Renaissance Says Quant Models Misfired During March Mayhem

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fingoals
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Renaissance Says Quant Models Misfired During March Mayhem

Post by fingoals »

I thought that this Bloomberg article is quite interesting. Could be considered as another warning against timing the market.

https://www.bloomberg.com/news/articles ... rch-mayhem
100factorial
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by 100factorial »

Their Medallion fund ("only open to employees, former employees and a handful of people close to the firm") is doing well:

Renaissance's $10 Billion Medallion Fund Gains 24% Year to Date in Tumultuous Market

https://www.wsj.com/articles/renaissanc ... 1587152401
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by fingoals »

100factorial wrote: Sun Apr 19, 2020 4:46 pm Their Medallion fund ("only open to employees, former employees and a handful of people close to the firm") is doing well:

Renaissance's $10 Billion Medallion Fund Gains 24% Year to Date in Tumultuous Market

https://www.wsj.com/articles/renaissanc ... 1587152401
I'm not sure how many people and organizations, after reading that information, would entrust their money to a company, which apparently uses different algorithms for "different" types of customers. Seems like an unfair practices case to me. Unless it is considered normal in the investment community ...
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by fwellimort »

I thought everyone knew about how Renaissance Tech operated.

The Medallion Fund brings investors in due to the ~66~80% pre-fee return (39% after-fee) since 1988.
Then from there investors realize they can't invest in the Medallion Fund so they instead invest in Institutional Equities Fund and Institutional Diversified Alpha Fund (neither of the two funds are anywhere as remotely interesting as the Medallion Fund).
One of the main reasons Medallion Fund does not allow more investors is because it cannot take more than a total of ten billion dollars: as the money gets large, the returns aren't scalable (the very problem professionals face currently in the industry and why historically, micro/small-cap value with positive profits has been beating the market [cause the market isn't scalable]). I actually wouldn't be surprised if Medallion Fund could easily increase its return by a noticeable margin if it was playing with small enough money but at that point, the absolute returns wouldn't justify all the hard work anyways.

That said, I think this only supports timing the market.
When this article was written, S&P500 fell over 20%. RIEF only dropped 14%. It beat the market.

It though failed to meet its goal. Although given the abnormal situation, I think people should cut some slack on that (since no one expected this epidemic and mass lock down).

This article only proves that if you get a bunch of brilliant mathematicians/physicists around the world, beating the market is quite a common feat.
I understand articles want sensationalism but I think it's unfair to interpret as "you can't time the market" when it still outperformed the market.

Look. The market is beatable. There's enough evidence in research papers and historical records that show so. The notion of 'you can't time the market' is meant for retail investors and most institutional investors, not award winning mathematicians who can publish theories about pattern recognitions and all.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by nisiprius »

100factorial wrote: Sun Apr 19, 2020 4:46 pm Their Medallion fund ("only open to employees, former employees and a handful of people close to the firm") is doing well:

Renaissance's $10 Billion Medallion Fund Gains 24% Year to Date in Tumultuous Market

https://www.wsj.com/articles/renaissanc ... 1587152401
I don't see the relevance. Except that the more different funds a hedge fund is operating, the more likely it is that, at any given time, one of them will be outperforming the market by chance alone. Ditto underperforming.

Absent full transparency, we simply don't know what lessons to take from anything about these hedge funds, or any others.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by fwellimort »

RenTech is quite transparent unlike most hedge funds. The company hires nobel/fields medal people + top phds only to have fun with their own side money (yes, the fund was made for themselves, not for others).

It has quite an interesting history in that it was doing high freq trading before anyone else in Wall Street.
Basically, it beat the market historically by simply having knowledge decades ahead of time from everyone else.
I mean... they might have even been the first (or one of the first) to use machine learning and neural network on the stock market. The stuff that people now do.

I don't know the future of RenTech (as the field is now known and is getting a lot more competitive) but the founder was a genius mathematician.

RenTech has 3 major funds.
Medallion fund and the 2 others that institutional investors can partake.

The high frequency trading happen only in the Medallion fund. Hence the other 2 funds isn't really interesting (if at all).
I don't know how long Medallion Fund will continuously average 66+% pretax a year but the math behind the fund is very legitimate (and basically the guy who pioneered much of the math founded the company).
{especially since the founder of the company pretty much hinted the public his strategy to help advance this field}

Simons is like the Einstein of pattern recognition in the finance market. Not your average run of the mill professional. That said, I do believe Simons is retired now so who knows the future.

I personally think there should at least be some respect to those who achieved such feat. I know most of us aren't market timers as Bogleheaders but there's no reason not to acknowledge super stars in the field.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by bgf »

nisiprius wrote: Mon Apr 20, 2020 4:47 am
100factorial wrote: Sun Apr 19, 2020 4:46 pm Their Medallion fund ("only open to employees, former employees and a handful of people close to the firm") is doing well:

Renaissance's $10 Billion Medallion Fund Gains 24% Year to Date in Tumultuous Market

https://www.wsj.com/articles/renaissanc ... 1587152401
I don't see the relevance. Except that the more different funds a hedge fund is operating, the more likely it is that, at any given time, one of them will be outperforming the market by chance alone. Ditto underperforming.

Absent full transparency, we simply don't know what lessons to take from anything about these hedge funds, or any others.
Did you say that random chance is a sufficient explanation for how the medallion fund has performed?
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by Jags4186 »

bgf wrote: Mon Apr 20, 2020 6:30 am
nisiprius wrote: Mon Apr 20, 2020 4:47 am
100factorial wrote: Sun Apr 19, 2020 4:46 pm Their Medallion fund ("only open to employees, former employees and a handful of people close to the firm") is doing well:

Renaissance's $10 Billion Medallion Fund Gains 24% Year to Date in Tumultuous Market

https://www.wsj.com/articles/renaissanc ... 1587152401
I don't see the relevance. Except that the more different funds a hedge fund is operating, the more likely it is that, at any given time, one of them will be outperforming the market by chance alone. Ditto underperforming.

Absent full transparency, we simply don't know what lessons to take from anything about these hedge funds, or any others.
Did you say that random chance is a sufficient explanation for how the medallion fund has performed?
That is one possible explanation. The other is that Renaissance is one of the exceedingly few people/firms actually able to beat the market. But since it isn’t scalable and not publicly available I don’t know how that’s helpful to the average person.

What makes no sense to me is if the fund has $10billion in assets, and wants to stay at that size, wouldn’t it explode to a much higher value with such great returns? $1 million at 39% annualized for 32 years is $37billion.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by arcticpineapplecorp. »

fwellimort wrote: Mon Apr 20, 2020 3:43 am Look. The market is beatable. There's enough evidence in research papers and historical records that show so. The notion of 'you can't time the market' is meant for retail investors and most institutional investors, not award winning mathematicians who can publish theories about pattern recognitions and all.
And then there's Long Term Capital Management.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by MotoTrojan »

Jags4186 wrote: Mon Apr 20, 2020 6:47 am

What makes no sense to me is if the fund has $10billion in assets, and wants to stay at that size, wouldn’t it explode to a much higher value with such great returns? $1 million at 39% annualized for 32 years is $37billion.
Simple, you distribute it. Would you invest in a fund that didn’t let you reinvest your dividend if the yield was 39%? :)
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by bgf »

Jags4186 wrote: Mon Apr 20, 2020 6:47 am
bgf wrote: Mon Apr 20, 2020 6:30 am
nisiprius wrote: Mon Apr 20, 2020 4:47 am
100factorial wrote: Sun Apr 19, 2020 4:46 pm Their Medallion fund ("only open to employees, former employees and a handful of people close to the firm") is doing well:

Renaissance's $10 Billion Medallion Fund Gains 24% Year to Date in Tumultuous Market

https://www.wsj.com/articles/renaissanc ... 1587152401
I don't see the relevance. Except that the more different funds a hedge fund is operating, the more likely it is that, at any given time, one of them will be outperforming the market by chance alone. Ditto underperforming.

Absent full transparency, we simply don't know what lessons to take from anything about these hedge funds, or any others.
Did you say that random chance is a sufficient explanation for how the medallion fund has performed?
That is one possible explanation. The other is that Renaissance is one of the exceedingly few people/firms actually able to beat the market. But since it isn’t scalable and not publicly available I don’t know how that’s helpful to the average person.

What makes no sense to me is if the fund has $10billion in assets, and wants to stay at that size, wouldn’t it explode to a much higher value with such great returns? $1 million at 39% annualized for 32 years is $37billion.
i dont think random chance can in any way explain their performance, given that they've made millions of trades over the decades. its just too many trades to say they 'got lucky.'

if i flip a coin 5 times, and get heads all 5 times. its easy to explain by random chance. the odds aren't THAT low for someone in an even game to get 5 heads in a row.

if i flip a coin 10 million times, and i get heads 2% more times than i get tails, its probably not random chance. its because i have an edge or a weighted coin. rennaisance has an edge. period.

i am sure the fund has consistently returned capital to its shareholders, ie, employees.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by fingoals »

Just wanted to take a moment to thank everyone replied for their feedback. I found it interesting and quite educational. :beer
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by Stef »

To this day I believe that the people behind this fund are aliens.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by livesoft »

fwellimort wrote: Mon Apr 20, 2020 5:48 am RenTech is quite transparent unlike most hedge funds.
I never heard of the firm being described that way. I think that not only is it not transparent, but it also puts out a lot of disinformation, so that no one has any idea of what they are actually doing. It might not lie, but it is never divulging the complete truth. Any articles that appear in the media have to be taken with a large grain of salt especially since the firm is NOT going to correct any misconception about what it does. The more misconceptions out there, the better it is for the firm.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by skeptic42 »

fwellimort wrote: Mon Apr 20, 2020 5:48 am RenTech is quite transparent unlike most hedge funds. The company hires nobel/fields medal people + top phds only to have fun with their own side money (yes, the fund was made for themselves, not for others).

It has quite an interesting history in that it was doing high freq trading before anyone else in Wall Street.
Basically, it beat the market historically by simply having knowledge decades ahead of time from everyone else.
I mean... they might have even been the first (or one of the first) to use machine learning and neural network on the stock market. The stuff that people now do.

I don't know the future of RenTech (as the field is now known and is getting a lot more competitive) but the founder was a genius mathematician.

RenTech has 3 major funds.
Medallion fund and the 2 others that institutional investors can partake.

The high frequency trading happen only in the Medallion fund. Hence the other 2 funds isn't really interesting (if at all).
I don't know how long Medallion Fund will continuously average 66+% pretax a year but the math behind the fund is very legitimate (and basically the guy who pioneered much of the math founded the company).
{especially since the founder of the company pretty much hinted the public his strategy to help advance this field}

Simons is like the Einstein of pattern recognition in the finance market. Not your average run of the mill professional. That said, I do believe Simons is retired now so who knows the future.

I personally think there should at least be some respect to those who achieved such feat. I know most of us aren't market timers as Bogleheaders but there's no reason not to acknowledge super stars in the field.
Where can one find some transparent description of what the Medallion fund is doing?
Is the distributed money really coming from superior trading or is it just an accounting trick, like distributed fees from other funds?
Did someone check the numbers and is there a transparent report?

And 66+% pretax gains a year is not a compounded growth rate. The CAGR is lower after fees and taxes and reinvesting in something different than the Medallion fund.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by cableguy »

I just read a book about these guys. My old neighbor works for them. He moved to a bigger house on the water last year. Very secretive. Supposedly they are in an argument with the feds about taxes....a $1B+ tax liability. Their returns and overall secrecy would lead most people to believe....if its sounds too good to be true....it probably isn't. I would not be shocked if one day we hear the whole thing was a scam. BTW....my old neighbor was a nice guy. They only hire PhD's and he had one in mathematics. Bright guy. Generous. But very shy and very guarded....
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by BionicBillWalsh »

cableguy wrote: Mon Apr 20, 2020 10:57 am I just read a book about these guys. My old neighbor works for them. He moved to a bigger house on the water last year. Very secretive. Supposedly they are in an argument with the feds about taxes....a $1B+ tax liability. Their returns and overall secrecy would lead most people to believe....if its sounds too good to be true....it probably isn't. I would not be shocked if one day we hear the whole thing was a scam. BTW....my old neighbor was a nice guy. They only hire PhD's and he had one in mathematics. Bright guy. Generous. But very shy and very guarded....
The Feds may be interested in them for multiple reasons.

The insider returns vs the outsider returns are pretty alarming from a smell test stand-point.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by fwellimort »

cableguy wrote: Mon Apr 20, 2020 10:57 am Supposedly they are in an argument with the feds about taxes....a $1B+ tax liability.
If you look at the cases for why IRS goes for Ren Tech, it honestly looks like an excuse from the IRS side to earn more tax.
Ren Tech didn't do anything 'illegal' per se but rather take advantage of loop holes in the current tax laws.
Ren Tech for instance used to do all these trades on a 401(K) until it couldn't. Then it moved to mostly IRA.
And for taxable accounts, Ren Tech uses basket options to get long term capital gains over short term capital gains: a loophole I'm sure IRS is not happy with in which you are 'holding' the option long term but moving around the inner holdings of the options itself.
What Ren Tech does is all legal in the current tax law. What IRS goes after is the amount of money generated without having paid taxes: if IRS does change rules about basket options, who knows the future but for now, all these 3 are legal.
Also, why should a company get punished for using 401(K) and IRA just because it is able to beat the stock market by a noticeable margin. Doesn't make much sense to me: now as of 'basket options', that's an if-fy topic but it's the government's fault for not making those instruments as short term taxes.
arcticpineapplecorp. wrote: Mon Apr 20, 2020 7:10 am And then there's Long Term Capital Management.
And the management made 21% first year, 43% second year, 41% third year after fees before its big mess up.
Until something unusual happens in the market (that was not accommodated for) or the public finds out your strategy, this management shows you CAN make outsized gains in the market.
Jags4186 wrote: Mon Apr 20, 2020 6:47 am What makes no sense to me is if the fund has $10billion in assets, and wants to stay at that size, wouldn’t it explode to a much higher value with such great returns? $1 million at 39% annualized for 32 years is $37billion.
It resets its worth every year (and sometimes have lower caps. e.g: $5 billion). The money isn't compounded because of such.
That said, Ren Tech's Medallion Fund has created an extra-ordinary amount of millionaires/billionaires in the US.

Honestly, I don't see anything wrong with Ren Tech beating the market historically.
RenTech initially had people who co-invented Baum-Welch algorithm for estimated hidden markov models. No one back in the day really used markov models to beat the market especially when the guys who came up with some of those algorithms were working for the medallion fund.
It's only very recently do we see these quant hedge funds use all these modelings including machine learning, deep learning, neural networks, etc.
I mean we are talking about people here who created firms such as Cambridge Analytica.
The math that went on RenTech's Medallion fund was simply almost 30 years ahead of its time: though who knows the future now that everyone is doing machine learning, etc.

If you had Excel back in the day when everyone was calculating by hand, I would expect you to have certain edges.
It's just what happens when you know more than the market itself.
I think you guys are very much under-estimating how much of 'insider knowledge' it is to know about utilizing markov models on the stock market when every other professional back in the day was trying to beat the market through a traditional mutual fund.
There were simply in the past, no competitions.
Now that these formulas are everywhere, who knows the future.

If I had the knowledge of mathematics/statistics that was 30~50 years ahead of everyone else that could be applied to the stock market, then I too wouldn't be surprised if I could beat the stock market. But I don't nor does the general retail/professional investor.
Heck, until 3 years after Graham published his book about Security Analysis, it was very easy to beat the market if investors knew how to evaluate stocks (based on Security Analysis). It's just what happens when you simply know a lot more than the public.
If anything, Ren Tech's Medallion Fund shows that if you want to reliably (there are risks) beat the market, know information that others don't have 30 years ahead of time. Maybe one of you should find a way to use abstract topology on the stock market. Who knows.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by arcticpineapplecorp. »

fwellimort wrote: Mon Apr 20, 2020 1:22 pm
arcticpineapplecorp. wrote: Mon Apr 20, 2020 7:10 am And then there's Long Term Capital Management.
And the management made 21% first year, 43% second year, 41% third year after fees before its big mess up.
Until something unusual happens in the market (that was not accommodated for) or the public finds out your strategy, this management shows you CAN make outsized gains in the market.
And regardless of those generous returns, a 100% loss of your money, leaves you with nothing.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by oldfort »

fwellimort wrote: Mon Apr 20, 2020 1:22 pm
Jags4186 wrote: Mon Apr 20, 2020 6:47 am What makes no sense to me is if the fund has $10billion in assets, and wants to stay at that size, wouldn’t it explode to a much higher value with such great returns? $1 million at 39% annualized for 32 years is $37billion.
It resets its worth every year (and sometimes have lower caps. e.g: $5 billion). The money isn't compounded because of such.
That said, Ren Tech's Medallion Fund has created an extra-ordinary amount of millionaires/billionaires in the US.
The global stock market cap was $90 trillion at the end of the year. Apple alone has a market cap of $1.2 trillion. If you had a truly superior model of the stock market, couldn't you have more capacity than $5-10 billion? It's not actionable anyway because the Medallion fund is closed to outside investors.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by HomerJ »

High frequency trading isn't "market-timing", and it's not the same as a fund "beating the market".

It's a business that uses microseconds arbitrage, and some get paid to provide liquidity. If you have income from the exchanges, you don't really get to count that income as part of your "returns".
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by AlphaLess »

nisiprius wrote: Mon Apr 20, 2020 4:47 am
100factorial wrote: Sun Apr 19, 2020 4:46 pm Their Medallion fund ("only open to employees, former employees and a handful of people close to the firm") is doing well:

Renaissance's $10 Billion Medallion Fund Gains 24% Year to Date in Tumultuous Market

https://www.wsj.com/articles/renaissanc ... 1587152401
I don't see the relevance. Except that the more different funds a hedge fund is operating, the more likely it is that, at any given time, one of them will be outperforming the market by chance alone. Ditto underperforming.

Absent full transparency, we simply don't know what lessons to take from anything about these hedge funds, or any others.
It's quite relevant.

Say, I have a spectrum of strategies: from Sharpe of 10 down to Sharpe of 1.

I take the best strategies, combined them into an investment and call it "Medallion". Medallion does not make unlimited money. Quite the contrary: it makes a limited amount of money, say, $4B a year. It only needs maybe $4-7B in capital to operate.

I slowly kick out all outsider investors from Medallion, and that leaves Medallion with only my money (pretend my name is Jim and my last initial is S). Then, as an incentive, I slowly, let my employees into the fund.

There are two types of investors in Medallion: active employees, and non-active employees (all outsiders have been kicked out).
Active employees DO NOT PAY fees, thus earning 70% return.
Non-active employees pay fees, thus earning 30-40% return.

It is futile to grow the AUM of the fund. It does not matter how much AUM we have, we can not make more than the capacity allows.

Next, we all get a bright idea: why don't we get some OPM (other people's money), and then invest that money into LESS consistent funds. And use our name and reputation to grow that as much as possible, say, to the tune of $50B AUM.

And on that fund, we charge hefty fees to supplement our employee income.

So, that is what goes on.

BTW: everything that I am stating above is documented in public domain one way or another.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by AlphaLess »

Here is some more information about RenTech.

https://www.amazon.com/Man-Who-Solved-M ... 73521798X/

Caution: a lot of the reviews say, "Will only recommend to trading professionals."
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by alpenglow »

I know some Bogleheads like to complain about their property taxes from time to time.

Fun fact: Robert Mercer, CEO of RenTech, pays about $800,000/year in property taxes on his Long Island home. Of course, he can afford it.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by JonnyB »

He may end up owing hundreds of millions more. The IRS recently ruled against Renaissance for using an illegal tax avoidance scheme to convert short term gains to long term gains.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by Stef »

JonnyB wrote: Mon Apr 20, 2020 4:19 pm He may end up owing hundreds of millions more. The IRS recently ruled against Renaissance for using an illegal tax avoidance scheme to convert short term gains to long term gains.
One argument more that the whole fund is a scam.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by fwellimort »

Stef wrote: Thu Apr 23, 2020 1:32 pm
JonnyB wrote: Mon Apr 20, 2020 4:19 pm He may end up owing hundreds of millions more. The IRS recently ruled against Renaissance for using an illegal tax avoidance scheme to convert short term gains to long term gains.
One argument more that the whole fund is a scam.
No. It's called taking advantage of vague wording.
Let's say a lot of people were to massively profit off of the vague rules about 'tax loss harvesting'. The IRS could look at all that potential money and call your tax history and claim everything you did up to now was not 'tax loss harvesting' and instead tax avoidance.
Maybe VOO to VTSAX shouldn't be considered "tax loss harvesting". How should we know. The IRS can one day decide all the historical transactions shouldn't be considered for tax loss harvesting and claim most Bogleheaders owe money (and should pay penalty on top for not paying the owed money in time).

Also, fund returns are generally considered before taxes. Whether the fund used an "illegal tax avoidance" or not does not change the pre-tax returns of the fund.

I know a lot of Bogleheaders love to hate on anything other than "buy and hold the market" but there's nothing wrong with accepting that there are other strategies out there.
There are many ways to becoming "financially successful" in the investment world.
And as for Ren Tech, Ren Tech was pretty much the start of all these quant craze. Ren Tech pretty much showed the finance world that a bunch of math/physics major can do just as well (if not better) than finance majors when it comes to making money. In fact, if you look today, many financial jobs in Wall Street are being more and more geared towards Computer Science majors over traditional Finance majors.

As for Simons who founded this fund, Simons was a mathematical prodigy.
"Simons in 1976 was a recipient of the Oswald Veblen Prize of the American Mathematical Society, which is geometry's highest honor.[20] He is known in the scientific community for co-developing the Chern–Simons theory, which is fundamental in modern theoretical physics." <- wiki
Many of the scientists that came from Ren Tech created the math and science that led to much of today's knowledge.
If the people in Ren Tech never made any of these knowledges public, I wouldn't be surprised if Ren Tech did much better today.

I think many of us forget that it wasn't until very recently that Wall Street caught onto much of the mathematical models/algorithms to trade in the stock market.
As for how long the Medallion Fund will continue making large returns... well, until enough people in Wall Street figure it out or some unexpected event occurs.

There has to be someone that beats the market end of day to correct the market. If everyone loses to the market at any given period.. well, that's not how averages work.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by oldfort »

AlphaLess wrote: Mon Apr 20, 2020 3:36 pm
nisiprius wrote: Mon Apr 20, 2020 4:47 am
100factorial wrote: Sun Apr 19, 2020 4:46 pm Their Medallion fund ("only open to employees, former employees and a handful of people close to the firm") is doing well:

Renaissance's $10 Billion Medallion Fund Gains 24% Year to Date in Tumultuous Market

https://www.wsj.com/articles/renaissanc ... 1587152401
I don't see the relevance. Except that the more different funds a hedge fund is operating, the more likely it is that, at any given time, one of them will be outperforming the market by chance alone. Ditto underperforming.

Absent full transparency, we simply don't know what lessons to take from anything about these hedge funds, or any others.
It's quite relevant.

Say, I have a spectrum of strategies: from Sharpe of 10 down to Sharpe of 1.

I take the best strategies, combined them into an investment and call it "Medallion". Medallion does not make unlimited money. Quite the contrary: it makes a limited amount of money, say, $4B a year. It only needs maybe $4-7B in capital to operate.

I slowly kick out all outsider investors from Medallion, and that leaves Medallion with only my money (pretend my name is Jim and my last initial is S). Then, as an incentive, I slowly, let my employees into the fund.

There are two types of investors in Medallion: active employees, and non-active employees (all outsiders have been kicked out).
Active employees DO NOT PAY fees, thus earning 70% return.
Non-active employees pay fees, thus earning 30-40% return.

It is futile to grow the AUM of the fund. It does not matter how much AUM we have, we can not make more than the capacity allows.

Next, we all get a bright idea: why don't we get some OPM (other people's money), and then invest that money into LESS consistent funds. And use our name and reputation to grow that as much as possible, say, to the tune of $50B AUM.

And on that fund, we charge hefty fees to supplement our employee income.

So, that is what goes on.

BTW: everything that I am stating above is documented in public domain one way or another.
Described this way, it sounds like a scam from the standpoint of any outside investors.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by unclescrooge »

Jags4186 wrote: Mon Apr 20, 2020 6:47 am
bgf wrote: Mon Apr 20, 2020 6:30 am
nisiprius wrote: Mon Apr 20, 2020 4:47 am
100factorial wrote: Sun Apr 19, 2020 4:46 pm Their Medallion fund ("only open to employees, former employees and a handful of people close to the firm") is doing well:

Renaissance's $10 Billion Medallion Fund Gains 24% Year to Date in Tumultuous Market

https://www.wsj.com/articles/renaissanc ... 1587152401
I don't see the relevance. Except that the more different funds a hedge fund is operating, the more likely it is that, at any given time, one of them will be outperforming the market by chance alone. Ditto underperforming.

Absent full transparency, we simply don't know what lessons to take from anything about these hedge funds, or any others.
Did you say that random chance is a sufficient explanation for how the medallion fund has performed?
That is one possible explanation. The other is that Renaissance is one of the exceedingly few people/firms actually able to beat the market. But since it isn’t scalable and not publicly available I don’t know how that’s helpful to the average person.

What makes no sense to me is if the fund has $10billion in assets, and wants to stay at that size, wouldn’t it explode to a much higher value with such great returns? $1 million at 39% annualized for 32 years is $37billion.
By definition, a market beating strategy cannot be scalable. Once you become the market, who do you beat?
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by oldfort »

unclescrooge wrote: Thu Apr 23, 2020 4:28 pm By definition, a market beating strategy cannot be scalable. Once you become the market, who do you beat?
Renaissance is a long way from becoming the market. The global stock market was ~$90 trillion at the end of 2019.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by unclescrooge »

oldfort wrote: Thu Apr 23, 2020 4:33 pm
unclescrooge wrote: Thu Apr 23, 2020 4:28 pm By definition, a market beating strategy cannot be scalable. Once you become the market, who do you beat?
Renaissance is a long way from becoming the market. The global stock market was ~$90 trillion at the end of 2019.
With a 37% return it'll get there in under 30 years.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by fwellimort »

unclescrooge wrote: Thu Apr 23, 2020 4:39 pm
oldfort wrote: Thu Apr 23, 2020 4:33 pm
unclescrooge wrote: Thu Apr 23, 2020 4:28 pm By definition, a market beating strategy cannot be scalable. Once you become the market, who do you beat?
Renaissance is a long way from becoming the market. The global stock market was ~$90 trillion at the end of 2019.
With a 37% return it'll get there in under 30 years.
It's actually about 65~70% annual return cause returns compared to the market is considered before fees.
There's no way a 65~70% return is scalable when you become the market.

I'm actually surprised the fund can even return that high with a a few billion dollars. It's very difficult to get those returns in general with such large sums of money.
oldfort wrote: Thu Apr 23, 2020 3:29 pm Described this way, it sounds like a scam from the standpoint of any outside investors.
Ya.. That's the thing with Ren Tech. It's not really 'worth it' unless you work there. The Medallion Fund is just meant for very talented scientists to increase their own money. The fund's main objective is to increase money for the people working on the fund. It's not geared for clients.
So basically... it's you vsing the market yourself and making the returns public. Kind of weird structure honestly.
Last edited by fwellimort on Thu Apr 23, 2020 4:57 pm, edited 1 time in total.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by AlphaLess »

oldfort wrote: Thu Apr 23, 2020 3:29 pm Described this way, it sounds like a scam from the standpoint of any outside investors.
I can see where you are coming from. I would hesitate to call it a scam, because they can still provide value to investors.

Say, they return 8-10% a year, in *SOMEWHAT* uncorrelated manner to market.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by illumination »

grayfox wrote: Mon Apr 20, 2020 9:21 am
The Long Island-based firm‘s flagship Medallion hedge fund has risen 24% this year through April 14, according to investors. The performance is thanks in part to a 9.9% gain in March, a brutal month for global stock markets. Medallion’s gains come even after its hefty investor fees, which include a cut of 36% or more of all trading gains and 5% of all money invested in the fund.

Medallion is only open to employees, former employees and a handful of people close to the firm. Because employees are the firm’s owners, most of the fees end up going back to them in some form. Before those investor fees, Medallion, which manages nearly $10 billion, was up about 39% for the year on April 14.

Funds that Renaissance makes available to outside investors haven’t done nearly as well as well, however, though they have rebounded lately. The Renaissance Institutional Equities Fund (RIEF), for example, was down 10.4% through April 10, investors say. RIEF has a longer holding period than Medallion. The fund focuses on U.S. shares and aims for returns that more closely track the overall market.
The fund that is available only to "insiders" was up +39%.
The fund that is available to "ousiders" was down -10.4%. And that fund aims for returns that more closely track the overall market.

If you are not an "insider" you cannot get the good fund. But anyone can get a fund that closely tracks the overall market from Vanguar, e.g. Total Stock Market VTSMX. And Wellesley Income is only down about -3% YTD.

And Berkshire Hathaway has beaten the S&P500 over many decades (50+ years) and anyone can buy it and get the same return as Warren Buffet. From the Berkshire Annual Report:

.................................................................Berkshire.........S&P 500
Compounded Annual Gain 1965-2019.........20.3%.............10.0%

I have a similar feeling when I see those comparisons with their other offerings, but that's above my pay grade to dissect any of it.

I feel this sort of high frequency trading should be regulated or made more transparent as it has the potential to hurt retail investors and could blow up the market and maybe 10 people on Earth will understand what happened. When the Medallion fund gives its inside investors another billion every year, is that at the expense from the order flow from "mom and pop" type investors that pay a little more when they buy or get a little less when they sell? Why do we outlaw "insider trading"? At least part of it is an attempt to give everyone a level playing field.

It's a much different category than say a Warren Buffett or a Peter Lynch that are making longer term bets on business models and industries, I don't feel that comes at the expense of someone else and exploiting inefficiencies in the trading (but I'm sure you could make a case all of it is a zero sum game).

But even if everything is completely on the up and up, what they do is not really applicable to whether or not individuals can effectively time the market, I almost view their fund as a service that generates revenue with millions of transactions. Even if everything were open source, an individual wouldn't be able to replicate without some massive IT infrastructure and the ability to tap into extreme leverage. And then you have everyone else following the same models and it probably no longer working.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by JonnyB »

fwellimort wrote: Thu Apr 23, 2020 4:49 pm It's actually about 65~70% annual return cause returns compared to the market is considered before fees.
There's no way a 65~70% return is scalable when you become the market.
How do you know it is 65%? Have you seen an audited annual report?
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by BJJ_GUY »

livesoft wrote: Mon Apr 20, 2020 10:00 am
fwellimort wrote: Mon Apr 20, 2020 5:48 am RenTech is quite transparent unlike most hedge funds.
I never heard of the firm being described that way. I think that not only is it not transparent, but it also puts out a lot of disinformation, so that no one has any idea of what they are actually doing. It might not lie, but it is never divulging the complete truth. Any articles that appear in the media have to be taken with a large grain of salt especially since the firm is NOT going to correct any misconception about what it does. The more misconceptions out there, the better it is for the firm.
Agree. Definitely not transparent, even when compared to the hedge funds universe. That's not even close.

However, one area in which they can't be faulted is at least clearly stating that their various funds not only trade off of different models (some redundant, others not), the other funds don't even have the same goal as Medallion. They equity fund is a long-only substitute, thus fairly compared to the equity index (rather than against their various product offerings).
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by ARoseByAnyOtherName »

There was a long profile of James Simons in the New York Times about 6 years ago. I found it interesting:
https://www.nytimes.com/2014/07/08/scie ... osity.html

Thanks to the person who posted the link to the book, I might check it out.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by Independent George »

Ben Felix has a short video discussing them.

https://www.youtube.com/watch?v=hvUyuo53kQQ

I know very little about them beyond what he describes there, but my feeling is (1) Renaissance genuinely figured something out that others haven't, and (2) what they do is very unlikely to be easily replicable or reverse-engineered.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by oldfort »

fwellimort wrote: Thu Apr 23, 2020 4:49 pm Ya.. That's the thing with Ren Tech. It's not really 'worth it' unless you work there. The Medallion Fund is just meant for very talented scientists to increase their own money. The fund's main objective is to increase money for the people working on the fund. It's not geared for clients.
So basically... it's you vsing the market yourself and making the returns public. Kind of weird structure honestly.
Then, it seems the Medallion fund gets too much attention. It wouldn't be much different if Jim Simons was touting the outperformance of his family office.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by spae »

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Last edited by spae on Wed Jul 15, 2020 2:21 am, edited 1 time in total.
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fingoals
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by fingoals »

spae wrote: Fri Apr 24, 2020 2:52 am
fingoals wrote: Mon Apr 20, 2020 2:22 am
100factorial wrote: Sun Apr 19, 2020 4:46 pm Their Medallion fund ("only open to employees, former employees and a handful of people close to the firm") is doing well:

Renaissance's $10 Billion Medallion Fund Gains 24% Year to Date in Tumultuous Market

https://www.wsj.com/articles/renaissanc ... 1587152401
I'm not sure how many people and organizations, after reading that information, would entrust their money to a company, which apparently uses different algorithms for "different" types of customers. Seems like an unfair practices case to me. Unless it is considered normal in the investment community ...
This is normal for a hedge fund. Two Sigma has an employees fund and a managing director's fund for senior employees. Which fund do you think does better, the MD fund or the employees fund? Which do you think does better, the employee fund or the median fund open to outside investors?

If a hedge fund really has alpha, why wouldn't they keep all of the money they make and not just a fraction?
Thank you for the feedback, but I stand by my opinion in that it appears to be an unfair practice (if I were SEC, I would definitely investigate that). Imagine if you would go to a store and they would have products of low or so-so quality for "normal" customers "in the front" and of high quality for employees / management / VIPs only, "in the back". It would not fly well with FTC's Bureau of Consumer Protection. Similarly, since hedge funds operate in a regulated market, they can't play by their rules without guardrails, including financial products' consumer protection.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by spae »

.....
Last edited by spae on Wed Jul 15, 2020 2:21 am, edited 2 times in total.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by BJJ_GUY »

fingoals wrote: Fri Apr 24, 2020 5:34 am

Thank you for the feedback, but I stand by my opinion in that it appears to be an unfair practice (if I were SEC, I would definitely investigate that). Imagine if you would go to a store and they would have products of low or so-so quality for "normal" customers "in the front" and of high quality for employees / management / VIPs only, "in the back". It would not fly well with FTC's Bureau of Consumer Protection. Similarly, since hedge funds operate in a regulated market, they can't play by their rules without guardrails, including financial products' consumer protection.
No one is being swindled here. Investors may invest in the open funds if they wish. Nothing about Medallion is disadvantaging investors in the other funds. Big difference between having access to the best product (which no one has a right to), and actually being disadvantaged.

It is incredibly common for these type of strategies to have legacy funds closed to new investment as the models utilized aren't as scalable. However, legacy (often closed) funds can act as a research lab that can benefit the newer funds. For example, when a signal is being tested, there is not necessarily an idea that it will only be for Fund A, or B, or C. The research is done (in sample, out of sample blah blah blah), and if it passes all the hurdles to be introduced to live trading, the optimal parameters will determine which fund(s) will include it. Additionally, those same parameters (time horizon, liquidity, asset class, region, whatever) determine the capacity, or amount of capital, that can be optimally allocated to it.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by BJJ_GUY »

spae wrote: Fri Apr 24, 2020 7:21 am
If you think that's bad you should look into how investment banks make money. They make financial advisors and high-fee actively active fund managers look like saints.
Agree. And what the banks do, often does disadvantage the counter-party. Very different from a hedge fund investor being jealous they can't invest in any fund they want -- a situation without any actual damages.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by fingoals »

spae wrote: Fri Apr 24, 2020 7:21 am
fingoals wrote: Fri Apr 24, 2020 5:34 am
spae wrote: Fri Apr 24, 2020 2:52 am
fingoals wrote: Mon Apr 20, 2020 2:22 am
100factorial wrote: Sun Apr 19, 2020 4:46 pm Their Medallion fund ("only open to employees, former employees and a handful of people close to the firm") is doing well:

Renaissance's $10 Billion Medallion Fund Gains 24% Year to Date in Tumultuous Market

https://www.wsj.com/articles/renaissanc ... 1587152401
I'm not sure how many people and organizations, after reading that information, would entrust their money to a company, which apparently uses different algorithms for "different" types of customers. Seems like an unfair practices case to me. Unless it is considered normal in the investment community ...
This is normal for a hedge fund. Two Sigma has an employees fund and a managing director's fund for senior employees. Which fund do you think does better, the MD fund or the employees fund? Which do you think does better, the employee fund or the median fund open to outside investors?

If a hedge fund really has alpha, why wouldn't they keep all of the money they make and not just a fraction?
Thank you for the feedback, but I stand by my opinion in that it appears to be an unfair practice (if I were SEC, I would definitely investigate that). Imagine if you would go to a store and they would have products of low or so-so quality for "normal" customers "in the front" and of high quality for employees / management / VIPs only, "in the back". It would not fly well with FTC's Bureau of Consumer Protection. Similarly, since hedge funds operate in a regulated market, they can't play by their rules without guardrails, including financial products' consumer protection.
You asked if it was normal and I told you the answer. You may not like the answer but that doesn't change the answer.

If you think that's bad you should look into how investment banks make money. They make financial advisors and high-fee active fund managers look like saints.
Sure, I understand. And I appreciate your feedback, regardless of whether I like it or not. I just wanted to express how I feel about that situation (not that anybody cares, but nevertheless ...). As for hedge funds vs. investment banks, I didn't know that the former are considered as the lesser of two evils. I learned something new today. Will read up on investment banks when I get a chance.
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by BJJ_GUY »

fingoals wrote: Fri Apr 24, 2020 12:48 pm
spae wrote: Fri Apr 24, 2020 7:21 am You asked if it was normal and I told you the answer. You may not like the answer but that doesn't change the answer.

If you think that's bad you should look into how investment banks make money. They make financial advisors and high-fee active fund managers look like saints.
Sure, I understand. And I appreciate your feedback, regardless of whether I like it or not. I just wanted to express how I feel about that situation (not that anybody cares, but nevertheless ...). As for hedge funds vs. investment banks, I didn't know that the former are considered as the lesser of two evils. I learned something new today. Will read up on investment banks when I get a chance.
Interesting way you phrased that. Why do you say lesser of two evils?
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by fingoals »

BJJ_GUY wrote: Fri Apr 24, 2020 9:32 am
fingoals wrote: Fri Apr 24, 2020 5:34 am

Thank you for the feedback, but I stand by my opinion in that it appears to be an unfair practice (if I were SEC, I would definitely investigate that). Imagine if you would go to a store and they would have products of low or so-so quality for "normal" customers "in the front" and of high quality for employees / management / VIPs only, "in the back". It would not fly well with FTC's Bureau of Consumer Protection. Similarly, since hedge funds operate in a regulated market, they can't play by their rules without guardrails, including financial products' consumer protection.
No one is being swindled here. Investors may invest in the open funds if they wish. Nothing about Medallion is disadvantaging investors in the other funds. Big difference between having access to the best product (which no one has a right to), and actually being disadvantaged.

It is incredibly common for these type of strategies to have legacy funds closed to new investment as the models utilized aren't as scalable. However, legacy (often closed) funds can act as a research lab that can benefit the newer funds. For example, when a signal is being tested, there is not necessarily an idea that it will only be for Fund A, or B, or C. The research is done (in sample, out of sample blah blah blah), and if it passes all the hurdles to be introduced to live trading, the optimal parameters will determine which fund(s) will include it. Additionally, those same parameters (time horizon, liquidity, asset class, region, whatever) determine the capacity, or amount of capital, that can be optimally allocated to it.
I appreciate your feedback. Now the picture is a bit clearer to me (at least, motivation / technical reasons-wise), but it still leaves a bad aftertaste. I still don't buy the notion that "nothing about Medallion is disadvantaging investors in the other funds". You wrote: "big difference between having access to the best product (which no one has a right to), and actually being disadvantaged". I would argue that restricting access to the best product, especially in a highly regulated environment (c.f., healthcare), places excluded customers into the "disadvantaged" category. I would understand, if hedge funds would have higher financial barriers to entry (like many mutual funds do; or like in healthcare, you can get top-notch care in expensive private clinics), but restricting purely on a basis of belonging to a particular *class* of customers, again, especially in a regulated industry (where "if you want to participate in the market, play by the rules") - appears to be discriminatory. Market is not a private club, at least, I thought so ...
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Re: Renaissance Says Quant Models Misfired During March Mayhem

Post by fingoals »

BJJ_GUY wrote: Fri Apr 24, 2020 1:08 pm
fingoals wrote: Fri Apr 24, 2020 12:48 pm
spae wrote: Fri Apr 24, 2020 7:21 am You asked if it was normal and I told you the answer. You may not like the answer but that doesn't change the answer.

If you think that's bad you should look into how investment banks make money. They make financial advisors and high-fee active fund managers look like saints.
Sure, I understand. And I appreciate your feedback, regardless of whether I like it or not. I just wanted to express how I feel about that situation (not that anybody cares, but nevertheless ...). As for hedge funds vs. investment banks, I didn't know that the former are considered as the lesser of two evils. I learned something new today. Will read up on investment banks when I get a chance.
Interesting way you phrased that. Why do you say lesser of two evils?
Please see my comment above.
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