads flips again, with the new tails flippers sitting down. At the end when there’s one person left, the prof interviews him, asking “how did you become so skilled at flipping heads?” and “what advice can others take to get as good as you!” This is what we are doing when we admire stock pickers and try to figure out what their secret is.