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Nobody knows how Rentech makes money. The most likely explanation for the success of Medallion is that Rentech assigns ex post the best strategies to Medallion,

Nobody knows how Rentech makes money. The most likely explanation for the success of Medallion is that Rentech assigns ex post the best strategies to Medallion, which is run for the benefit of insiders. For instance the fund Bluecrest was charged and fined for doing exactly that. We also know, because it appeared in a Senate report, that Rentech is a massive tax fraud and owes over $5 billion in unpaid taxes. Is it so unreasonable that a massive tax cheat would also cheat his investors? The press is far too credulous towards Rentech. For instance Zuckerman in his book devotes just one paragraph to a discussion of the tax fraud and the Senate report. Noah Smith himself worked at SUNY Stony Brook, which is heavily funded by Simons.

deleted 6y ago
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esoterica 6y ago
> The most likely explanation for the success Mostly likely based on what grounds? Rentech was very profitable for decades before they ever started their public funds. > Nobody knows how Rentech makes money There's nothing extraordinarily special about Rentech's returns, they just employ short-term stat arb type strategies that require relatively little capital to execute, so if you express their returns as a percentage of invested capital you get an eye-popping number. But it's not comparable to the returns that a traditional buy-and-hold fund makes (in particular because those returns don't compound). There are plenty of other quant shops and prop trading firms that would make huge (>Rentech) annual returns if they attempted to phrase their earnings in those terms, but they typically don't, because if you don't need a lot of capital then you don't need to raise money from the clients and outside investors (can just trade the partners' money) and you don't need to brag about your returns in public.
- hogFeast 6y ago
  Their IP address is also the largest downloader of Form 4s.
  - deleted 6y ago
    [deleted]
kolbe 6y ago
If I'm interpreting your allegation correctly, that would be a serious crime. I could conceive of that happening in the early days, but Jim has tens of billions of dollars now. I don't know why he'd risk spending the rest of his life in prison for an extra 1-3b a year. Also, you've misunderstood the charges on Bluecrest. Platt may also have been doing the scheme you described, but that is not what the SEC fined him for. He would be in prison had he been charged with what you allege.
- chrisgd 6y ago
  You could have said the same about Madoff.
  - kolbe 6y ago
    Except Madoff had to conceal an accounting hole. If he ever stopped, his investors would ask for their $x back, and he would have to give them $0.5x. I know there's a lot of room for cynicism in the financial world, but you still need to know what is happening for each type of fraud or misdeed or good action.
    - redis_mlc 6y ago
      What was interesting about Madoff was that more than 0.5x was recovered (last thing I read it was much more), even considering the trustee billed over $1 billion in fees. Normally around 0.01x is recovered, as 99% is just blown on "expenses."
beagle3 6y ago
No, that’s not the most likely explanation - it’s actually very unlikely. Medallion is not unique, there are other firms with comparable win record (Virtu, a Czech one, an Israeli one and a couple of British ones at the very least) but only 5-10% of the size; of all these, only Virtu is public and verifiable, the others aren’t but you can find people who will confirm it off the record. People were begging Simons to take money. He wouldn’t let them into medallion (why should he share?) but he did start a higher-risk, lower-reward business and let’s people into that. As far as I can tell, the commonality among those always-winning firms is high frequency low latency algorithmic trading. These days it takes millions of dollars per month just to pay for the infrastructure you need to be able to be competitive - and then you also have to have some nontrivial edge, without which there isn’t all that much profit in having low latency. What’s Virtu’s or RenTexh’s/Medallion edge? I don’t know. In the past, they seemed to like people with speech/hmm background. But that was before the DNN / differential computing revolution. I have no idea where there edge is now (and actually whether hmm was their edge in the past - but it did seem to be quite common background among their recruits) That said, they may or may not be tax frauds as well - I have no idea. But I don’t see any reason to suspect they are doing retroactive allocation of successful trades.
- hogFeast 6y ago
  Virtu is a market-maker. Comparing their win record to RenTech makes no sense. They have a high win-rate but so did brokers in the 70s...Virtu is doing the same thing as them (they are also APs for ETFs...again, the innovation there has really been able to make markets at very low cost). There are hundreds of other quant firms with public records. RenTech has better numbers because they stayed smaller. It is difficult to generalise but firms either grow assets to a point where the market moves against them when they trade/returns drop or they go into strategies with lower returns at scale (btw, both things are common outside of quant too). They aren't doing HFT. Some quant strategies are tangential to HFT, for example front-running news was a big strategy in the early 2010s...it is somewhat latency-based but is still distinct from HFT, which tends to refer more to making markets. The book says they tried hmm/speech stuff and it didn't work. It is likely they are doing more complex things now but Nick Patterson said they were using linear regression for most of the 90s. Generally speaking, this is a common misconception: people believe that because the results are good, the model must be more complex. This reflects how university courses are organised but the real world isn't like that (one big advantage that RenTech had was data, they had data that no-one else had for a very long time, another big factor is execution...these kind of practical edges are far more important than people think). Also, they use a ton of leverage...their returns actually compare pretty well to what fundamental managers can achieve outside of a public fund. Having investors is a significant limitation because they will often force you to behave in a way that reduces returns (i.e. redeeming at the worst time, asking for risk reductions at the worst time). The structure is very kind to gross returns. Retroactive reallocation of successful trades is very old. The SEC cracked down on this in the 80s, it is very easy to prove, and it is very unlikely that someone doing this would hire a bunch of scientists and then give them a bunch of equity in the fund...it doesn't make any sense.
Spinnaker_ 6y ago
The Medallion fund had 17 years of incredible performance before their other funds existed. So that's not a good explanation. The $5 billion in unpaid taxes is a small fraction of their total returns. So again, not a great explanation.
darawk 6y ago
Can't believe a comment this ignorant is so highly upvoted. Quant funds that do well are a real thing. Many people here work at them. Renaissance used a technicality to try to avoid taxes, and they are in a dispute over it with the IRS. That has absolutely nothing to do with the legitimacy of their primary fund. Medallion predates their public funds. They launched their public funds because Medallion was capacity constrained, and they thought they could cash in on its reputation. It's the public funds that are the afterthought, not Medallion. They are not moving the strategies around ex-post. You're just completely making things up here. Anyone with any knowledge of the history of Renaissance knows that that doesn't even make chronological sense.
ironSkillet 6y ago
Rentech trades on extremely reliable (but constantly evolving) price movement patterns and levers them up to the hilt in order to generate their returns. This is one reason why they are capacity constrained and can't just compound their returns. When the coronavirus first knocked US markets out of orbit, because of this leverage, the medallion fund was actually close to losing all of their money due to many previously established patterns evaporating too quickly for their algorithms to adjust. I have heard this from someone with first hand familiarity with ren tech. As others have mentioned, they also understood at a very early stage the importance of solid data ingestion and infrastructure. They vacuum up anything that could plausibly be related to price movements.
inthewoods 6y ago
"The most likely explanation for the success of Medallion is that Rentech assigns ex post the best strategies to Medallion." Everything I've read (and you obviously have to take it with a grain of salt) doesn't agree with this assessment. The core fund trades commodities and stocks/options in a pair format with short holding times. To make their public fund, they needed to adopt more scalable strategies which meant longer holding periods. So it's not a matter of choosing/assigning ex post - they are fundamentally different approaches. They said up front that the public fund wouldn't replicate the internal fund. Whether people listened to them or not is another question. I get that we should be skeptical, but by the same token I don't think you can says fraud is happening without any evidence. Yes, they had a tax case - but that was related to their derivatives contracts and the tax handling of them. Clearly they were wrong on that - and they've stopped using them - and still been up huge after that. I'm just not clear why we should assume fraud just because they are successful. To me, it looks like tiny profits magnified by enormous leverage - but with holding periods and market neutral positioning to reduce risk.
nojito 6y ago
I don't get how such a wrong statement is upvoted in this thread. The larger "public" funds are for strategies that can't be used at Medallion but still provide value for others. > Noah Smith himself worked at SUNY Stony Brook, which is heavily funded by Simons. Simons is very clear that his money is to go to the Math and some science departments. Noah is out of their Finance department. Even if you take the senate report at face value...it only explains 1/5th % of their yearly returns.

deleted 6y ago

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esoterica 6y ago

> The most likely explanation for the success Mostly likely based on what grounds? Rentech was very profitable for decades before they ever started their public funds. > Nobody knows how Rentech makes money There's nothing extraordinarily special about Rentech's returns, they just employ short-term stat arb type strategies that require relatively little capital to execute, so if you express their returns as a percentage of invested capital you get an eye-popping number. But it's not comparable to the returns that a traditional buy-and-hold fund makes (in particular because those returns don't compound). There are plenty of other quant shops and prop trading firms that would make huge (>Rentech) annual returns if they attempted to phrase their earnings in those terms, but they typically don't, because if you don't need a lot of capital then you don't need to raise money from the clients and outside investors (can just trade the partners' money) and you don't need to brag about your returns in public.

hogFeast 6y ago
Their IP address is also the largest downloader of Form 4s.
- deleted 6y ago
  [deleted]

kolbe 6y ago

If I'm interpreting your allegation correctly, that would be a serious crime. I could conceive of that happening in the early days, but Jim has tens of billions of dollars now. I don't know why he'd risk spending the rest of his life in prison for an extra 1-3b a year. Also, you've misunderstood the charges on Bluecrest. Platt may also have been doing the scheme you described, but that is not what the SEC fined him for. He would be in prison had he been charged with what you allege.

chrisgd 6y ago
You could have said the same about Madoff.
- kolbe 6y ago
  Except Madoff had to conceal an accounting hole. If he ever stopped, his investors would ask for their $x back, and he would have to give them $0.5x. I know there's a lot of room for cynicism in the financial world, but you still need to know what is happening for each type of fraud or misdeed or good action.
  - redis_mlc 6y ago
    What was interesting about Madoff was that more than 0.5x was recovered (last thing I read it was much more), even considering the trustee billed over $1 billion in fees. Normally around 0.01x is recovered, as 99% is just blown on "expenses."

beagle3 6y ago

No, that’s not the most likely explanation - it’s actually very unlikely. Medallion is not unique, there are other firms with comparable win record (Virtu, a Czech one, an Israeli one and a couple of British ones at the very least) but only 5-10% of the size; of all these, only Virtu is public and verifiable, the others aren’t but you can find people who will confirm it off the record. People were begging Simons to take money. He wouldn’t let them into medallion (why should he share?) but he did start a higher-risk, lower-reward business and let’s people into that. As far as I can tell, the commonality among those always-winning firms is high frequency low latency algorithmic trading. These days it takes millions of dollars per month just to pay for the infrastructure you need to be able to be competitive - and then you also have to have some nontrivial edge, without which there isn’t all that much profit in having low latency. What’s Virtu’s or RenTexh’s/Medallion edge? I don’t know. In the past, they seemed to like people with speech/hmm background. But that was before the DNN / differential computing revolution. I have no idea where there edge is now (and actually whether hmm was their edge in the past - but it did seem to be quite common background among their recruits) That said, they may or may not be tax frauds as well - I have no idea. But I don’t see any reason to suspect they are doing retroactive allocation of successful trades.

hogFeast 6y ago
Virtu is a market-maker. Comparing their win record to RenTech makes no sense. They have a high win-rate but so did brokers in the 70s...Virtu is doing the same thing as them (they are also APs for ETFs...again, the innovation there has really been able to make markets at very low cost). There are hundreds of other quant firms with public records. RenTech has better numbers because they stayed smaller. It is difficult to generalise but firms either grow assets to a point where the market moves against them when they trade/returns drop or they go into strategies with lower returns at scale (btw, both things are common outside of quant too). They aren't doing HFT. Some quant strategies are tangential to HFT, for example front-running news was a big strategy in the early 2010s...it is somewhat latency-based but is still distinct from HFT, which tends to refer more to making markets. The book says they tried hmm/speech stuff and it didn't work. It is likely they are doing more complex things now but Nick Patterson said they were using linear regression for most of the 90s. Generally speaking, this is a common misconception: people believe that because the results are good, the model must be more complex. This reflects how university courses are organised but the real world isn't like that (one big advantage that RenTech had was data, they had data that no-one else had for a very long time, another big factor is execution...these kind of practical edges are far more important than people think). Also, they use a ton of leverage...their returns actually compare pretty well to what fundamental managers can achieve outside of a public fund. Having investors is a significant limitation because they will often force you to behave in a way that reduces returns (i.e. redeeming at the worst time, asking for risk reductions at the worst time). The structure is very kind to gross returns. Retroactive reallocation of successful trades is very old. The SEC cracked down on this in the 80s, it is very easy to prove, and it is very unlikely that someone doing this would hire a bunch of scientists and then give them a bunch of equity in the fund...it doesn't make any sense.

Spinnaker_ 6y ago

The Medallion fund had 17 years of incredible performance before their other funds existed. So that's not a good explanation. The $5 billion in unpaid taxes is a small fraction of their total returns. So again, not a great explanation.

darawk 6y ago

Can't believe a comment this ignorant is so highly upvoted. Quant funds that do well are a real thing. Many people here work at them. Renaissance used a technicality to try to avoid taxes, and they are in a dispute over it with the IRS. That has absolutely nothing to do with the legitimacy of their primary fund. Medallion predates their public funds. They launched their public funds because Medallion was capacity constrained, and they thought they could cash in on its reputation. It's the public funds that are the afterthought, not Medallion. They are not moving the strategies around ex-post. You're just completely making things up here. Anyone with any knowledge of the history of Renaissance knows that that doesn't even make chronological sense.

ironSkillet 6y ago

Rentech trades on extremely reliable (but constantly evolving) price movement patterns and levers them up to the hilt in order to generate their returns. This is one reason why they are capacity constrained and can't just compound their returns. When the coronavirus first knocked US markets out of orbit, because of this leverage, the medallion fund was actually close to losing all of their money due to many previously established patterns evaporating too quickly for their algorithms to adjust. I have heard this from someone with first hand familiarity with ren tech. As others have mentioned, they also understood at a very early stage the importance of solid data ingestion and infrastructure. They vacuum up anything that could plausibly be related to price movements.

inthewoods 6y ago

"The most likely explanation for the success of Medallion is that Rentech assigns ex post the best strategies to Medallion." Everything I've read (and you obviously have to take it with a grain of salt) doesn't agree with this assessment. The core fund trades commodities and stocks/options in a pair format with short holding times. To make their public fund, they needed to adopt more scalable strategies which meant longer holding periods. So it's not a matter of choosing/assigning ex post - they are fundamentally different approaches. They said up front that the public fund wouldn't replicate the internal fund. Whether people listened to them or not is another question. I get that we should be skeptical, but by the same token I don't think you can says fraud is happening without any evidence. Yes, they had a tax case - but that was related to their derivatives contracts and the tax handling of them. Clearly they were wrong on that - and they've stopped using them - and still been up huge after that. I'm just not clear why we should assume fraud just because they are successful. To me, it looks like tiny profits magnified by enormous leverage - but with holding periods and market neutral positioning to reduce risk.

nojito 6y ago

I don't get how such a wrong statement is upvoted in this thread. The larger "public" funds are for strategies that can't be used at Medallion but still provide value for others. > Noah Smith himself worked at SUNY Stony Brook, which is heavily funded by Simons. Simons is very clear that his money is to go to the Math and some science departments. Noah is out of their Finance department. Even if you take the senate report at face value...it only explains 1/5th % of their yearly returns.