Even in the early 1990s, Simons had basically checked out of the fund and was mainly doing venture stuff. He clearly made some good hires pre-1990s (I can't remember but the data guy clearly seemed to give them a huge edge over the competition, they clearly had data that no-one had) but it was that sequence of hires after this point that really elevated things: Peter Brown, Nick Patterson, Robert Mercer, etc. Very humbling. Of course, everyone will continue to think the strategies are the secret sauce.

Also, I think it highlights that quant investing starts out being very scalable but stops scaling quite quickly (and most similar firms hire people that, on paper, are very smart and get nowhere...so RenTech is the best example of scalability). At the top end, fundamental investing is still more scalable (which is what common sense would indicate).

As an aside, the article is totally pointless. Finance professors are engaged in an argument with themselves. They know they believe things that make no sense, and so spend all their time grappling with facts to fit them into their model. Humans do not reason perfectly, when you put a trade on you move the market, effects can last for ages (you have pure arbs that take years to close)...the whole discussion is just non-sensical, and any academic examination of finance should start from reality, not what theories are fun to teach. It is kind of tragic to see intelligent people do this to themselves...but some people just prefer Haskell to Python.

But I also disagree from the point that if physics did what you suggested we'd be no where at all. If they had to start with reality before producing useful models then we would of skipped pretty much all of modern physics today.

All models are wrong, but some are useful as they say.

These models aren't useful. Also, the saying is wrong. The reason why is that close to 100% of finance professors will quote that saying (srs, I think I have heard this 20-30 times now) because they use models that are wrong and not useful but this model seems to give them an intellectual reason for doing so: any "wrong" model could actually be good, according to this idea. But wrongness is neither nor there because wrongness for a model is utility, they are identical. The only point is utility. And the reason why these models aren't useful, as I have said already, is that they aren't used outside of academia. Their only utility is giving finance professors something fun to teach. And again, the solution is to build models from the way the world actually is (and btw, these are numerous...almost every successful investor, fundamental or quant, has a systematic process...but these models aren't fun to teach).

I'm not sure which models you are talking about - but models such as Modern Portfolio Theory, or Black Scholes, while inherently flawed have been massively useful in the real world. Claiming they aren't useful is simply not true. But again, you don't mention any specific models so it's hard to even know what you are talking about.

I mean all of them. Black-Scholes was used in industry before academia, and is only used in a heavily adjusted form (for example, option MMs have never used it as the only pricing input). MPT isn't useful: volatility doesn't describe risk to any degree (possibly as you move to the limit of retirement age...but then, not really), the empirical relationship is actually the inverse of that predicted by MPT (i.e. the model is not only wrong, it is misleading and will cause you to lose money), and it is easy to construct superior models that beat MPT models in every way (and even those aren't very good because they often use the same theoretical underpinning...again, most of these models exist because the subject needs to be taught in universities and needs to build on stuff learned earlier...the practical use is zero, which is why no-one really uses these theories...the only place I have seen them used at scale is in investment consultancies, and most of these places are clueless).

Many finance professors strike me as the kind of people who critique the design of a hammer without having ever built anything themselves. Every tool has perks and limitations, and the challenge of using that tool is to figure out what those things are and get them to bend to your favor. BSM is the lingua franca of the options market and can be tweaked in practice to accommodate many limitations (skew, event volatility, etc).

The point is to make money. If the tool helps you do that, then it's a good tool.

During the next three years, you keep evaluating the opportunities to reverse your transactions, but always calculate that you will make more by continuing to hold the short futures contracts and the copper. You thus end up in the arb for three years.

Commodities futures contracts are a very tangible example, but my understanding is that the pattern is much more general. Most futures arbitrage trades made by large multinationals are fundamentally these sorts of storage cost arbitrage and/or funding cost arbitrage. (Funding cost can be thought of as a storage cost for money/debt.)

For instance, my understanding is that trading stock index futures vs. a replicating basket of single-stock futures is usually a matter of finding ways to secure funding more cheaply than your competitors. In this case, your competitive advantage is fundamentally linked to time, and exiting early reduces your competitive advantage.

Not a pure ARB bc of dividend and interest rate risk, but it's close.

Nothing humbling about hiring a deceitful guy like Mercer. Of course, this being a technical website and everyone needing something to believe in there are people who say that this company's success is mostly based on its technical achievements (and on the people that helped implement those technical achievements), but looking at the character of people like Mercer that success is probably most likely based on stuff like insider trading.

It could be that smart businesspeople realize that employees can have diverse political views, and those views don't have to be at the centre of every discussion.

Also the data back then was much harder to acquire. Bloomberg didn't even exist at the time.

There was no Bloomberg but there was compuserve and AOL and usenet and various other forms of financial forums.

Any market-beating strategy will no longer work when the market adopts it. I.e. if you have such a strategy, keep it to yourself as long as practical.

However if your strategies are well known people typically won't pay you much (if anything) to manage their money, because a bunch of shops will be offering comparable results with the same thing.

Continuing with risk parity: there are walkthroughs of how this works with code and math available online: https://cryptm.org/posts/2020/08/01/parity.html

Note the alpha, beta, volatility and Sharpe measures comparing a straightforward risk parity strategy to SPY.

It's not controversial to anyone in the actual industry that you can beat the market on a risk-adjusted basis. Very often the techniques for doing that are well known and can be levered up to safely beat SPY on a total basis with less overall risk. What's truly difficult (and secret) is beating the market by several standard deviations.

I don't know anything about this blog^[0] , but I wanted to find some charts comparing a well known risk parity fund to more general portfiolios. Trusting that they're accurate, it looks like risk parity performed great in 2008, but hasn't beat the market over longer periods of time. Even measuring from 2007 to late 2020, it appears a 60/40 bond fund has beat it substantially.

Thus I'm not really sure what grounds there is to say risk parity beats the market. Certainly not by all measurements. I'm not a huge financial guy though, maybe I'm misunderstanding something?

[0] https://www.evidenceinvestor.com/the-all-weather-portfolio-e...

Sorry, I meant you don't need to find a book, you can find the info online.

The problem for me going forward is that these returns for the last 40 years have been do to falling interest rates. Can the rates keep falling? A little bit more. Will they go negative like some other countries? Maybe? But at some point I have to wonder if this strategy is still viable.

Are there any mutual funds or ETFs which follow it?

This simply isn't true. Sometimes there are dollar bills on the ground. It takes a lot of years for everyone to pick them all up.

Keep in mind that the efficient market hypothesis disproves(TM) starting a successful business just as well as it disproves finding a successful trading strategy. ie: if that were a good startup idea, someone would have already started it, so it can't be an opportunity any longer. EMH is a useful tool but in reality it takes a long time after a fundamental shift creates an opportunity for it to be arbitraged away, and sometimes the opportunity ends due to another fundamental shift, not due to people arbitraging it away.

Keep in mind that changing an investment strategy is simply changing the algorithm used. If I was running a fund returning 7% yoy, and yours was returning 10% yoy, you bet I'd be telling my staff to try out your algorithm.

Magellan was the biggest fund in the world until other funds adopted their innovations and it pretty much reverted to the mean.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...

(Disclaimer: this is not an endorsement)

the downside to this particular fund is the extreme turnover in the fixed income component (only suitable for tax-free accounts) and the interest rate risk; the fund could underperform SPY in a world with increasing interest rates (which is where many traders believe we are now)

Almost all people will immediately balk at the idea of using leverage in investing, despite the higher backward-looking risk adjusted returns. This is especially true when it might be statistically better, but in various stretches (eg. Last March) it does worse.