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Note that RenTec also runs two other funds that are larger than the Medallion Fund, but both under perform the index. On a completely unrelated note, if I were

by gibybo 7y ago

Note that RenTec also runs two other funds that are larger than the Medallion Fund, but both under perform the index. On a completely unrelated note, if I were interested in creating a fund that appeared to have market beating returns for decades and I wasn't concerned about the legal consequences, here's one way I might do it: I would create fund A and B and seed them with some initial capital. For fund A, I would create a machine learning model that took in lots of opaque parameters and hire a team of very smart mathematicians and computer scientists to optimize this model to perform profitable trades. In order to easily generate alpha, I would subtlety feed in some parameters that were correlated to the future market moving actions of fund B. Since I also run fund B, I uniquely have this information. I would use the performance of fund A to woo outside investors into investing their money into fund B. In order to prevent fund A from overtaking fund B in asset value and thus diminishing the value of the subtle signals, I would close the fund to the public when it got sufficiently large and periodically distribute its assets to its investors. In order to avoid any of my employees from eventually figuring out what's going on and reporting me, I'd incentivize them to avoid looking too closely by requiring that they invest a large part of their income into the fund with a long vesting date. I'd also require them to sign a long term non-compete so that they cannot work anywhere else in the financial industry if they leave.

deleted 7y ago
[deleted]
dxhdr 7y ago
Aren't SEC whistleblower awards setup to combat the scenario you're proposing? The first individual to defect would presumably earn vastly more money than continuing with the scheme.
- patentatt 7y ago
  Thing is, it could happen semi-inadvertently even, such that there’s nothing to blow the whistle on. Basically, the incentives are aligned to support the above scenario. If the thinking going into the public funds is geared toward how “big money” works, and the small, private fund is designed to exploit features of “big money” moving around the market, and you get some cross-pollination of those hypothesis about what “big money” should do, the scenario described above emerges naturally. No grand conspiracy in a smoke-filled room is necessary.
- rlucas 7y ago
  "The SEC has now awarded approximately $376 million to 61 individuals since issuing its first award in 2012." There's no way the incentives from something like this SEC program could outweigh the economics of being high up within Rentec. [No dog in this fight about theorizing fraud vs. legit, just saying the SEC gap is multiple orders of magnitude in incentives here.]
throwawaymath 7y ago
To be frank, running this sham for 30 years sounds less plausible to me than beating the market the boring way. How would you stop investors in your two public funds (and their accountants) from asking pointed questions about disbursements from one fund to the others? Do you plan to fool them for this amount of time, or bring them into the conspiracy? And how will you sustain the conspiracy when your other two funds trail the market index by a lower combined differential than your other, internal fund is beating the index? Will you initiate a Ponzi, or something else? There is a more realistic angle to attribute RenTech's returns to fraud. I don't personally believe it as I have friends there, but I believe it would technically work: A nontrivial number of RenTech's employees have come from the intelligence apparatus of the United States; namely the NSA. Simons was particularly affiliated with them early on in his math career. It strikes me as plausible (but again, highly unlikely) that if RenTech is is a conspiracy, it is a conspiracy sponsored by US intelligence. They would have the capability to run a 30 year secretive conspiracy, and they would have they desire to attract top talent in math, physics and computer science. But I'm just speculating for fun year. I really don't think there's any conspiracy :)
- deleted 7y ago
  [deleted]
- gibybo 7y ago
  There would be no disbursements from one fund to the other. Fund A would purchase an asset slowly over time. When it has finished purchasing the asset, fund B would purchase that asset quickly at a scale large enough to increase the market price of it. As the price rose, fund A would sell its position. The net effect is that fund A sees increased returns and fund B sees decreased returns.
  - Carioca 7y ago
    And, importantly, the proportional impact in fund A is much larger than the one in fund B
  - rramdin 7y ago
    This is throwing any efficient-market hypothesis out the window. Msybe this would work for a year, but why would anyone invest in fund B if it is a consistent loser. If you can figure out a way to slowly buy an asset and then quickly buy more of it and make both strategies profitable at all, then you're onto something huge. Almost as huge as Ren Tech
unlinked_dll 7y ago
I mean if you want to not go to jail all you really need to do is beat the market by N% and take that as your fee. If N is sufficiently low you can probably do it by aggressively balancing the portfolio every 2-3 years, such that it functions like an index fund but with adjustment to cut out losers. There are plenty of folks out there that will do this for you. Just don't get greedy.
- BoiledCabbage 7y ago
  Uh, if all it took to beat the market was consistently rebalancing your portfolio everyone would be doing it. It takes more than that to consistently beat the market.
  - unlinked_dll 7y ago
    A lot of money managers are doing that. It's a tiny percentage, something like 2%. The reason that it isn't as common is because the time table is like 15-20 years, not 3-5.
    - deleted 7y ago
      [deleted]
    - BoiledCabbage 7y ago
      If you beat the market for 3-5 years, that's not consistently beating the market. That's flipping a coin. That's 100 people flipping coins, and being impressed that someone got 4 heads - all in a row.
jessriedel 7y ago
Just to make sure I understand you: the idea is that the excess returns of fund A above the index would be no larger than the under returns of fund B below the index?
- gibybo 7y ago
  Yes, but on a $ basis rather than a % basis.
  - auntienomen 7y ago
    What do you think the $ figures are? Have you tried to see whether the numbers add up for your theory?
    - deleted 7y ago
      [deleted]
    - gibybo 7y ago
      Well reports are that the Medallion Fund is capped at $10B with a 66% annual return before fees and a 39% annual return after fees, so the other funds would need to underperform by an average of at least $3.9B per year. If we include the fees in the performance (it's not clear to me that we should, since it's just an accounting measure that RenTec claims to pay itself) then it's at least $6.6B. Wikipedia says RenTec AUM is $110B. $10B for the Medallion Fund leaves $100B for the other two. So they would need to underperform by either >3.9% or >6.6%. I have had trouble finding exact numbers for those funds, so I can't determine if that's really the case or not. However, this assumes RenTec is unable to beat the market at all. Maybe they really can beat it, but by only 2-3% per year. They can still funnel that outperformance into the smaller fund to turn it into 66%/39%.
      - auntienomen 7y ago
        The other funds have not had $110B in AUM for most of the time period in question. Probably less than half that. RIEF shrunk to ~$7B at one point, during the post 2009 period. Next step is to look up RIEF, RIFF, & RIDA's dollar returns to see if you can match the figures.
deleted 7y ago
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rbavocadotree 7y ago
It's an interesting idea, but in this case Fund B only came into existence after 15+ years of market beating performance by fund A. A funny thing from the recent book: One of Rentech's earlier employees spent his first few months there trying to figure out what the scam was.
- gibybo 7y ago
  Thanks, I didn't know that. Do you know if there were any other funds by him at the time? I could also create a dozen funds that do randomly different things and just close the ones that didn't do well to get me started.
  - rbavocadotree 7y ago
    Simons had other investment funds, but they were mainly focused on early stage, private tech companies. He did have about 10 years worth of poor-to-decent results running other hedge funds before he found real success with RenTech. So it's not like this all came out of nowhere.
auntienomen 7y ago
In the scenario you're outlining, the Medallion Fund's yearly returns would be capped by the underperformance of the other RenTec funds. There are two problems with this scenario: 1) The Medallion fund has been outperforming since the 90s, while the other funds opened in 2005. 2) The Medallion fund has extracted vastly more than would be available from RIEF/RIFF underperformance.
- patentatt 7y ago
  Not necessarily. Using the weight of the big funds to put your thumb on the scale of the market could absolutely shift market prices in a way that can be exploited to reap more reward than is lost. In fact, it is a good explanation for why the medallion fund is size-limited. Also, as someone else noted, there is a 10x size difference between the two pools of money. So the big fund can “lose” 1% which generates a 10% increase in the small fund. Then you advertise that you are capable of incredible returns to induce people to invest in the big fund. Another reason why the small private fund is limited in size.
scottlocklin 7y ago
> Note that RenTec also runs two other funds that are larger than the Medallion Fund, but both under perform the index. Citations needed: last time I checked, their outside funds beat the index. As for your conspiracy theory: their outside funds didn't exist until recently.
- account73466 7y ago
  see https://whalewisdom.com/filer/renaissance-technologies-llc https://whalewisdom.com/filer/renaissance-technologies-llc they are as good as SP&500
maest 7y ago
Front running external money with the internal fund is a big no-no and a well known possible conflict of interests. I don't see a way this would go on for such a long time.

by gibybo 7y ago

deleted 7y ago

[deleted]

dxhdr 7y ago

Aren't SEC whistleblower awards setup to combat the scenario you're proposing? The first individual to defect would presumably earn vastly more money than continuing with the scheme.

patentatt 7y ago
Thing is, it could happen semi-inadvertently even, such that there’s nothing to blow the whistle on. Basically, the incentives are aligned to support the above scenario. If the thinking going into the public funds is geared toward how “big money” works, and the small, private fund is designed to exploit features of “big money” moving around the market, and you get some cross-pollination of those hypothesis about what “big money” should do, the scenario described above emerges naturally. No grand conspiracy in a smoke-filled room is necessary.
rlucas 7y ago
"The SEC has now awarded approximately $376 million to 61 individuals since issuing its first award in 2012." There's no way the incentives from something like this SEC program could outweigh the economics of being high up within Rentec. [No dog in this fight about theorizing fraud vs. legit, just saying the SEC gap is multiple orders of magnitude in incentives here.]

throwawaymath 7y ago

To be frank, running this sham for 30 years sounds less plausible to me than beating the market the boring way. How would you stop investors in your two public funds (and their accountants) from asking pointed questions about disbursements from one fund to the others? Do you plan to fool them for this amount of time, or bring them into the conspiracy? And how will you sustain the conspiracy when your other two funds trail the market index by a lower combined differential than your other, internal fund is beating the index? Will you initiate a Ponzi, or something else? There is a more realistic angle to attribute RenTech's returns to fraud. I don't personally believe it as I have friends there, but I believe it would technically work: A nontrivial number of RenTech's employees have come from the intelligence apparatus of the United States; namely the NSA. Simons was particularly affiliated with them early on in his math career. It strikes me as plausible (but again, highly unlikely) that if RenTech is is a conspiracy, it is a conspiracy sponsored by US intelligence. They would have the capability to run a 30 year secretive conspiracy, and they would have they desire to attract top talent in math, physics and computer science. But I'm just speculating for fun year. I really don't think there's any conspiracy :)

deleted 7y ago
[deleted]
gibybo 7y ago
There would be no disbursements from one fund to the other. Fund A would purchase an asset slowly over time. When it has finished purchasing the asset, fund B would purchase that asset quickly at a scale large enough to increase the market price of it. As the price rose, fund A would sell its position. The net effect is that fund A sees increased returns and fund B sees decreased returns.
- Carioca 7y ago
  And, importantly, the proportional impact in fund A is much larger than the one in fund B
- rramdin 7y ago
  This is throwing any efficient-market hypothesis out the window. Msybe this would work for a year, but why would anyone invest in fund B if it is a consistent loser. If you can figure out a way to slowly buy an asset and then quickly buy more of it and make both strategies profitable at all, then you're onto something huge. Almost as huge as Ren Tech

unlinked_dll 7y ago

I mean if you want to not go to jail all you really need to do is beat the market by N% and take that as your fee. If N is sufficiently low you can probably do it by aggressively balancing the portfolio every 2-3 years, such that it functions like an index fund but with adjustment to cut out losers. There are plenty of folks out there that will do this for you. Just don't get greedy.

BoiledCabbage 7y ago
Uh, if all it took to beat the market was consistently rebalancing your portfolio everyone would be doing it. It takes more than that to consistently beat the market.
- unlinked_dll 7y ago
  A lot of money managers are doing that. It's a tiny percentage, something like 2%. The reason that it isn't as common is because the time table is like 15-20 years, not 3-5.
  - deleted 7y ago
    [deleted]
  - BoiledCabbage 7y ago
    If you beat the market for 3-5 years, that's not consistently beating the market. That's flipping a coin. That's 100 people flipping coins, and being impressed that someone got 4 heads - all in a row.

jessriedel 7y ago

Just to make sure I understand you: the idea is that the excess returns of fund A above the index would be no larger than the under returns of fund B below the index?

gibybo 7y ago
Yes, but on a $ basis rather than a % basis.
- auntienomen 7y ago
  What do you think the $ figures are? Have you tried to see whether the numbers add up for your theory?
  - deleted 7y ago
    [deleted]
  - gibybo 7y ago
    Well reports are that the Medallion Fund is capped at $10B with a 66% annual return before fees and a 39% annual return after fees, so the other funds would need to underperform by an average of at least $3.9B per year. If we include the fees in the performance (it's not clear to me that we should, since it's just an accounting measure that RenTec claims to pay itself) then it's at least $6.6B. Wikipedia says RenTec AUM is $110B. $10B for the Medallion Fund leaves $100B for the other two. So they would need to underperform by either >3.9% or >6.6%. I have had trouble finding exact numbers for those funds, so I can't determine if that's really the case or not. However, this assumes RenTec is unable to beat the market at all. Maybe they really can beat it, but by only 2-3% per year. They can still funnel that outperformance into the smaller fund to turn it into 66%/39%.
    - auntienomen 7y ago
      The other funds have not had $110B in AUM for most of the time period in question. Probably less than half that. RIEF shrunk to ~$7B at one point, during the post 2009 period. Next step is to look up RIEF, RIFF, & RIDA's dollar returns to see if you can match the figures.

deleted 7y ago

[deleted]

rbavocadotree 7y ago

It's an interesting idea, but in this case Fund B only came into existence after 15+ years of market beating performance by fund A. A funny thing from the recent book: One of Rentech's earlier employees spent his first few months there trying to figure out what the scam was.

gibybo 7y ago
Thanks, I didn't know that. Do you know if there were any other funds by him at the time? I could also create a dozen funds that do randomly different things and just close the ones that didn't do well to get me started.
- rbavocadotree 7y ago
  Simons had other investment funds, but they were mainly focused on early stage, private tech companies. He did have about 10 years worth of poor-to-decent results running other hedge funds before he found real success with RenTech. So it's not like this all came out of nowhere.

auntienomen 7y ago

In the scenario you're outlining, the Medallion Fund's yearly returns would be capped by the underperformance of the other RenTec funds. There are two problems with this scenario: 1) The Medallion fund has been outperforming since the 90s, while the other funds opened in 2005. 2) The Medallion fund has extracted vastly more than would be available from RIEF/RIFF underperformance.

patentatt 7y ago
Not necessarily. Using the weight of the big funds to put your thumb on the scale of the market could absolutely shift market prices in a way that can be exploited to reap more reward than is lost. In fact, it is a good explanation for why the medallion fund is size-limited. Also, as someone else noted, there is a 10x size difference between the two pools of money. So the big fund can “lose” 1% which generates a 10% increase in the small fund. Then you advertise that you are capable of incredible returns to induce people to invest in the big fund. Another reason why the small private fund is limited in size.

scottlocklin 7y ago

> Note that RenTec also runs two other funds that are larger than the Medallion Fund, but both under perform the index. Citations needed: last time I checked, their outside funds beat the index. As for your conspiracy theory: their outside funds didn't exist until recently.

account73466 7y ago
see https://whalewisdom.com/filer/renaissance-technologies-llc https://whalewisdom.com/filer/renaissance-technologies-llc they are as good as SP&500

maest 7y ago

Front running external money with the internal fund is a big no-no and a well known possible conflict of interests. I don't see a way this would go on for such a long time.