7 ms·

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/renais

by 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.

by Kranar 7y ago

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.