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Medallion Fund “Stretches Explanation to the Limit,” Professor Claims

236 points by SirLJ 7y ago

scottious 7y ago
I'm no finance expert but doesn't this all seem way too good to be true? At first I was reading this and thinking "how is this not exactly like Bernie Madoff?" Then they say "The Medallion fund has been closed to external capital since 1993 ... whatever profit they make, they pay out". So clearly it can't be a ponzie scheme? Still, it seems too good to be true. If financial experts are stumped as well then that also seems like a red flag.
- huffmsa 7y ago
  I don't think they could keep it up for that long without slipping up at least once. Enron started around the same time and got tripped up in 2001. If it were a one man investment shop, then maybe it leans more towards fraud. But if they obviously employ dozens of quants, and have obvious hardware outlays, it seems less likely. It makes a lot of sense to me that they just win a bit more than they lose, play a lot of hands, and treat everything with pretty even money, so they're never overexposed in any one place.
  - huffmsa 7y ago
    I think I have the math right here, but let's say you start with > Capital = $100 1 time a day 5 days a week 50 weeks a year, you're going to take your capital and place that many $1 bets with it. Let's say you net +1% on your deployed capital ever day. After 250 rounds, you have $1215 in the bank. Again, correct the math if I'm wrong. But scale that down to 0.57%, which is the win rate I saw, and they're making ~$600/yr, which is the stated average return. Seems legit
    - papln 7y ago
      > Let's say you net +1% on your deployed capital ever day. That's the "..." step in "1 steal underpants, 2 ..., 3 Profit!"
      - huffmsa 7y ago
        Well yeah. But that's what they've figured out. It's unlikely, but not impossible.
    - texasbigdata 7y ago
      The book has more detail. They raised capital in the beginning.
  - papln 7y ago
    Enron only collapsed because they intentionally destabilized major public-facing national security infrastructure (retail energy markets), and they were incredibly brazen and sloppy about it. If they didn't make as large bets on collateral damage, and they acted with professionalism, they would have been fine.
    - huffmsa 7y ago
      See what you said? They made too many large, overleveraged bets. Blew them up
- yasp 7y ago
  My mind went to the same place.
- thomak 7y ago
  Financial experts aren’t stumped. The article found one guy who’s trying to get attention, but in general, folks are both impressed and pretty sure it’s real.
  - macspoofing 7y ago
    You have one fund that is an extreme outlier in performance over decades (!!) that nobody can explain and yet 'financial experts' aren't stumped and are 'pretty sure it's real'?
  - SirLJ 7y ago
    This was no expert, but an academic... those who can't do, teach...
    - ceejayoz 7y ago
      Yeah, those useless academics. https://en.wikipedia.org/wiki/List_of_Nobel_laureates_by_university_affiliation https://en.wikipedia.org/wiki/List_of_Nobel_laureates_by_uni...
      - SirLJ 7y ago
        any successful academic in economics making money in the stock market? Or I am missing something? Maybe a Nobel winner from Chicago?
        ceejayoz 7y ago
        No, for the same reasons the soldier pressing the button at a nuclear test doesn't get the Nobel Prize for doing so.
        SirLJ 7y ago
        like the reasons for Nobel for Fama for the wrong theory...
        7y ago
- ajmurmann 7y ago
  Could they been moving money from their open to investments , less successful funds to the medallion fund? Maybe even thought the market via trades?
  - Noughmad 7y ago
    This makes a lot of sense. Sacrificing a percent of profit from other funds won't make that much of a different in the minds of possible investors, but managing a fantastically high fund must be a good advertisement.
  - RookyNumbas 7y ago
    No, the medallion fund existed for 20 years before these other funds were opened.
    - papln 7y ago
      Was Medallion fund Rentec's only business, or was there other business they could skim from?
      - RookyNumbas 7y ago
        James Simons had a funds for tech startups. But it wasn't nearly large enough to support the kind of profits that happened.
- toss1 7y ago
  OK, what behaves like a Ponzi scheme that lasts too long? Money Laundering of assets on a national scale, e.g., for oligarchs who have taken 95% of a nations' wealth. Their biggest problem is to get it "legitimately" into the international money system. If the fund owners have really discovered a technological "secret sauce", why isn't it working in their other funds? Not a conclusion, but a valid open question.
  - xt00 7y ago
    Closed to outside funds in 1993 (shortly after ussr collapse), returns after fees (and paying everybody as well at the firm) are above 50%, assets of 10 billion and anything above the 10 billion gets paid out every year.. so roughly 5 billion plus gets paid out every year? I mean, as a wise man said “I want to believe” but yea feels / smells like you said.. oligarch money laundering... 5billion in clean money every year.. not bad..
- crawftv 7y ago
  The reason is that they are highly levered with many small short term trades. >dealbook.nytimes.com/2014/07/21/senate-inquiry-faults-hedge-funds-tax-strategy/https://dealbook.nytimes.com/2014/07/21/senate-inquiry-faults-hedge-funds-tax-strategy/ https://dealbook.nytimes.com/2014/07/21/senate-inquiry-fault... “Jul 21, 2014 Within these complicated financial structures, Renaissance Technologies was able to borrow as much as $17 for every $1 in the account.”
- jandrewrogers 7y ago
  Even without knowing the full details, their returns are quite plausible if you have less speculative knowledge of their business. The challenge for most hedge funds is that any "edge" they find decays over time, often quickly, which leaves them scrambling to find a new edge that will allow them to outperform the market. Most hedge funds go to a lot of effort to preserve an edge to the extent they can. Renaissance focused on finding and developing novel mathematics that can be exploited to find an edge, some of which is extremely esoteric and unique, and then massively automating that. Consequently, they can find more new edges before breakfast than some hedge funds find all year. The real effect is that they don't need to milk a dying edge for returns because they are constantly generating new ones, and they can pick the best of the bunch at any point in time. The investment side of the business is mechanical. Their recruiting has reflected their deep interest in novel theoretical approaches to edge discovery. In a sense, they are a higher order abstraction of a more typical hedge fund.
  - stanferder 7y ago
    I find it really hard to believe that the fund can be generating returns so consistently by pursuing a variety of different strategies over time. It seems very unlikely that Renaissance/Medallion constantly finds these things, whereas other operations almost never do. The conspiracy theorist in the back of my brain thinks that Renaissance/Medallion hires a lot of eggheads so they can plausibly claim to keep finding mathematical and operational edges, but the actual money-making strategy might be something else entirely.
    - RookyNumbas 7y ago
      These eggheads (very) occasionally move to other firms and see similar returns. Of course rentech then sues those other firms for all the profits they make. And they win.
      - chollida1 7y ago
        > These eggheads (very) occasionally move to other firms and see similar returns. Of course rentech then sues those other firms for all the profits they make. And they win. Not true at all as far as I know. Name one member of RenTech that went else where and made similar returns; I don't think you can because its never happened as far as I know. The closest I can think of is Pavel Volfbeyn and Alexander Belopolsky leaving to join the Millenium fund. Their performance there was so poor even not comparing their performance to what RenTech did so much so that they were let go even after Millenium settled the lawsuit with RenTech that allowed them to stay at Millenium.
- texasbigdata 7y ago
  No one is stumped, they're not making any external claim and they are not raising capital. This type of drive by analysis is the equivalent of "will Brad and jennifer get back together" at the grocery store check out line.
codingslave 7y ago
Investing is like tech, its winner take all. This is like being surprised that Google dominates search
- endorphone 7y ago
  Only it isn't like that at all.
  - codingslave 7y ago
    areas like HFT are
    - smabie 7y ago
      HFT isn’t investing. Moreover, RenTec isn’t a HFT firm. No one knows exactly what they do, but I suspect they are primarily a market neutral short-term factor model firm with a very very good execution and slippage model.
    - endorphone 7y ago
      There are dozens of HFT players, all endlessly leap-frogging each other. Despite the fact that HFT is actually a relatively tiny market (the crumbs claimed by the HFT market account for at most a couple of billion a year), and is grossly overstated in significance. In the broader market there are tens of thousands of major players, and millions of smaller participants. There is no network effect, and the market is so enormous that it doesn't concentrate.
      - codingslave 7y ago
        Most HFT players are barely making money, theres a few that are actually highly profitable People in this thread are confusing beta and alpha, alpha is limited and competed for
- smabie 7y ago
  No it’s not. The market return isn’t zero-sum. Everyone can acheive it (by definition). Moreover, there’s a lot of different kinds of alpha in the market and no one firm is going to be able to capture anymore than a small chunk.
Tycho 7y ago
Seems to me there's an obvious flaw in the efficient market hypothesis. It states that, essentially, you can find no sustainable edge because the market rapidly reacts to information. Meaning, if there is some information relevant to expected investment performance, investors will immediately act on it, extinguishing the information advantage. But what if the opportunity is some kind of abstract pattern that doesn't make any sense to humans? You can hardly say that people would efficiently react to patterns that are entirely uninterpretable to them. So it leaves the door open for these sort of statistical artifacts - abstract side-effects or unintuitive properties of the overall system - to provide a sustainable source of alpha.
- empath75 7y ago
  I think the idea is that once someone figures out how to exploit it, others will soon.
  - Tycho 7y ago
    But I don't see why that would be true if we're talking about arcane patterns in data. Who's to say anyone's even looking at the same data, let alone the same pattern? If we were talking about intuitive patterns that map to logic and investor psychology, then sure, others will reliable stumble upon the same ideas. But if we're talking about unintuitive patterns in non-obvious datasets, the search space is far too big to assure that effect.
  - thedudeabides5 7y ago
    Sure, but isn't this as much an argument for efficient markets as anything. Literally hundreds of thousands of folks have died on the very hill Medallion is holding. The fact that there is just one firm with this track record is evidence that markets are pretty hard and relatively efficient. Whether markets are so perfectly efficient that no firm can really beat the market, well that just seems like a pretty academic and unhelpful question. You don't need some grand perfect market hypothesis to say 'man those returns look a bit too good to be true, what's really going on in there?"
- jerf 7y ago
eaenki 7y ago
The nasdaq 100 leveraged x3 on a daily basis returned like 50%+ YoY during the last decade. And that’s an index. Buffet himself said he could return 50% YoY consistently with a small(ish) amount of money. (He manages like half a trillion) there’s no reason why with $10B trading all asset classes one can’t return 70% YoY. You must note that the fund is capped, the execution costs are incredibly low and that over the last decade it returned less than 70% YoY.
- scottious 7y ago
  If it's so easy and straightforward to return 50% YoY, why aren't there a proliferation of funds doing this?
  - eaenki 7y ago
    You might not know how funds work? You don’t try to get the best returns, with quite a bit of risk. You try to get the best returns with zero risk of losing all the money. You get paid 2% + 20% of profits. If you lose all the money you lose your reputation too. If you were levered x3 on the nasdaq in 2001 you would have lost all your money. Heck, even 1.2 would have lost you everything. Ditto 2008. Having all your assets levered long term, that much, it’s risky and something you would only do with your personal capital anyway. Funds usually do that for shorter amounts of time and with a small percentage of the total assets.
    - scottious 7y ago
      Yes very possible I don't understand what you are trying to say... I know what leveraged investing is but a lot of the details may be beyond me. This is not my area of expertise. Correct me if I'm wrong: my understanding is that you're saying that they could have taken a huge risk using a lot of leverage and they didn't lose all their money so they get their 5% + 44% (found this from a Bloomberg article). Essentially they're just the notable outliers and have been for 30 years? If so, that still seems a little far fetched for me.
      - 7y ago
nateburke 7y ago
How big are the external funds? If they are large enough, it wouldn't be hard (quantitatively) to shave a percent or two off of their returns in bad medallion years to keep the winning streak alive. The inflows inspired by the mystique shrouding medallion alone could make this easy
- hhmc 7y ago
  There are strict regulatory obligations to the outside investors that would make that transfer illegal.
  - scottious 7y ago
    illegal, sure. But let's say there are some very bad actors involved... would it be possible? People have been known to do illegal things in finance and have tried to cover their tracks in the past.
    - hogFeast 7y ago
      Nope. This used to be quite common in the 80s (you would run a public fund, and allocate losing positions to pension funds) but doesn't happen today.
- RookyNumbas 7y ago
  The medallion fund had 20 years of performance before the other funds existed.
scotty79 7y ago
There are two simple explanations for this: - somebody lies. - one out of hundres of thousands may seem (and be) incredibly lucky for quite long. Until it isn't. With the amount of transparency involved in this case for all I know they could be just laundering money for mafia by doing too many transactions that anyone could ever audit and claiming profit on them. It's way easier explanation than "random walk is not random" and even easier than "they got 30 years of luck on random walk where second best got 5 or sth." which still is not so implausible as the first one.
CPLX 7y ago
The hedge fund business is and has always been based on insider trading. Ockham’s razor looms large over this conversation.
- smabie 7y ago
  If that were true, you’d expect that as a group they would have better risk adjusted returns. I personally have not witnessed any insider trading in the industry and suspect it quite rare nowadays. It was more common in the past, though.
  - papln 7y ago
    Some hedge funds are good at it, and some are bad it. The existence of a winnable game doesn't mean that everyone who attempts it will succeed. Especially since the game is competitive, so if I have better insider information than you, I can take from you you all the money you take from the non-insider traders.
jkhdigital 7y ago
As the article hints at, Medallion isn't really an investment fund so much as a pool of capital which is employed in the business of providing tactical liquidity to markets. This is a business where one's competitive advantage rests upon their technological advantage, and Renaissance has been exceptionally adept at building and maintaining that advantage. The EMH is a theoretical concept that must be tempered to account for the frictions inherent in reality. As my PhD advisor likes to say, "all models are wrong; some are useful." Liquidity is a major friction in real-world markets, and providing liquidity (i.e. a means of moving capital into and out of specific assets) is a service that is compensated accordingly. In other words, I think Renaissance is simply better than anyone in the world at finding the markets where traders are willing to pay the highest premiums for liquidity, and providing it in a timely and measured dose that ensures they skim the cream off the profit opportunity. There are a limited amount of such opportunities, so they must limit the amount of capital employed to maintain the high rate of return.
- RookyNumbas 7y ago
  I'm not sure how accurate this tactical liquidity picture is, at least for much of medallion's history. For a good portion of their existence they called in all their trades twice a day. Them being fairly late to the automated trading game was one of the the surprises from the book for me. Any "HFT" as mentioned in the article is not done by renaissance, but through execution services. The big picture seems to be statistical arbitrage done with extreme precision and leveraged to a massive scale. Add in some quasi-legal agreements with banks, and likely tax-fraud, they are able to do this at a magnitude no one else can.
  - dcolkitt 7y ago
    Providing liquidity doesn't necessarily mean HFT. It doesn't even necessarily mean classical market making. Here's how I like to think about liquidity. It's the market's ability to absorb random imbalances in the non-informed order flow (while still correctly engaging in price discovery for informed order flow). In other words it looks a lot like what economists call price elasticity. Having a lot of participants who are very price sensitive makes prices stable by keeping demand responsive to small fluctuations. On the very short horizon that's done by market makers and HFT participants. They're quoting a tight two-sided market so that as orders arrive the price remains stable. But HFTs keep very small inventories[1]. They're unable to absorb the typical imbalance seen on the scale of hours, or even minutes. There exists a secondary class of participants, usually grouped under the catchall category of "stat-arb", that exist to fill this need. They're still trading directionally, but that direction is very sensitive to recent price moves on the scale of hours or even minutes. Moreover they tend to overwhelmingly trade in a mean-reverting manner.[2] Effectively these participants "provide liquidity" in the sense that they're stepping in and absorbing imbalances in the natural order flow. [1]https://www.cftc.gov/sites/default/files/idc/groups/public/@economicanalysis/documents/file/oce_riskandreturn0414.pdf https://www.cftc.gov/sites/default/files/idc/groups/public/@... [2]https://web.mit.edu/Alo/www/Papers/august07.pdf https://web.mit.edu/Alo/www/Papers/august07.pdf
fsckboy 7y ago
the magic $10 billion number capping the size of the fund also seems curious because why would it be impervious to change over a period of 25 yrs in which the scale of trading volumes, market capitalization, etc. have all grown? also, groups of people don't perfectly share ideas, outlooks, etc. especially over time. Humans tend to argue, debate, tug of war. If this task (the puzzle they are solving) requires a team of people, the 1st tiers and 2nd tiers, again, how does that translate to a steady $10 billion "working capital" portfolio and steady returns over 25 yrs, this money sucking tick parasitically attaching itself to a stochastic market that has undergone vast changes, but itself staying so consistent?
- deleted 7y ago
  [deleted]
- eigenvalue 7y ago
  I don't believe the size has in fact been constant. I remember reading years ago that Medallion was capped at around $5 billion.
nabla9 7y ago
The explanations given in the article are good ones and are said before. Even in HN https://news.ycombinator.com/item?id=13033733 https://news.ycombinator.com/item?id=13033733 They have a strategy that does not scale beyond certain limit and they keep the fund tightly within those limits.
dwnvoted2hell 7y ago
“An overlooked key is ample and cheap leverage,” he added. “You get that by having consistent returns and a crazy-high Sharpe ratio. That, in turn, comes from the firm’s numerous advantages and advances — superior talent, better data, a unique management approach, a focus on mid-frequency trading, a willingness to cap the fund, and more.” One often contemplates what "more" means. Near slavery of workers, extracting wealth from other funds, or other dubious practices. Often the success of side industries for a company take a back seat to its primary performer. Wouldn't surprise me if this was the case once again. For most trying to obtain vast wealth, the ends justify the means, which is all you have to remember.
jjoonathan 7y ago
Of the wild theories I've heard to explain the Medallion Fund, my favorite is the "money wormhole." I have no finance qualifications whatsoever -- I just stick my money in index funds -- but I love a good conspiracy theory, so here goes. The idea is that you have two theoretically unrelated funds that take complementary positions with uneven odds. One sacrifices performance for the other, effectively transmitting money. The trick, of course, is doing this in a manner so that you have plausible deniability with regulators and, more importantly, so that other market players don't grab the money in flight, because that's what an efficient market would do. Still, consistently creating and hiding complementary pairs of good/bad opportunities is a much easier problem than consistently beating the market. OK, so you've got a way to transmit money from a "sucker fund" to a "winner's fund" with plausible deniability, what do you do with this ability? In reality you'd probably have many "sucker funds," rotate the one that gets sucked, and limit the extent to which it gets sucked, but still, nobody's going to just buy the sucker fund, not for long, anyway. That's how efficient markets work. Well, one major, well-known, boring inefficiency is the principal agent problem: trusting others to invest your money. They can't just steal it, because that's illegal. They can't just invest in a private fund that they just happen to oversee and which just happens to pay them an enormous salary, because that's illegal. However, if they were to invest in one side of a money wormhole, which is designed to look like a perfectly reasonable investment on its own, in exchange for a cut of the proceeds from the other side of the money wormhole, who's to say the theft even happened? Such an accusation would need to untangle the coordination behavior of the money wormhole to make its case, and those inner workings could be made very convoluted indeed, hidden deep inside complementary pseudorandom behavior. So, in short, the conspiracy theory says it's a heist -- but one that's well hidden under the veil of statistics and plausible deniability. It provides investment managers looking to monetize the confidence placed in them a way to make that happen without getting caught. It's probably a dumb theory, but it's enough to entertain someone who knows as little about finance as I do :)
- fyp 7y ago
  It's an interesting idea. You can make two funds sum up to a constant by taking opposite and equal positions. But I am not seeing how you can control the direction the money moves. For example if you knew fund A will gain $x and fund B will lose $x, shouldn't you simply not make the trade in fund B?
orbifold 7y ago
My long standing hypothesis on Medallion is that they figured out how to apply gauge theoretic techniques to financial markets. This fits with Simons work that he did before he founded the fund. The fact that gauge theory is applicable to for example currency trading is folk knowledge in the Havard, Princeton, IAS circles (here is for example the lecture notes of a popular lecture by Maldacena that uses currency trading as an example of a gauge theory https://arxiv.org/pdf/1410.6753.pdf https://arxiv.org/pdf/1410.6753.pdf). In currency trading example the curvature $F$ of the gauge connection $A$ vanishes precisely, when there is no arbitrage opportunity. Now what Chern and Simons discovered is a differential form K (https://en.wikipedia.org/wiki/Chern–Simons_form https://en.wikipedia.org/wiki/Chern–Simons_form), which when taken as the action S(A) of a gauge field $A$, has a corresponding field equation $F = 0$ (i.e. in the finance case = no arbitrage). In these equations time does not enter, however there are several ways in which on can incorporate time into the picture (for a naive example see also the lecture notes). Assets in this framework live in associated vector bundles of the principal bundle defining exchange rates. My speculative assertion is that it is possible to identify "topological invariants" which can be computed by sequences of trades, i.e. parallel transport along the gauge connection and that those can have provably positive expected return. The fact that the fund is limited to a small amount of invested capital might be related to the fact that the strategies require measurements, that would have self-interactions if they were too large.
- dogman144 7y ago
  seems like you know your way around the topic, do you mind putting this into more simple English? Wikipedia on gauge theory was impenetrable from step 0 for me unfortunately
  - throwqwerty 7y ago
    imagine all the wind on the earth's surface right now. that's a vector field or gauge (as physicists call it). there are many units that it could denominated in (meters per sec, feet per second, etc). changing from one to the other is a gauge transformation (unit change, rescaling). okay now suppose you want to compare the wind at two points. you can't just take the vectors at those two points and take a dot product because they're not in the same vector space (each of them is in a vector space tangent to the point they're anchored at). to figure out the issue with doing this watch this video https://youtu.be/p1tfZD2Bm0w?t=170 https://youtu.be/p1tfZD2Bm0w?t=170 you have to perform parallel transport. one way to do this is to track how much moving the vector changes it (messes with its orientation). that's the connection and the covariant derivative. you can then take a look at how that connection itself changes over the surface of the earth. if it's curl free (recall curl free vector field from multivariable calculus) then you don't have eddies in your wind charts i.e. you can't get faster by going around in a loop. absolutely none of this applies to currency or equities because the surface of the earth is smooth and curved. neither of this is true about equities or securities or currency.
hash872 7y ago
>Robert Mercer, the former co–chief executive of Renaissance Technologies, allegedly told a friend that Medallion was right 50.75 percent of the time when it came to its millions of trades — adding that “you can make billions that way.” Totally not a finance guy, but how can this be true with drawdowns? The losses are worse than the gains- if you had $100 and take a 33% loss, it would take a bit more than a 50% gain to get back to where you were. 50% loss and you'd need to double your money to get back, etc. So.... with drawdowns, don't you need to be right more than 50.75% of the time?
- tomatocracy 7y ago
  Because you don't bet the entire fund on every trade.
- papln 7y ago
  with drawdown on simple bets, the average compounding step per play, for a given edge and bet size, is ((1+bet)^(0.5+edge))*((1-bet)^(0.5-edge))) = ((1-bet^2)^0.5 * ((1+bet)/(1-bet))^edge For a given bet size, there's room to make your edge large enough (without exceeding 0.5) to make the (>1) right-side factor overwhelm the (<1) left side. https://www.wolframalpha.com/input/?i=log%28%281-b%5E2%29%5E0.5+*+%28%281%2Bb%29%2F%281-b%29%29%5Ed%29%2C+for+0%3Cb%3C0.1%2C+0%3Cd%3C0.5 https://www.wolframalpha.com/input/?i=log%28%281-b%5E2%29%5E...
- dogman144 7y ago
  Virtu financial does this approach, very successful. Its SEC forms explain things better.
- tomp 7y ago
  No, you bet 100 x $1, win 50.75% of the time, so you make $1.5 in profit. Now repeat 1bn times.
  - hash872 7y ago
    But if you're losing (undefined amount of money) on 49.25% of the trades....
PaulVYoung 7y ago
Considering the motivations from the various points of view.... As an investor, I’m going to discount anything I can’t invest in and just focus on the numbers of the open fund. These closed flagships are a common marketing approach. Like concept cars, they grab attention and help sell the more mundane models that are commercially viable. This article being a good example. Clearly it works in this role and I can understand why they would do this. As a PM, I’d always prefer to have my own capital in a closed flagship where I can cherry pick the best strategies, charge myself less fees and make use of the latest tech and R&D subsidised by the open funds. My reporting requirements are much less onerous so there is plenty of scope to massage the numbers too. As a regulator, I’m underfunded and politically motivated to focus on high profile cases where large numbers of everyday public (voters) have been ripped off. I have little time for institutional investors who should know better and so closed funds trading internal money are way down my list. As a regTech founder, I’ve seen plenty of examples of creative methods to get around regulations. Or they just being blatantly ignored. Compliance are usually colluding and helping coverup. Insider trading is one of the higher risk methods, to get these sort of returns it would be easier to simply get access to the “dumb” order flow from the open funds. Using lots of fancy looking algos etc. to hide simple front running. Given they are closed and trading their own money we are only going to know what they choose to disclose. Personally, I’d bet on this being legit, given the figures while great, aren’t impossible given the privileged position they have in terms of access, information, tech etc. And the existing distribution of performance for low capacity HFT strategies. People abusing the system would be making even more and keeping quiet about it.
leto_ii 7y ago
> The Medallion fund has been closed to external capital since 1993, and analysis of the flagship fund’s annual returns suggests that significant distributions are made each year to keep the fund about the same size. For example, despite the fact that Medallion reported annual net returns above 29 percent every year between 2010 and 2018, the fund’s assets under management stayed at about $10 billion throughout that period. This suggests to me that whatever opportunities they're exploiting, they would vanish quickly if they would increase the fund's size (e.g. by compounding returns). It's worth taking a look at the Numberphile interview with Simons (https://www.youtube.com/watch?v=QNznD9hMEh0 https://www.youtube.com/watch?v=QNznD9hMEh0). There he suggests that they're mostly using ML and other relatively simple techniques, with a bit of more advanced math when it comes to predicting how a trade will move the market. This chimes in well with the idea that they have to keep their trades relatively small in order to remain this profitable.
hogFeast 7y ago
Asking a finance professor about a hedge fund is like asking someone from the 1850s how a car works. Wrong tools. Wrong knowledge. Wrong way of thinking. Like he is talking about EMH...lul, it is just fiction.
cynusx 7y ago
I have a much more simpler (not based on any evidence) theory which kind of explains the founders' alignment with Russian interests. Most of medaillon's returns are made with insider trading from hacking. The data science part is just come up with explanations that are complex enough and not easily disproven (e.g. find a correlating variable and explain that you had a magic algo that derived prediction from that correlating variable after the fact). It's a perfect crime, but you would need to setup crazy incentive structures for all the team members and their immediate family to keep it secret... and that's what they are doing. I would guess they used Russian hackers for the job, given that the fund is heavily funding Russian political interests in western countries. I would recommend the SEC to dive really deep with appropriate expertise into this magic fund and double-check this simple theory of mine. Just for national security reasons alone. (note again: this is a conspiracy theory and not evidence or fact-based)
- anonu 7y ago
  I think the SEC and finra have probably poured over the surveillance data for countless hours. They would have found something. Also they trade 1000s of stocks. So the insider trading theory would not hold up.
- tehlike 7y ago
  Keeping something like this secret is... Hard.
  - SirLJ 7y ago
    NSA will know about this in a heartbeat
bawana 7y ago
What are they talking about? Rentech went into the dumpster. https://seekingalpha.com/news/3300183-rentech-to-delist-from-nasdaq-sharesminus-26 https://seekingalpha.com/news/3300183-rentech-to-delist-from...
- duncancarroll 7y ago
  Doesn't look like that's the same Rentech: https://seekingalpha.com/symbol/RTK https://seekingalpha.com/symbol/RTK "Owns and operates wood fibre and nitrogen fertilizer businesses"
bhouston 7y ago
Madoff has unexplained gains year over year as well based on new methods. The explanation as offered triggers me but I haven't looked into it in detail. For Madoff the gains were truly magical as there was little evidence he actually traded. Interestingly, Epstein supposedly has magical gains as well with little evidence he traded.
musicale 7y ago
If it looks too good to be true, it usually is.
james-imitative 7y ago
Deep as anythink. ;)
analogkid 7y ago
These comments are almost all a dumpster fire of clueless speculation. I normally suggest people read Hacker News comments, but this is embarrassing. The uninformed ramblings about winner v. sucker funds, or assertions of insider trading are sad. The only factual comment here was by MR4D about how IRA accounts can impact wash sale rules, as would all accounts you own in prime brokerage. Hint: maybe there is a high probability the author of this paper doesn't know what he is doing. It wouldn't be the first time: https://www.latimes.com/business/hiltzik/la-fi-hiltzik-cornell-verizon-20190219-story.html https://www.latimes.com/business/hiltzik/la-fi-hiltzik-corne... Or maybe he's selling a competing product: https://cornell-capital.com/about-2 https://cornell-capital.com/about-2 but can't compete.

236 points by SirLJ 7y ago

I'm no finance expert but doesn't this all seem way too good to be true? At first I was reading this and thinking "how is this not exactly like Bernie Madoff?" Then they say "The Medallion fund has been closed to external capital since 1993 ... whatever profit they make, they pay out". So clearly it can't be a ponzie scheme? Still, it seems too good to be true. If financial experts are stumped as well then that also seems like a red flag.

huffmsa 7y ago
I don't think they could keep it up for that long without slipping up at least once. Enron started around the same time and got tripped up in 2001. If it were a one man investment shop, then maybe it leans more towards fraud. But if they obviously employ dozens of quants, and have obvious hardware outlays, it seems less likely. It makes a lot of sense to me that they just win a bit more than they lose, play a lot of hands, and treat everything with pretty even money, so they're never overexposed in any one place.
- huffmsa 7y ago
  I think I have the math right here, but let's say you start with > Capital = $100 1 time a day 5 days a week 50 weeks a year, you're going to take your capital and place that many $1 bets with it. Let's say you net +1% on your deployed capital ever day. After 250 rounds, you have $1215 in the bank. Again, correct the math if I'm wrong. But scale that down to 0.57%, which is the win rate I saw, and they're making ~$600/yr, which is the stated average return. Seems legit
  - papln 7y ago
    > Let's say you net +1% on your deployed capital ever day. That's the "..." step in "1 steal underpants, 2 ..., 3 Profit!"
    - huffmsa 7y ago
      Well yeah. But that's what they've figured out. It's unlikely, but not impossible.
  - texasbigdata 7y ago
    The book has more detail. They raised capital in the beginning.
- papln 7y ago
  Enron only collapsed because they intentionally destabilized major public-facing national security infrastructure (retail energy markets), and they were incredibly brazen and sloppy about it. If they didn't make as large bets on collateral damage, and they acted with professionalism, they would have been fine.
  - huffmsa 7y ago
    See what you said? They made too many large, overleveraged bets. Blew them up
yasp 7y ago
My mind went to the same place.
thomak 7y ago
Financial experts aren’t stumped. The article found one guy who’s trying to get attention, but in general, folks are both impressed and pretty sure it’s real.
- macspoofing 7y ago
  You have one fund that is an extreme outlier in performance over decades (!!) that nobody can explain and yet 'financial experts' aren't stumped and are 'pretty sure it's real'?
- SirLJ 7y ago
  This was no expert, but an academic... those who can't do, teach...
  - ceejayoz 7y ago
    Yeah, those useless academics. https://en.wikipedia.org/wiki/List_of_Nobel_laureates_by_university_affiliation https://en.wikipedia.org/wiki/List_of_Nobel_laureates_by_uni...
    - SirLJ 7y ago
      any successful academic in economics making money in the stock market? Or I am missing something? Maybe a Nobel winner from Chicago?
      - ceejayoz 7y ago
        No, for the same reasons the soldier pressing the button at a nuclear test doesn't get the Nobel Prize for doing so.
        SirLJ 7y ago
        like the reasons for Nobel for Fama for the wrong theory...
      - 7y ago
ajmurmann 7y ago
Could they been moving money from their open to investments , less successful funds to the medallion fund? Maybe even thought the market via trades?
- Noughmad 7y ago
  This makes a lot of sense. Sacrificing a percent of profit from other funds won't make that much of a different in the minds of possible investors, but managing a fantastically high fund must be a good advertisement.
- RookyNumbas 7y ago
  No, the medallion fund existed for 20 years before these other funds were opened.
  - papln 7y ago
    Was Medallion fund Rentec's only business, or was there other business they could skim from?
    - RookyNumbas 7y ago
      James Simons had a funds for tech startups. But it wasn't nearly large enough to support the kind of profits that happened.
toss1 7y ago
OK, what behaves like a Ponzi scheme that lasts too long? Money Laundering of assets on a national scale, e.g., for oligarchs who have taken 95% of a nations' wealth. Their biggest problem is to get it "legitimately" into the international money system. If the fund owners have really discovered a technological "secret sauce", why isn't it working in their other funds? Not a conclusion, but a valid open question.
- xt00 7y ago
  Closed to outside funds in 1993 (shortly after ussr collapse), returns after fees (and paying everybody as well at the firm) are above 50%, assets of 10 billion and anything above the 10 billion gets paid out every year.. so roughly 5 billion plus gets paid out every year? I mean, as a wise man said “I want to believe” but yea feels / smells like you said.. oligarch money laundering... 5billion in clean money every year.. not bad..
crawftv 7y ago
The reason is that they are highly levered with many small short term trades. >dealbook.nytimes.com/2014/07/21/senate-inquiry-faults-hedge-funds-tax-strategy/https://dealbook.nytimes.com/2014/07/21/senate-inquiry-faults-hedge-funds-tax-strategy/ https://dealbook.nytimes.com/2014/07/21/senate-inquiry-fault... “Jul 21, 2014 Within these complicated financial structures, Renaissance Technologies was able to borrow as much as $17 for every $1 in the account.”
jandrewrogers 7y ago
Even without knowing the full details, their returns are quite plausible if you have less speculative knowledge of their business. The challenge for most hedge funds is that any "edge" they find decays over time, often quickly, which leaves them scrambling to find a new edge that will allow them to outperform the market. Most hedge funds go to a lot of effort to preserve an edge to the extent they can. Renaissance focused on finding and developing novel mathematics that can be exploited to find an edge, some of which is extremely esoteric and unique, and then massively automating that. Consequently, they can find more new edges before breakfast than some hedge funds find all year. The real effect is that they don't need to milk a dying edge for returns because they are constantly generating new ones, and they can pick the best of the bunch at any point in time. The investment side of the business is mechanical. Their recruiting has reflected their deep interest in novel theoretical approaches to edge discovery. In a sense, they are a higher order abstraction of a more typical hedge fund.
- stanferder 7y ago
  I find it really hard to believe that the fund can be generating returns so consistently by pursuing a variety of different strategies over time. It seems very unlikely that Renaissance/Medallion constantly finds these things, whereas other operations almost never do. The conspiracy theorist in the back of my brain thinks that Renaissance/Medallion hires a lot of eggheads so they can plausibly claim to keep finding mathematical and operational edges, but the actual money-making strategy might be something else entirely.
  - RookyNumbas 7y ago
    These eggheads (very) occasionally move to other firms and see similar returns. Of course rentech then sues those other firms for all the profits they make. And they win.
    - chollida1 7y ago
      > These eggheads (very) occasionally move to other firms and see similar returns. Of course rentech then sues those other firms for all the profits they make. And they win. Not true at all as far as I know. Name one member of RenTech that went else where and made similar returns; I don't think you can because its never happened as far as I know. The closest I can think of is Pavel Volfbeyn and Alexander Belopolsky leaving to join the Millenium fund. Their performance there was so poor even not comparing their performance to what RenTech did so much so that they were let go even after Millenium settled the lawsuit with RenTech that allowed them to stay at Millenium.
texasbigdata 7y ago
No one is stumped, they're not making any external claim and they are not raising capital. This type of drive by analysis is the equivalent of "will Brad and jennifer get back together" at the grocery store check out line.

codingslave 7y ago

Investing is like tech, its winner take all. This is like being surprised that Google dominates search

endorphone 7y ago
Only it isn't like that at all.
- codingslave 7y ago
  areas like HFT are
  - smabie 7y ago
    HFT isn’t investing. Moreover, RenTec isn’t a HFT firm. No one knows exactly what they do, but I suspect they are primarily a market neutral short-term factor model firm with a very very good execution and slippage model.
  - endorphone 7y ago
    There are dozens of HFT players, all endlessly leap-frogging each other. Despite the fact that HFT is actually a relatively tiny market (the crumbs claimed by the HFT market account for at most a couple of billion a year), and is grossly overstated in significance. In the broader market there are tens of thousands of major players, and millions of smaller participants. There is no network effect, and the market is so enormous that it doesn't concentrate.
    - codingslave 7y ago
      Most HFT players are barely making money, theres a few that are actually highly profitable People in this thread are confusing beta and alpha, alpha is limited and competed for
smabie 7y ago
No it’s not. The market return isn’t zero-sum. Everyone can acheive it (by definition). Moreover, there’s a lot of different kinds of alpha in the market and no one firm is going to be able to capture anymore than a small chunk.

Tycho 7y ago

Seems to me there's an obvious flaw in the efficient market hypothesis. It states that, essentially, you can find no sustainable edge because the market rapidly reacts to information. Meaning, if there is some information relevant to expected investment performance, investors will immediately act on it, extinguishing the information advantage. But what if the opportunity is some kind of abstract pattern that doesn't make any sense to humans? You can hardly say that people would efficiently react to patterns that are entirely uninterpretable to them. So it leaves the door open for these sort of statistical artifacts - abstract side-effects or unintuitive properties of the overall system - to provide a sustainable source of alpha.

empath75 7y ago
I think the idea is that once someone figures out how to exploit it, others will soon.
- Tycho 7y ago
  But I don't see why that would be true if we're talking about arcane patterns in data. Who's to say anyone's even looking at the same data, let alone the same pattern? If we were talking about intuitive patterns that map to logic and investor psychology, then sure, others will reliable stumble upon the same ideas. But if we're talking about unintuitive patterns in non-obvious datasets, the search space is far too big to assure that effect.
- thedudeabides5 7y ago
  Sure, but isn't this as much an argument for efficient markets as anything. Literally hundreds of thousands of folks have died on the very hill Medallion is holding. The fact that there is just one firm with this track record is evidence that markets are pretty hard and relatively efficient. Whether markets are so perfectly efficient that no firm can really beat the market, well that just seems like a pretty academic and unhelpful question. You don't need some grand perfect market hypothesis to say 'man those returns look a bit too good to be true, what's really going on in there?"
jerf 7y ago

eaenki 7y ago

The nasdaq 100 leveraged x3 on a daily basis returned like 50%+ YoY during the last decade. And that’s an index. Buffet himself said he could return 50% YoY consistently with a small(ish) amount of money. (He manages like half a trillion) there’s no reason why with $10B trading all asset classes one can’t return 70% YoY. You must note that the fund is capped, the execution costs are incredibly low and that over the last decade it returned less than 70% YoY.

scottious 7y ago
If it's so easy and straightforward to return 50% YoY, why aren't there a proliferation of funds doing this?
- eaenki 7y ago
  You might not know how funds work? You don’t try to get the best returns, with quite a bit of risk. You try to get the best returns with zero risk of losing all the money. You get paid 2% + 20% of profits. If you lose all the money you lose your reputation too. If you were levered x3 on the nasdaq in 2001 you would have lost all your money. Heck, even 1.2 would have lost you everything. Ditto 2008. Having all your assets levered long term, that much, it’s risky and something you would only do with your personal capital anyway. Funds usually do that for shorter amounts of time and with a small percentage of the total assets.
  - scottious 7y ago
    Yes very possible I don't understand what you are trying to say... I know what leveraged investing is but a lot of the details may be beyond me. This is not my area of expertise. Correct me if I'm wrong: my understanding is that you're saying that they could have taken a huge risk using a lot of leverage and they didn't lose all their money so they get their 5% + 44% (found this from a Bloomberg article). Essentially they're just the notable outliers and have been for 30 years? If so, that still seems a little far fetched for me.
    - 7y ago

nateburke 7y ago

How big are the external funds? If they are large enough, it wouldn't be hard (quantitatively) to shave a percent or two off of their returns in bad medallion years to keep the winning streak alive. The inflows inspired by the mystique shrouding medallion alone could make this easy

hhmc 7y ago
There are strict regulatory obligations to the outside investors that would make that transfer illegal.
- scottious 7y ago
  illegal, sure. But let's say there are some very bad actors involved... would it be possible? People have been known to do illegal things in finance and have tried to cover their tracks in the past.
  - hogFeast 7y ago
    Nope. This used to be quite common in the 80s (you would run a public fund, and allocate losing positions to pension funds) but doesn't happen today.
RookyNumbas 7y ago
The medallion fund had 20 years of performance before the other funds existed.

scotty79 7y ago

There are two simple explanations for this: - somebody lies. - one out of hundres of thousands may seem (and be) incredibly lucky for quite long. Until it isn't. With the amount of transparency involved in this case for all I know they could be just laundering money for mafia by doing too many transactions that anyone could ever audit and claiming profit on them. It's way easier explanation than "random walk is not random" and even easier than "they got 30 years of luck on random walk where second best got 5 or sth." which still is not so implausible as the first one.

CPLX 7y ago

The hedge fund business is and has always been based on insider trading. Ockham’s razor looms large over this conversation.

smabie 7y ago
If that were true, you’d expect that as a group they would have better risk adjusted returns. I personally have not witnessed any insider trading in the industry and suspect it quite rare nowadays. It was more common in the past, though.
- papln 7y ago
  Some hedge funds are good at it, and some are bad it. The existence of a winnable game doesn't mean that everyone who attempts it will succeed. Especially since the game is competitive, so if I have better insider information than you, I can take from you you all the money you take from the non-insider traders.

jkhdigital 7y ago

As the article hints at, Medallion isn't really an investment fund so much as a pool of capital which is employed in the business of providing tactical liquidity to markets. This is a business where one's competitive advantage rests upon their technological advantage, and Renaissance has been exceptionally adept at building and maintaining that advantage. The EMH is a theoretical concept that must be tempered to account for the frictions inherent in reality. As my PhD advisor likes to say, "all models are wrong; some are useful." Liquidity is a major friction in real-world markets, and providing liquidity (i.e. a means of moving capital into and out of specific assets) is a service that is compensated accordingly. In other words, I think Renaissance is simply better than anyone in the world at finding the markets where traders are willing to pay the highest premiums for liquidity, and providing it in a timely and measured dose that ensures they skim the cream off the profit opportunity. There are a limited amount of such opportunities, so they must limit the amount of capital employed to maintain the high rate of return.

RookyNumbas 7y ago
I'm not sure how accurate this tactical liquidity picture is, at least for much of medallion's history. For a good portion of their existence they called in all their trades twice a day. Them being fairly late to the automated trading game was one of the the surprises from the book for me. Any "HFT" as mentioned in the article is not done by renaissance, but through execution services. The big picture seems to be statistical arbitrage done with extreme precision and leveraged to a massive scale. Add in some quasi-legal agreements with banks, and likely tax-fraud, they are able to do this at a magnitude no one else can.
- dcolkitt 7y ago
  Providing liquidity doesn't necessarily mean HFT. It doesn't even necessarily mean classical market making. Here's how I like to think about liquidity. It's the market's ability to absorb random imbalances in the non-informed order flow (while still correctly engaging in price discovery for informed order flow). In other words it looks a lot like what economists call price elasticity. Having a lot of participants who are very price sensitive makes prices stable by keeping demand responsive to small fluctuations. On the very short horizon that's done by market makers and HFT participants. They're quoting a tight two-sided market so that as orders arrive the price remains stable. But HFTs keep very small inventories[1]. They're unable to absorb the typical imbalance seen on the scale of hours, or even minutes. There exists a secondary class of participants, usually grouped under the catchall category of "stat-arb", that exist to fill this need. They're still trading directionally, but that direction is very sensitive to recent price moves on the scale of hours or even minutes. Moreover they tend to overwhelmingly trade in a mean-reverting manner.[2] Effectively these participants "provide liquidity" in the sense that they're stepping in and absorbing imbalances in the natural order flow. [1]https://www.cftc.gov/sites/default/files/idc/groups/public/@economicanalysis/documents/file/oce_riskandreturn0414.pdf https://www.cftc.gov/sites/default/files/idc/groups/public/@... [2]https://web.mit.edu/Alo/www/Papers/august07.pdf https://web.mit.edu/Alo/www/Papers/august07.pdf

fsckboy 7y ago

the magic $10 billion number capping the size of the fund also seems curious because why would it be impervious to change over a period of 25 yrs in which the scale of trading volumes, market capitalization, etc. have all grown? also, groups of people don't perfectly share ideas, outlooks, etc. especially over time. Humans tend to argue, debate, tug of war. If this task (the puzzle they are solving) requires a team of people, the 1st tiers and 2nd tiers, again, how does that translate to a steady $10 billion "working capital" portfolio and steady returns over 25 yrs, this money sucking tick parasitically attaching itself to a stochastic market that has undergone vast changes, but itself staying so consistent?

deleted 7y ago
[deleted]
eigenvalue 7y ago
I don't believe the size has in fact been constant. I remember reading years ago that Medallion was capped at around $5 billion.

nabla9 7y ago

The explanations given in the article are good ones and are said before. Even in HN https://news.ycombinator.com/item?id=13033733 https://news.ycombinator.com/item?id=13033733 They have a strategy that does not scale beyond certain limit and they keep the fund tightly within those limits.

dwnvoted2hell 7y ago

“An overlooked key is ample and cheap leverage,” he added. “You get that by having consistent returns and a crazy-high Sharpe ratio. That, in turn, comes from the firm’s numerous advantages and advances — superior talent, better data, a unique management approach, a focus on mid-frequency trading, a willingness to cap the fund, and more.” One often contemplates what "more" means. Near slavery of workers, extracting wealth from other funds, or other dubious practices. Often the success of side industries for a company take a back seat to its primary performer. Wouldn't surprise me if this was the case once again. For most trying to obtain vast wealth, the ends justify the means, which is all you have to remember.

jjoonathan 7y ago

Of the wild theories I've heard to explain the Medallion Fund, my favorite is the "money wormhole." I have no finance qualifications whatsoever -- I just stick my money in index funds -- but I love a good conspiracy theory, so here goes. The idea is that you have two theoretically unrelated funds that take complementary positions with uneven odds. One sacrifices performance for the other, effectively transmitting money. The trick, of course, is doing this in a manner so that you have plausible deniability with regulators and, more importantly, so that other market players don't grab the money in flight, because that's what an efficient market would do. Still, consistently creating and hiding complementary pairs of good/bad opportunities is a much easier problem than consistently beating the market. OK, so you've got a way to transmit money from a "sucker fund" to a "winner's fund" with plausible deniability, what do you do with this ability? In reality you'd probably have many "sucker funds," rotate the one that gets sucked, and limit the extent to which it gets sucked, but still, nobody's going to just buy the sucker fund, not for long, anyway. That's how efficient markets work. Well, one major, well-known, boring inefficiency is the principal agent problem: trusting others to invest your money. They can't just steal it, because that's illegal. They can't just invest in a private fund that they just happen to oversee and which just happens to pay them an enormous salary, because that's illegal. However, if they were to invest in one side of a money wormhole, which is designed to look like a perfectly reasonable investment on its own, in exchange for a cut of the proceeds from the other side of the money wormhole, who's to say the theft even happened? Such an accusation would need to untangle the coordination behavior of the money wormhole to make its case, and those inner workings could be made very convoluted indeed, hidden deep inside complementary pseudorandom behavior. So, in short, the conspiracy theory says it's a heist -- but one that's well hidden under the veil of statistics and plausible deniability. It provides investment managers looking to monetize the confidence placed in them a way to make that happen without getting caught. It's probably a dumb theory, but it's enough to entertain someone who knows as little about finance as I do :)

fyp 7y ago
It's an interesting idea. You can make two funds sum up to a constant by taking opposite and equal positions. But I am not seeing how you can control the direction the money moves. For example if you knew fund A will gain $x and fund B will lose $x, shouldn't you simply not make the trade in fund B?

orbifold 7y ago

My long standing hypothesis on Medallion is that they figured out how to apply gauge theoretic techniques to financial markets. This fits with Simons work that he did before he founded the fund. The fact that gauge theory is applicable to for example currency trading is folk knowledge in the Havard, Princeton, IAS circles (here is for example the lecture notes of a popular lecture by Maldacena that uses currency trading as an example of a gauge theory https://arxiv.org/pdf/1410.6753.pdf https://arxiv.org/pdf/1410.6753.pdf). In currency trading example the curvature $F$ of the gauge connection $A$ vanishes precisely, when there is no arbitrage opportunity. Now what Chern and Simons discovered is a differential form K (https://en.wikipedia.org/wiki/Chern–Simons_form https://en.wikipedia.org/wiki/Chern–Simons_form), which when taken as the action S(A) of a gauge field $A$, has a corresponding field equation $F = 0$ (i.e. in the finance case = no arbitrage). In these equations time does not enter, however there are several ways in which on can incorporate time into the picture (for a naive example see also the lecture notes). Assets in this framework live in associated vector bundles of the principal bundle defining exchange rates. My speculative assertion is that it is possible to identify "topological invariants" which can be computed by sequences of trades, i.e. parallel transport along the gauge connection and that those can have provably positive expected return. The fact that the fund is limited to a small amount of invested capital might be related to the fact that the strategies require measurements, that would have self-interactions if they were too large.

dogman144 7y ago
seems like you know your way around the topic, do you mind putting this into more simple English? Wikipedia on gauge theory was impenetrable from step 0 for me unfortunately
- throwqwerty 7y ago
  imagine all the wind on the earth's surface right now. that's a vector field or gauge (as physicists call it). there are many units that it could denominated in (meters per sec, feet per second, etc). changing from one to the other is a gauge transformation (unit change, rescaling). okay now suppose you want to compare the wind at two points. you can't just take the vectors at those two points and take a dot product because they're not in the same vector space (each of them is in a vector space tangent to the point they're anchored at). to figure out the issue with doing this watch this video https://youtu.be/p1tfZD2Bm0w?t=170 https://youtu.be/p1tfZD2Bm0w?t=170 you have to perform parallel transport. one way to do this is to track how much moving the vector changes it (messes with its orientation). that's the connection and the covariant derivative. you can then take a look at how that connection itself changes over the surface of the earth. if it's curl free (recall curl free vector field from multivariable calculus) then you don't have eddies in your wind charts i.e. you can't get faster by going around in a loop. absolutely none of this applies to currency or equities because the surface of the earth is smooth and curved. neither of this is true about equities or securities or currency.

hash872 7y ago

>Robert Mercer, the former co–chief executive of Renaissance Technologies, allegedly told a friend that Medallion was right 50.75 percent of the time when it came to its millions of trades — adding that “you can make billions that way.” Totally not a finance guy, but how can this be true with drawdowns? The losses are worse than the gains- if you had $100 and take a 33% loss, it would take a bit more than a 50% gain to get back to where you were. 50% loss and you'd need to double your money to get back, etc. So.... with drawdowns, don't you need to be right more than 50.75% of the time?

tomatocracy 7y ago
Because you don't bet the entire fund on every trade.
papln 7y ago
with drawdown on simple bets, the average compounding step per play, for a given edge and bet size, is ((1+bet)^(0.5+edge))*((1-bet)^(0.5-edge))) = ((1-bet^2)^0.5 * ((1+bet)/(1-bet))^edge For a given bet size, there's room to make your edge large enough (without exceeding 0.5) to make the (>1) right-side factor overwhelm the (<1) left side. https://www.wolframalpha.com/input/?i=log%28%281-b%5E2%29%5E0.5+*+%28%281%2Bb%29%2F%281-b%29%29%5Ed%29%2C+for+0%3Cb%3C0.1%2C+0%3Cd%3C0.5 https://www.wolframalpha.com/input/?i=log%28%281-b%5E2%29%5E...
dogman144 7y ago
Virtu financial does this approach, very successful. Its SEC forms explain things better.
tomp 7y ago
No, you bet 100 x $1, win 50.75% of the time, so you make $1.5 in profit. Now repeat 1bn times.
- hash872 7y ago
  But if you're losing (undefined amount of money) on 49.25% of the trades....

PaulVYoung 7y ago

Considering the motivations from the various points of view.... As an investor, I’m going to discount anything I can’t invest in and just focus on the numbers of the open fund. These closed flagships are a common marketing approach. Like concept cars, they grab attention and help sell the more mundane models that are commercially viable. This article being a good example. Clearly it works in this role and I can understand why they would do this. As a PM, I’d always prefer to have my own capital in a closed flagship where I can cherry pick the best strategies, charge myself less fees and make use of the latest tech and R&D subsidised by the open funds. My reporting requirements are much less onerous so there is plenty of scope to massage the numbers too. As a regulator, I’m underfunded and politically motivated to focus on high profile cases where large numbers of everyday public (voters) have been ripped off. I have little time for institutional investors who should know better and so closed funds trading internal money are way down my list. As a regTech founder, I’ve seen plenty of examples of creative methods to get around regulations. Or they just being blatantly ignored. Compliance are usually colluding and helping coverup. Insider trading is one of the higher risk methods, to get these sort of returns it would be easier to simply get access to the “dumb” order flow from the open funds. Using lots of fancy looking algos etc. to hide simple front running. Given they are closed and trading their own money we are only going to know what they choose to disclose. Personally, I’d bet on this being legit, given the figures while great, aren’t impossible given the privileged position they have in terms of access, information, tech etc. And the existing distribution of performance for low capacity HFT strategies. People abusing the system would be making even more and keeping quiet about it.

leto_ii 7y ago

> The Medallion fund has been closed to external capital since 1993, and analysis of the flagship fund’s annual returns suggests that significant distributions are made each year to keep the fund about the same size. For example, despite the fact that Medallion reported annual net returns above 29 percent every year between 2010 and 2018, the fund’s assets under management stayed at about $10 billion throughout that period. This suggests to me that whatever opportunities they're exploiting, they would vanish quickly if they would increase the fund's size (e.g. by compounding returns). It's worth taking a look at the Numberphile interview with Simons (https://www.youtube.com/watch?v=QNznD9hMEh0 https://www.youtube.com/watch?v=QNznD9hMEh0). There he suggests that they're mostly using ML and other relatively simple techniques, with a bit of more advanced math when it comes to predicting how a trade will move the market. This chimes in well with the idea that they have to keep their trades relatively small in order to remain this profitable.

hogFeast 7y ago

Asking a finance professor about a hedge fund is like asking someone from the 1850s how a car works. Wrong tools. Wrong knowledge. Wrong way of thinking. Like he is talking about EMH...lul, it is just fiction.

cynusx 7y ago

I have a much more simpler (not based on any evidence) theory which kind of explains the founders' alignment with Russian interests. Most of medaillon's returns are made with insider trading from hacking. The data science part is just come up with explanations that are complex enough and not easily disproven (e.g. find a correlating variable and explain that you had a magic algo that derived prediction from that correlating variable after the fact). It's a perfect crime, but you would need to setup crazy incentive structures for all the team members and their immediate family to keep it secret... and that's what they are doing. I would guess they used Russian hackers for the job, given that the fund is heavily funding Russian political interests in western countries. I would recommend the SEC to dive really deep with appropriate expertise into this magic fund and double-check this simple theory of mine. Just for national security reasons alone. (note again: this is a conspiracy theory and not evidence or fact-based)

anonu 7y ago
I think the SEC and finra have probably poured over the surveillance data for countless hours. They would have found something. Also they trade 1000s of stocks. So the insider trading theory would not hold up.
tehlike 7y ago
Keeping something like this secret is... Hard.
- SirLJ 7y ago
  NSA will know about this in a heartbeat

bawana 7y ago

What are they talking about? Rentech went into the dumpster. https://seekingalpha.com/news/3300183-rentech-to-delist-from-nasdaq-sharesminus-26 https://seekingalpha.com/news/3300183-rentech-to-delist-from...

duncancarroll 7y ago
Doesn't look like that's the same Rentech: https://seekingalpha.com/symbol/RTK https://seekingalpha.com/symbol/RTK "Owns and operates wood fibre and nitrogen fertilizer businesses"

bhouston 7y ago

Madoff has unexplained gains year over year as well based on new methods. The explanation as offered triggers me but I haven't looked into it in detail. For Madoff the gains were truly magical as there was little evidence he actually traded. Interestingly, Epstein supposedly has magical gains as well with little evidence he traded.

musicale 7y ago

If it looks too good to be true, it usually is.

james-imitative 7y ago

Deep as anythink. ;)

analogkid 7y ago

These comments are almost all a dumpster fire of clueless speculation. I normally suggest people read Hacker News comments, but this is embarrassing. The uninformed ramblings about winner v. sucker funds, or assertions of insider trading are sad. The only factual comment here was by MR4D about how IRA accounts can impact wash sale rules, as would all accounts you own in prime brokerage. Hint: maybe there is a high probability the author of this paper doesn't know what he is doing. It wouldn't be the first time: https://www.latimes.com/business/hiltzik/la-fi-hiltzik-cornell-verizon-20190219-story.html https://www.latimes.com/business/hiltzik/la-fi-hiltzik-corne... Or maybe he's selling a competing product: https://cornell-capital.com/about-2 https://cornell-capital.com/about-2 but can't compete.