13 ms·

I'd still wish to have details on this (I too heard of similar numbers for his fund before), because in my newb eyes .. such returns would mean they could absor

I'd still wish to have details on this (I too heard of similar numbers for his fund before), because in my newb eyes .. such returns would mean they could absorb a huge chunk of the planet liquidity.

oldpersonintx 2y ago
[dead]
tomp 2y ago
No, because such returns aren't scalable. According to industry rumors, RenTech is somewhere between $10-20bn AUM (assets under management, i.e. the capital used for trading), and the profit that they make, they can't reinvest, they have to take it out as profit.
- jamiek88 2y ago
  How come? Why do they have to take the profits out and can’t compound it? I know literally zero about this stuff!
  - WrongAssumption 2y ago
    When you scale up too much it creates market impact that affects returns. You basically become too much of the market.
  - tomp 2y ago
    The simplistic explanation is, if you're doing arbitrage - i.e. "fixing market mispricing", there's only so much arbitrage you can do before you fix the price... This is of course a completely theoretical proposition, because in reality you don't know what the "fair price" is. You don't even have probabilities, because those are also unobservable, you only see one version of "history". In practice, what happens is that if you trade "too much", "shit goes wrong". Both of these things require empirical estimation and are easy to get wrong. The most obvious is the market liquidity, which you can observe at e.g. BitStamp TradeView [1] - there's only so many orders at a given price, so the more you trade, the worse price you get (the average/marginal trade). No professional of course trades like that, especially not HFTs, but similar problems happen at every scale - you're competing with other traders, they might have better information, there's limited amount of stock in the market, the edge/alpha/expected profit you can earn decays over time as the price moves, if you trade too much you move the market and inform other participants who can then trade against you, ... [1] https://www.bitstamp.net/market/tradeview/ https://www.bitstamp.net/market/tradeview/
  - paulpauper 2y ago
    I know literally zero about this stuff! I guess you will not be getting a job there But in seriousness, when you become so big relative to the market, you become the market.
tim333 2y ago
All investment strategies are limited as to the amount of money they will take. They probably couldn't have ran much more without reducing perfomance.
ljosifov 2y ago
You'd have to sacrifice the returns if you want bigger size. For every trade you do, there will be expected return (+ve) and then some costs to pay (-ve). Commissions and similar costs are only linear so not terrible. With increasing size, the market impact cost that's non-linear will soon overwhelm all other costs. So you keep adding alpha in your forecasts (via your research pipeline), that will be eaten away by the impact cost, as you scale up. If you keep it small (-ish - still gross pfolio will be billions) - then you will get to keep high returns.
eru 2y ago
How do you 'absorb' liquidity? Are they like some kind of financial kitchen towel?

I'd still wish to have details on this (I too heard of similar numbers for his fund before), because in my newb eyes .. such returns would mean they could absorb a huge chunk of the planet liquidity.

oldpersonintx 2y ago

[dead]

tomp 2y ago

No, because such returns aren't scalable. According to industry rumors, RenTech is somewhere between $10-20bn AUM (assets under management, i.e. the capital used for trading), and the profit that they make, they can't reinvest, they have to take it out as profit.

jamiek88 2y ago
How come? Why do they have to take the profits out and can’t compound it? I know literally zero about this stuff!
- WrongAssumption 2y ago
  When you scale up too much it creates market impact that affects returns. You basically become too much of the market.
- tomp 2y ago
  The simplistic explanation is, if you're doing arbitrage - i.e. "fixing market mispricing", there's only so much arbitrage you can do before you fix the price... This is of course a completely theoretical proposition, because in reality you don't know what the "fair price" is. You don't even have probabilities, because those are also unobservable, you only see one version of "history". In practice, what happens is that if you trade "too much", "shit goes wrong". Both of these things require empirical estimation and are easy to get wrong. The most obvious is the market liquidity, which you can observe at e.g. BitStamp TradeView [1] - there's only so many orders at a given price, so the more you trade, the worse price you get (the average/marginal trade). No professional of course trades like that, especially not HFTs, but similar problems happen at every scale - you're competing with other traders, they might have better information, there's limited amount of stock in the market, the edge/alpha/expected profit you can earn decays over time as the price moves, if you trade too much you move the market and inform other participants who can then trade against you, ... [1] https://www.bitstamp.net/market/tradeview/ https://www.bitstamp.net/market/tradeview/
- paulpauper 2y ago
  I know literally zero about this stuff! I guess you will not be getting a job there But in seriousness, when you become so big relative to the market, you become the market.

tim333 2y ago

All investment strategies are limited as to the amount of money they will take. They probably couldn't have ran much more without reducing perfomance.

ljosifov 2y ago

You'd have to sacrifice the returns if you want bigger size. For every trade you do, there will be expected return (+ve) and then some costs to pay (-ve). Commissions and similar costs are only linear so not terrible. With increasing size, the market impact cost that's non-linear will soon overwhelm all other costs. So you keep adding alpha in your forecasts (via your research pipeline), that will be eaten away by the impact cost, as you scale up. If you keep it small (-ish - still gross pfolio will be billions) - then you will get to keep high returns.

eru 2y ago

How do you 'absorb' liquidity? Are they like some kind of financial kitchen towel?