The "it's a scam" theory that I heard had nothing to do with it being a Ponzi scheme, instead it was about laundering high-tax income into low-tax capital gains while maintaining a plausibly deniable investment cover story. It didn't have to beat the market, it just had to beat regulators.
I have nowhere near enough domain competence to comment on the plausibility of that scenario, other than to say that I suspect if it were that easy everyone would be doing it, so on those grounds alone I suspect the conspiracy theory I heard was incorrect. Someone more invested in the idea that it's a conspiracy would likely just argue that it isn't easy to be good at this or that there are economies of scale, so only one dominant player. Shrug.
There are public swap-based ETFs (in Canada) formulated around this concept:
That sounds like misdirection. It's very common for hedge funds to use tons of leverage. It's not like getting this level of leverage is an unsolved problem.
On the other hand reducing your tax rate from 37% to 20% increases your returns by 27%. Even that would be valuable, but the real number is probably even more than 27%.
A podcast interview with the author:
* https://awealthofcommonsense.com/2019/11/talk-your-book-greg...
* https://awealthofcommonsense.com/2019/11/non-intuitive-lesso...
My best guess is that it's a combination of luck, skill, and hindsight bias. Rentech probably had (has?) an edge. They were also partly lucky: in investment, you can do everything right and still lose money. There were also many other players: had LTCM not blown themselves up, we might be marvelling at their investment prowess now.
I’ll link to the Wikipedia page below for the math, but these figures would highly suggest that their returns are much less likely the result of luck, and more likely the result of some edge/alpha generation.
They're famous because Medallion is the best performing quant fund. Even if quant funds were just chumps tossing coins, if you pick the best of a number of them, you'll get something that looks good.
Now that maths still doesn't stack up that they were just lucky - they probably had skill too. But I think it's more likely that they had a modest edge and were lucky than it is that they had a large edge and got an average result.
https://www.lesswrong.com/posts/dC7mP5nSwvpL65Qu5/why-the-ta...
Luck means making big returns, skill means doing it with low volatility and high Sharpe.
For example, you might make a (successful) bet that works only in a low-volatility environment; if it works, your ex post Sharpe ratio will look ingenious.
But, if a given fund (Medallion in this case) is able to thrive/survive during the 1998 Russian financial crisis (which felled LTCM), the 2000-2004 tech bubble bursting, the 2007 quant quake, the 2008 financial crisis, and 2010 flash crash, it would seem to suggest that their statistical arbitrage strategy performs well in all manner of environments.
After their very hefty 5/40 fees, their worst year between 2001 and 2013 was a 21% gain [1].
I understand that there are all manner of epistemic and mathematical problems that prevent us ever from completely disentangling luck and skill, but a conceptual framework like "The Superinvestors of Graham and Doddsville" would seem to apply here. I.e., after a long period of consistent overperformance, the case for skill starts to look much more likely.
There's no need for the aggressive tone.
> Sharpe isn’t changed by leveraging.
Indeed, volatility is, however.
This is nonsense. Rentech makes 1000s+ of transactions per day across numerous asset classes. It is 99% skill. It’s black box automated.
Who has audited these numbers and what is your source specifically?
I‘m aware of Rentec for many years and also awed by the numbers but I‘ve always wondered where do people actually get them?
In particular: RenTech likes to keep a handle on this publicity for the purposes of courting extremely good talent from academia and industry. That's the only reason the Medallion returns are ever intentionally publicized. Anyone investing in RenTech's other funds knows full well they're not getting the alpha powering Medallion's returns.
Simons would probably have preferred to stay entirely under the radar, but the cat's out of the bag already and has been for decades. The most successful hedge funds (like the Princeton Alpha offshoots) don't court publicity because they don't need to pool risk with outside investors. They're not even hedge funds in the common sense of the term; they're proprietary trading firms run on employee and partner capital. Medallion can be thought of a prop shop within a hedge fund in that way.
Also, what Princeton Alpha offshoots? IIRC, Princeton Alpha was a PDT spinoff that closed due to poor performance. Maybe you mean Princeton/Newport offshoots?
The probability of my particular shuffled card deck is around 1E-68: vanishingly less likely. Therefore I think we can all agree we can reject the null hypothesis that my card deck was obtained at random. /s
Highly unlikely things happen all the time. Their occurrence should not be ascribed to alpha due to occurrence. The probability of occurrence due to occurrence is of course 1.
Moreover, I don’t think you or anyone else actually applies your logic in your own life. If you did, you would be dead because of your disbelief in reality. For example, you migh conclude that eating is unnecessary, because the people who starved to death were just unlucky and that in fact, there’s been no “proof” that people need food at all. Or even proof that people exist at all!
So yes to us little people it is insider trading. But I’m 99% sure it is real alpha at the core.
There are other possibilities. For example shifting profitable trades that occurred in their external funds to their internal funds. In which case it is partly a 'scam' and they would not be scamming their own employees.
We don’t live in a world of wizards. When impossible feats are delivered on schedule for years without others figuring out is a hint that something is up.
Someday, we’ll learn about whatever combination of corruption, grift or other bullshit that was lurking behind the curtain.
An example of such information would be information gathered from insiders at other corporations or industrial espionage.
It's more likely, in my view, that they've created a world-class industrial espionage outfit than that they've "solved the market" for decades where virtually everyone else has failed.
On the other hand, if they really are cheating, I'm not sure why the US government (who doubtless has penetrated them with their own spies) has let them continue operating for all these years.
Intel analysis is more CIA/DIA.
My understanding is that this was generally true in the 1960s-70s as well. E.g., MINARET:
Think about the quality between Google Maps and Apple Maps when Apple maps was first launched. Apple even hired a bunch of ex-Google Maps employees to improve their product, so it likely was using similar algorithms, but with worse data. Apple though had the luxury of gathering every iPhone user's location data though to build up their dataset. In Rentech's case, a competing hedge fund would not only have to build out the team and infrastructure, they would only likely lose a lot of money at first to gather enough data to have a similar edge. There were a lot of HFT firms like Jump, Citadel's unit, Getco that generated very impressive risk-adjusted returns for a while, but I don't believe it was close to Rentech in terms of capital capacity and number of years.
You can't. Renaissance only hire ~100-150 people, their strategy is very much based on only hiring the best of the best. This is nothing like tech. Tech firms employ thousands of engineers, you have to employ average people if your demand is this high.
Jump and Citadel aren't trying to do what RenTech does either (it is very hard and very risky). They do a lot of HFT, afaik Jump is just a market maker, so they are more like tech companies in that they do not need geniuses. They just need competent bodies at scale who won't blow up the company.
1. S&P 500 returns are log-normally distributed with a log-return of 10% and volatility of 10% 2. RenTec made a mean annualized return of 71.9% over 20 years 3. The returns of RenTec are independent from year to year
We get a P<1.64E-14. Therefore, I think we all can agree that we can reject the null hypothesis of RenTec having no alpha.
And before someone says that it's a scam, there's no outside investors in the Medallion fund anymore, so if it is a scam, they would only be scamming their own employees. And if that was the case, I think we would know.