Seth Klarman's Baupost Group averaged a 20% return between its founding in 1982 and 2015.[2] This is a 33 year term, during which the S&P 500's average annual return was 8.8%.
Average annual return is not the whole picture (i.e. it is theoretically possible to have a phenomenal single year and mediocre performance for 9 years and thus beat the S&P 500 over a 10 year period) and there are other examples, but these should suffice.
[1]: http://www.bloomberg.com/news/articles/2015-06-16/how-an-exc...
[2]: http://www.octafinance.com/hedge-funds/seth-klarman-baupost-...
Of course, this doesn't mean that this performance will necessarily continue indefinitely; knowledge diffuses, and their strategies will eventually become public, turning from "alpha" into "beta" (like trend following has in the past). They need to keep innovating to continue beating the market.
Also, the biggest issue of strategies like this is that they are severely constrained - you just can't put more than a certain amount of money into them. In contrast, some other strategies are much less constrained; like trend following (CTAs manage tens of billions of funds), and global macro (Bridgewater manages 50bn).
the only half-true statement you made was about scalability. like, theoretically every strategy has a limit to its effectiveness and i guess you can argue that algo-based trading funds should be limited in size and scope. but compare that to seriously unscalable fields such as venture capital, where the constraints are in lack of investment targets, need for GP's to consult/manage, domain expertise more important for companies w/o sec-standard accounting, covenants blocking investments in previously funded companies - in essence, high human capital costs. implementing an extra algo strategy is much less human-intensive, which might suggest easier scaling (though nowhere near mutual funds, etc)
Quant funds don't trade with computers - in fact, computers trade instead of humans.
> the number of trades you make doesn't determine alpha
No, but it does determine how statistically significant your alpha is. If I make 1 good trade, it might be alpha or it might be a lucky guess. If I make 10000 good trades, it's unlikely to be just a lucky guess.
> certainly no sense to 'alpha becoming beta.'
Trend following used to be "alpha", but now it's considered "beta" - in the sense that everybody can replicate it, and there is no specific "alpha"-based fee warranted for a fund executing trend-following strategies.
> there is no a priori reason that their strategies must or will become public
the more people know about it, the easier the math behind it, and the more broadly it applies, the more chance there is that it becomes "public" knowledge (public in the sense that many industry practitioners working for different funds know about it)
> but compare that to seriously unscalable fields such as venture capital
Well, given that quite a few venture funds are bigger than $10bn [1], I wouldn't call that "seriously unscalable". But in any case, my comparision was to trend following (Winton has about $30bn), global macro (Bridgewater's Pure Alpha has about $50bn), and passive index investing (SPDR S&P 500 ETF is > $100bn).
[1] http://www.forbes.com/sites/alexkonrad/2015/03/25/midas-top-...
The number of trades does not determine alpha, but it means that you can be much more certain about whether someone has alpha or not. For example, John Paulson made billions on (essentially) a single trade in 2007 and early 2008. Does he have alpha? It's hard to say, because all of those profits were from one trade, and he could have been lucky. Virtu Financial generates millions of dollars each year, by making tens of millions of trades. Do they have alpha? Absolutely - you can be certain of it, because it would be statistically impossible to get lucky tens of millions of times.
The idea "alpha becoming beta" is an extremely relevant one for many hedge funds today. As strategies become well known, they become commodified, and are often offered at a lower fee, both by hedge funds, ETFs and investment bank products. Frequently, they are offered for little or no performance fee, so they cannot be called "alpha" and are often referred to as "smart beta". For example, AQR Capital Management offers many low-fee funds giving exposure to value investing, momentum investing, managed futures, the FX carry trade and others. It sounds like you are using a very narrow definition of beta (exposure to the stock market) whereas the usage in the industry is much broader.
Pointing out that quant funds use "algorithms" to trade rather than "computers" is pointlessly picking holes. It's clear what he means.
I think Renaissance's track record only answers the first question. But apparently the last few years have been really tough for quant funds, some strategies actually lost money on average. And I'd have no idea how to separate well run quant funds that like Renaissance that can withstand changing market conditions and funds that will fail when market conditions change. Also, I'd be a little nervous assuming that a well run fund will stay well run.
I think that some managers do have actual skill, and would provide value. But I think that trying to find those managers would usually be really difficult.
It would be very risky to assume that their advantage will continue in the next 20 years.
I certainly meant it in that sense. I'm not accusing the Medallion of illegal front running.
I think people like Brad Katsuyama and fixing the "early information" problem are the answer to this kind of behavior. Katsuayama is working on a system to make the fight between high frequency traders and other investors more fair. Good write up is here : http://www.nytimes.com/2014/04/06/magazine/flash-boys-michae... ...
"Coil the fiber. Instead of running straight fiber between the two places, why not coil 38 miles of fiber and stick it in a compartment the size of a shoe box to simulate the effects of the distance. And that’s what they did."
Brad Katsuyama's dark pool is definitely deceptive.
Play on.
He is much more than an investor. He takes a large enough position in his investments so that he has control (or major influence) in how his companies are run.
From https://www.gsb.stanford.edu/insights/what-it-be-owned-warre...:
"The subsidiary chiefs also believe their companies’ performances are better under Berkshire (and even better than if they were stand-alone companies). Respondents point to Berkshire’s brand value and financial strength. Another reason? Berkshire lets CEOs focus on a longer performance horizon than they would expect under other ownership. Although each CEO varied on what that horizon would be, with estimates ranging from three years to 50, they all said Berkshire management encourages a long-term focus."
This is narrowing the problem to growth investing. Most high-net worth individuals care about growth investments only tangentially, the agenda is usually income generation.
With income generation one can consistently beat the market year over year over long term. Simplest examples would be a cash-flowing real estate investment at an attractive entry price.
If you believe that public markets are efficient, then it also implies that by the time you're on the buying side, any inefficiency and pricing discrepancy has been squeezed.
I'm not sure what the performance was in 2005. In 2006 they were down 16% (because of premiums on their CDS positions) which they then recouped in 2007 and early 2008.
Is there any objective evidence that there are people who consistently beat the market, over the long term? (And let's factor out those who use insider information)