Re:Medallion Fund “Stretches Explanation to the Limit,” Prof...
by scottious on Wednesday January 29, 2020 @09:06AM
(#22180564)
Yes very possible I don't understand what you are trying to say... I know what leveraged investing is but a lot of the details may be beyond me. This is not my area of expertise.
Correct me if I'm wrong: my understanding is that you're saying that they could have taken a huge risk using a lot of leverage and they didn't lose all their money so they get their 5% + 44% (found this from a Bloomberg article). Essentially they're just the notable outliers and have been for 30 years? If so, that still seems a little far fetched for me.
Re:Medallion Fund “Stretches Explanation to the Limit,” Prof...
by smabie on Wednesday January 29, 2020 @09:28AM
(#22180815)
RenTec does use a lot of leverage, but they only can do it because there Sharpe ratio ((return-riskfree)/volatility) is over 7x. This means that if there fund had a unlevered return of 3.5% then their vol would be 0.5%. Let’s say their risk limit is to cap vol at 10%, this means that their theoretical return would be 70%. It doesn’t exactly work like this because of volatility drag. If you’re interested check out my blog post on the topic: https://smabie.github.io/posts/2019/10/04/vol.html
If you were levered x3 on the nasdaq in 2001 you would have lost all your money. Heck, even 1.2 would have lost you everything. Ditto 2008.
Having all your assets levered long term, that much, it’s risky and something you would only do with your personal capital anyway. Funds usually do that for shorter amounts of time and with a small percentage of the total assets.