And I speculate that their outsized gains are due to market manipulation, front running, or other insider activities (as in, illegal/unfair).
No one is smart enough; no algorithm or model is future-proof; nobody gets returns like this unless they define the scenarios themselves.
as a former insider at a different, less successful-than-rentec-but-still-successful firm, I doubt it. They have better data, technology, and employees than most other market participants. So then the question is how did they get there:
> No one is smart enough; no algorithm or model is future-proof
I agree with the sentiment, but the way it worked was in the early days, it was much easier for one person or a small team to get those advantages. Then, as the market matured and simple algorithms became less profitable, they made new, more complex ones. It became harder for new entrants to jump-start the whole process from scratch. Simons started rentech in 1982. Teleport that Simons to today and his fund probably wouldn't even get off the ground. He would still be a genius, but a billionaire? I don't think so. As you say, no one is smart enough. It was right place/right time, and they built on their advantages.
I had read this[1] and seen some other things about his activities.
Since Mercer and his family seem deeply wrapped up in something that has some worrying ties to hostile foreign nations, a company who has been recorded saying they've done REALLY shady things along those lines, etc...
How feasible is it that RenTech used similar technology and god knows what data to directly impact the geopolitical landscape, and traded off of that? If you can for example...create major disturbances in certain areas, or draw certain attention to various things at a certain scale, could that impact markets?
I want to clarify that I know absolutely nothing about the regulations and mechanisms in place to catch such a thing with the SEC, etc., and don't want this to come off as a conspiracy theory. It's just...with what's come out so far the conspiracy is kind of writing itself, so I wouldn't be surprised if something like this were at play.
[1] https://www.institutionalinvestor.com/article/b17q91wjnnr68x...
What keeps me up at night is not rentech but state actors, like you said, hostile foreign nations. They have the resources to pull it off and plenty of motivation...trading profits would just be icing on the cake, really.
Here's an amateur-level manipulation example you may find interesting [2]. Could rentech do this more subtly with 10x impact? Like I was saying, it may be feasible...still kinda doubt it. If this happens my guess it would be a fund that was no longer profitable, on it's way out, they have nothing left to lose, all this computing power laying around...
[1] https://www.bloomberg.com/opinion/articles/2019-02-27/windst...
[2] https://www.bloomberg.com/news/articles/2017-04-21/german-so...
And you assert this on what basis? There's enough that's been published to get some broad idea of what happens within the firm.
> And I speculate that their outsized gains are due to market manipulation, front running, or other insider activities (as in, illegal/unfair).
If they were engaging in illegal activities, it's very likely the firm, which is undoubtedly scrutinized by regulators, any such activities would have been discovered.
> No one is smart enough; no algorithm or model is future-proof; nobody gets returns like this unless they define the scenarios themselves.
RenTech constantly updates its algorithms. Alpha decay is a well known phenomenon. The firm utilizes sophisticated risk management techniques in order to avoid drawdowns, in all likelihood. Assuming this is the case, they're able to more effectively compound returns while simultaneously levering positions. Here's an example of a risk parity strategy [0], which may help explain how risk management works.
[0] https://towardsdatascience.com/ray-dalio-etf-900edfe64b05?_b...
There isn't one smart guy or one great strategy - there are dozens of smart guys and loads of strategies and they can win because they outsmart the city types.
https://www.amazon.com/When-Genius-Failed-Long-Term-Manageme...
As I remember, beaucoup back testing, hilarity ensues anyway.
*edit: I'm not a serious student of this aspect, but I recall that none of the top independent hedge funds took a bath in the 2007+ collapse (that is, those that weren't in-house funds from a major wall st. company). They all had their risk management in order and all did pretty well in buying distressed assets. Some like Bridgewater really managed to grow non-stop right through that.
Coming up with the predictor is often the hard part. For example, take the tweets of a (sane) president and run sentiment analysis on it. If it is positively correlated with mentioning an equity, the sentiment of the tweet might be a good linear predictor of the stock price.
The math is simple once the feature is well defined.
Feature development is the current frontier, as I understand it.
This is false. RenTec generated outsized returns for a decade prior to entering into the derivatives with Barclays and DB beginning in 2000.
> the bulk of their profits beyond what would have been made just investing in an index fund
This is also false. For example, RenTec generated 99% return in 2000 net of fees, while the S&P 500 lost ~8%.