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> The fund [Medallion] has earned an average annual return of more than 35 percent for two decades. OK, can someone explain this? Most people say that "you can

> The fund [Medallion] has earned an average annual return of more than 35 percent for two decades. OK, can someone explain this? Most people say that "you can't beat the market in the long term", "market is efficient", etc. So how can these people have done so well over more than 20 years??

gphil 11y ago
Because out of the many thousands of funds who attempt it, some are bound to end up beating the market. You can't know in advance which funds are going to the be the best over the next two decades.
- Tycho 11y ago
  That's completely incorrect... the chances of a fund having that record through luck alone are astronomically low.
  - gnopgnip 11y ago
    Survivorship bias. The funds that do not have great records are eventually closed leaving only the ones that are successful
    - marvin 11y ago
      So presumably, there is a 75% chance that the Medallion fund will lose money (hedge fund = zero sum) for the first time ever, during the next few years. I don't think this interpretation of the maths is correct.
    - auntienomen 11y ago
      You haven't done the math. Let me illustrate: We'll assume that trading returns have a binary distribution. Traders win or lose with equal probability. This is not a great model, but it's good for making ballpark estimates, because it overestimates the odds of a track record like Renaissances. RenTec's Medallion fund has not had a down year in the past 25. The odds of this are at most 1 in 33 million, using our binary model. Survivorship bias does not begin to explain this; there have not been anything resembling 33 million hedge funds over the course of history. I think 30000 hedge funds is a fairly generous estimate. Exercise: Suppose Medallion's returns are at least a standard deviation above zero, every year. Calculate the odds of this happening.
      - gphil 11y ago
        This is still the wrong math. I'm not qualified to come up with a great model here, but given that the S&P 500 has only lost value in 5 of the last 25 years the chances of having no losses in the last 25 years are a lot greater. I've been investing for almost a decade, was lucky enough to sit out the worst in 2008, and I haven't had a down year in 10 years myself. This outcome was mostly luck on my part.
        auntienomen 11y ago
        Consider the probability of beating the S&P instead. Same math applies. If that doesn't convince you, look up their monthly returns and do the same calculation.
Tycho 11y ago
Nobody really knows how they've done it. But in order for markets to be efficient there needs to be lots of constant arbitrage, and anyone who pulls off an arbitrage trade makes a profit. So maybe the Medallion fund just does a lot of the arbitrage that makes markets so efficient.
hiou 11y ago
As far as I am aware the Medallion fund is not in any way publicly available. I believe it's an exclusive fund to a small number of investors who are involved directly with Renaissance. It would make a lot of sense to it's success as not having to scale past a certain point allows them to avoid a lot of uncertainty when taking models live.
joshstrange 11y ago
> "you can't beat the market in the long term" Without cheating that may be true.
logfromblammo 11y ago
There are several plausible hypotheses. My personal favorite is, "They trade on non-public information, and use a complex trade algorithm for the purposes of plausible deniability." Another is, "They got lucky." Another likely one is "The reporter did not calculate average annual return correctly." One that I find dubious: "They actually are that good at investing." For giggles: "They are using hedge funds to launder drug money." I'm sure there are other ways to explain it, but that return just sounds way too good to be true.
- Maarten88 11y ago
  Or maybe they move the most successful trades from client's funds into this employee fund, and move the unsuccessful ones out to client's funds?
  - logfromblammo 11y ago
    Oh, I like that one too, but how would they cover their asses in the event of an audit? Retroactive accounting?
    - Maarten88 11y ago
      If they can move ownership for a year, they'll certainly have no problems moving it for a few hundred milliseconds... I think they'll probably use a database that's "eventually consistent" ;-) I
maaku 11y ago
Google Berkshire Hathaway. Today you will learn something new.

gphil 11y ago

Because out of the many thousands of funds who attempt it, some are bound to end up beating the market. You can't know in advance which funds are going to the be the best over the next two decades.

Tycho 11y ago
That's completely incorrect... the chances of a fund having that record through luck alone are astronomically low.
- gnopgnip 11y ago
  Survivorship bias. The funds that do not have great records are eventually closed leaving only the ones that are successful
  - marvin 11y ago
    So presumably, there is a 75% chance that the Medallion fund will lose money (hedge fund = zero sum) for the first time ever, during the next few years. I don't think this interpretation of the maths is correct.
  - auntienomen 11y ago
    You haven't done the math. Let me illustrate: We'll assume that trading returns have a binary distribution. Traders win or lose with equal probability. This is not a great model, but it's good for making ballpark estimates, because it overestimates the odds of a track record like Renaissances. RenTec's Medallion fund has not had a down year in the past 25. The odds of this are at most 1 in 33 million, using our binary model. Survivorship bias does not begin to explain this; there have not been anything resembling 33 million hedge funds over the course of history. I think 30000 hedge funds is a fairly generous estimate. Exercise: Suppose Medallion's returns are at least a standard deviation above zero, every year. Calculate the odds of this happening.
    - gphil 11y ago
      This is still the wrong math. I'm not qualified to come up with a great model here, but given that the S&P 500 has only lost value in 5 of the last 25 years the chances of having no losses in the last 25 years are a lot greater. I've been investing for almost a decade, was lucky enough to sit out the worst in 2008, and I haven't had a down year in 10 years myself. This outcome was mostly luck on my part.
      - auntienomen 11y ago
        Consider the probability of beating the S&P instead. Same math applies. If that doesn't convince you, look up their monthly returns and do the same calculation.

Tycho 11y ago

Nobody really knows how they've done it. But in order for markets to be efficient there needs to be lots of constant arbitrage, and anyone who pulls off an arbitrage trade makes a profit. So maybe the Medallion fund just does a lot of the arbitrage that makes markets so efficient.

hiou 11y ago

As far as I am aware the Medallion fund is not in any way publicly available. I believe it's an exclusive fund to a small number of investors who are involved directly with Renaissance. It would make a lot of sense to it's success as not having to scale past a certain point allows them to avoid a lot of uncertainty when taking models live.

joshstrange 11y ago

> "you can't beat the market in the long term" Without cheating that may be true.

logfromblammo 11y ago

There are several plausible hypotheses. My personal favorite is, "They trade on non-public information, and use a complex trade algorithm for the purposes of plausible deniability." Another is, "They got lucky." Another likely one is "The reporter did not calculate average annual return correctly." One that I find dubious: "They actually are that good at investing." For giggles: "They are using hedge funds to launder drug money." I'm sure there are other ways to explain it, but that return just sounds way too good to be true.

Maarten88 11y ago
Or maybe they move the most successful trades from client's funds into this employee fund, and move the unsuccessful ones out to client's funds?
- logfromblammo 11y ago
  Oh, I like that one too, but how would they cover their asses in the event of an audit? Retroactive accounting?
  - Maarten88 11y ago
    If they can move ownership for a year, they'll certainly have no problems moving it for a few hundred milliseconds... I think they'll probably use a database that's "eventually consistent" ;-) I

maaku 11y ago

Google Berkshire Hathaway. Today you will learn something new.