No, it doesn’t. The first and most obvious observation: the basket options described in the report were not utilized until 2002. Renaissance already had 14 years of ~70% average annual returns (~40% net of fees) by that point.
Second, Renaissance stopped using these derivatives in 2014 (though they’re still fighting the IRS on back taxes, last I heard). Surprise: they’ve still been up ~39% in 2014, ~35% in 2015 and ~22% for the first half of 2016 (again, net).
To be clear, I’m not saying I agree with their utilization of the Deutsche and Barclays basket options. There is a lot of creative financial engineering that happens in the industry. But like most of the other topics that come up on Hacker News, the reality is far too nuanced to be dismissed in the offhand way you’ve done here.
At best, their tax maneuvering amplified the alpha already present. The basket options provided leverage, which obviously boosted returns. However, leverage will only improve a strategy’s returns, it cannot (on its own) improve risk characteristics or increase win rate consistency. Leveraged beta is still beta, and leveraged alpha remains alpha when you decrease the leverage (though the returns will be lower).
And in my previous comment to you, literally the one you replied to, I explained that this is not the case. Re-read my comment. Their strategies have alpha distinct from the leverage (because, again, leverage is not alpha), both historically before the tax maneuvering began, and since the conclusion of its use.
Then neither are you, and this entire discussion becomes rather meaningless, wouldn't you say?
What we do have are public numbers that indicate, whatever the strategies may be, their returns exist independent of tax-advantaged leverage.
This said, please elaborate, how exactly could they turn a strategy losing them money around by pumping more money into that?
If that's the stance you want to take, it works both ways. You are no more qualified an outsider than anyone else to evaluate their strategies. But given the available evidence, your position is on shaky ground.
> Second, the Medallion fund cherrypicks the best strategies, so we don't know what the global return is, just the Medallion return, which is reported for PR purposes. To the extent that the strategies have been revealed, as in this Senate report, the strategies rely on fraud and illegal levels of leverage.
This is more complicated than you imply. Medallion uses strategies which have lower capacity constraints and risk, which is why only employees are allowed to invest in it (they don't need outside capital, and they don't need to share risk with investors). Renaissance could close up shop to the outside world completely, but the fact remains that if they are consistently developing strategies for Medallion, they are consistently developing alpha. This alpha is not nullified because they have other strategies that perform worse, because on any realistic timeline they can abandon one and favor another. They would simply not use the strategies which they feel require risk pooling (i.e. capital from outside investors).
Furthermore, the returns are reported by various news outlets which do get to audit them, even if the general public cannot. If you're willing to pay for the information from hedge fund performance indices, you can get it. Which circles back to my original point - regardless of where you stand on the strategies documented in the Senate report, Renaissance has enjoyed those returns both before and after the use of the tax maneuvering.
Leverage does not create alpha or consistency on its own, it only amplifies the returns (positive or negative) thereof. To make my position very clear: again, I'm not saying I agree with the tax maneuvering; I simply disagree with your dismissive characterization of the firm's returns.
If so, where do the "loser" funds go? The clients?
If you were actually right about their tax cheating, the IRS would have been able to successfully mount a challenge to their tax returns at least once in the last 40 years. Despite his contributions to Democrats, Republicans have been in charge for much of that time.
And $6B in lower taxes for RenTech over the years is a tiny benefit in regards to their size.
https://www.opensecrets.org/news/2016/06/a-hedge-fund-house-...
Basically, the Senate report alleges that Rentech evaded leverage limits (6x capital) and used the balance sheet of their broker to operate basically as an unregulated market maker. So the two keys to Rentech's strategy were a) illegal levels of leverage and b) evading taxes on short term gains to the tune of $6 billion. Once you dial down the leverage and pay taxes, the alpha disappears. One firm rejected the scheme as illegal and the emails from that firm are in the report. The scheme uses the broker as an illegal front, which is what the firm lawyer immediately recognized.
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...