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> here's no outside investors in the Medallion fund anymore, so if it is a scam, they would only be scamming their own employees The "it's a scam" theory that

> here's no outside investors in the Medallion fund anymore, so if it is a scam, they would only be scamming their own employees The "it's a scam" theory that I heard had nothing to do with it being a Ponzi scheme, instead it was about laundering high-tax income into low-tax capital gains while maintaining a plausibly deniable investment cover story. It didn't have to beat the market, it just had to beat regulators. I have nowhere near enough domain competence to comment on the plausibility of that scenario, other than to say that I suspect if it were that easy everyone would be doing it, so on those grounds alone I suspect the conspiracy theory I heard was incorrect. Someone more invested in the idea that it's a conspiracy would likely just argue that it isn't easy to be good at this or that there are economies of scale, so only one dominant player. Shrug.

throw0101a 7y ago
> ... high-tax income into low-tax capital gains while maintaining a plausibly deniable investment cover story. There are public swap-based ETFs (in Canada) formulated around this concept: * https://www.pwlcapital.com/understanding-swap-based-etfs/ https://www.pwlcapital.com/understanding-swap-based-etfs/ * https://en.wikipedia.org/wiki/Total_return_swap https://en.wikipedia.org/wiki/Total_return_swap
thewarrior 7y ago
But how exactly would this laundering work ?
- billsnow 7y ago
  I think he means that they funnel the income from fees into this "black box" fund and that's what creates the huge returns. My instinct would be that there's no way this would get past auditors, but then again, Madoff got away with cooked books, so it's plausible.
hogFeast 7y ago
The book actually covers this. What they did is somewhat complex and involved obtaining leverage as much as the tax savings but basically they turned short-term capital gains into long-term gains. That saved something like $7bn, iirc, out of the $100bn in net profit they have generated...so it is not significant.
- vostok 7y ago
  > What they did is somewhat complex and involved obtaining leverage as much as the tax savings but basically they turned short-term capital gains into long-term gains. That sounds like misdirection. It's very common for hedge funds to use tons of leverage. It's not like getting this level of leverage is an unsolved problem. On the other hand reducing your tax rate from 37% to 20% increases your returns by 27%. Even that would be valuable, but the real number is probably even more than 27%.

throw0101a 7y ago

> ... high-tax income into low-tax capital gains while maintaining a plausibly deniable investment cover story. There are public swap-based ETFs (in Canada) formulated around this concept: * https://www.pwlcapital.com/understanding-swap-based-etfs/ https://www.pwlcapital.com/understanding-swap-based-etfs/ * https://en.wikipedia.org/wiki/Total_return_swap https://en.wikipedia.org/wiki/Total_return_swap

thewarrior 7y ago

But how exactly would this laundering work ?

billsnow 7y ago
I think he means that they funnel the income from fees into this "black box" fund and that's what creates the huge returns. My instinct would be that there's no way this would get past auditors, but then again, Madoff got away with cooked books, so it's plausible.

hogFeast 7y ago

The book actually covers this. What they did is somewhat complex and involved obtaining leverage as much as the tax savings but basically they turned short-term capital gains into long-term gains. That saved something like $7bn, iirc, out of the $100bn in net profit they have generated...so it is not significant.

vostok 7y ago
> What they did is somewhat complex and involved obtaining leverage as much as the tax savings but basically they turned short-term capital gains into long-term gains. That sounds like misdirection. It's very common for hedge funds to use tons of leverage. It's not like getting this level of leverage is an unsolved problem. On the other hand reducing your tax rate from 37% to 20% increases your returns by 27%. Even that would be valuable, but the real number is probably even more than 27%.