[1] Deception also prevents the making of kings, as in the case of the man who believes magic is what he'll need to succeed, and it's this magic he doesn't have.

Well yeah so now instead of a super intellect you need grit. Good luck with that if you're born a low energy lazy person. :-)

They're also heavily dependent on collaboration with others, availability of data, the existence of the right tools, and so on. Unlike in comic books, raw intelligence alone doesn't get you very far. But put a bunch of very smart people together for a decade+ with a lot of money on their hands and you can definitely make magic happen.

what about solo tech start-ups?

e.g. - Newton's investment in South Sea Bubble - Long Term Capital Group with multiple noble laureates imploding so bad that it almost took down Wall Street in late 90s (When Genuis Failed is a fascinating read

Seems like if you find an edge, trading on it removes it so others cant see it and copy.

Also these strategies don't scale infinitely. Medallion Fund is closed to investors presumably because they can't deploy that much capital towards whatever the strategy with an edge is.

One interesting bit from the book was that the strategies did not revolve around speed. It's not high frequency trading, or at least wasn't, but much slower moves.

You can build a massive city in the middle of a desert with edges well under 5%.

"Secret sauce is always 'insider trading'"

He expanded on that a bit to also include buying up all the critical fiber nodes between the trading datacenters, and also laying down a new kind of fiber side by side with the old ones that's a teensy bit faster, and most critically, it knows how much faster it is. But the really big breaks - again, according to this buddy, who of course none of you know, so this has zero credibility - always come back to what's basically spies.

I don't think he's correct because of simple economics - spies and insider trades aren't going to be a smooth curve, and your investors will be pissed if one year you give them 5000% and the next 12%. Sure, you can move the money around to make a curve, but will your board let you do that? But yknow what? I don't work in the industry, so benefit of the doubt goes to the buddy who does. I'm not sure I could deal with working in the industry, given that the financial industry's done more to break this country than any other singular force. I would overdose in irony.

[1] He's a very cynical man

    <100% SPECULATION>

Now imagine that you open a fund and start stealing from your customers using this transmission mechanism as a back door. No good - the performance of the fund will be poor. Nobody would buy it except for suckers, and suckers can be exploited without need for this kind of subtlety.

Now imagine that you open two funds: "Gold Medal Fund" and "Bronze Medal Fund" where the transmission mechanism is used to make Gold outperform and Bronze underperform. You still have the same problem, right? Nobody wants to buy Bronze Medal Fund. Ah, but now you can call up Joe Money Manager and offer him access to Gold Medal shares if he sells his clients Bronze Medal shares. Joe has heard that Gold Medal Fund outperforms, he wants those shares. Bronze Medal Fund hasn't been performing great but it has a plausible sounding thesis, big-name backing, and looks respectable enough for Joe to recommend, so he does.

Bam. You have now created a scalable mechanism for stealing investment returns from rich people who delegate their investment decisions. The best part? At almost every step it can be disguised and denied unless someone can unwind and prove the technically sophisticated transmission mechanism itself.

    </100% SPECULATION>

I would be interested in hearing why you find it more plausible.

I'll start. I find it less plausible because you actually go to jail for that.

Hiring as an edge makes a lot more sense. Quant trading is often not about a single strategy but about the sum of many small ones. And other quants that have been taking similar hiring approaches also had incredible success (eg. Jane Street, Citadel, Jump Trading, Optiver, etc). RenTec just has a reputation of being "the best", which in turn makes the best people more likely to join them, which again in turn makes RenTec better, like a vicious cycle.

I also want to mention that in some years, there's a massive discrepancy between RenTec's internal Medallion fund (+76% in 2020), and its external funds (-19% to -31% in 2020). Not saying there is something to it (they never claimed using the same strategies), but it does seem at least a bit suspicious.

Weren't you meant to make the case for insider trading? This isn't insider trading.

> I also want to mention that in some years, there's a massive discrepancy between RenTec's internal Medallion fund (+76% in 2020), and its external funds (-19% to -31% in 2020). Not saying there is something to it (they never claimed using the same strategies), but it does seem at least a bit suspicious.

Are you telling me that the insiders keep the good stuff for themselves and the outsiders get fucked? I don't find that suspicious at all.

For example, maintain a portfolio across as wide an asset base as possible, while trading each asset frequently enough that any insider trade inserted into the mix looks random, or at least plausibly deniable, and thus a low-odds case for the SEC to prosecute.

The low-latency networks you're alluding to exist but there is nothing nefarious about them. They aren't insider trading they are just getting market information faster than almost all other participants. I also don't think RenTech does this, it's more of an HFT strategy, and the HFT industry as a whole makes a few billion in profits per year, a lot of money sure, but it's not a huge amount when you consider how many transactions they are involved in.

Also, while the financial industry has caused some major blowups and bad actors often go unpunished it's a crucial part of any developed country and enables almost all big projects to get funded.

It could be that an early algorithmic advantage compounded into an incumbency advantage: better research tools; better data; better pay for better scientists.

The 'secret sauce' may have started out as novel discoveries and, over time, become 'just being RenTec'.

Most of the alpha in the traditional hedge fund world often just boiled down to getting away with insider trading. It was so rampant that it was just part of the game. The stuff we all heard about in the news was just the particularly egregious stuff the SEC HAD to blow up. But if the SEC prosecuted every instance of anything even remotely insider-y, there would have been no hedge funds left.

(Now to be fair: I'm not really speaking to Renaissance - just to the general industy in the early 2000s. I think other commenters have made compelling points that Renaissance may very well have some actual special sauce.)

I don’t think it’s possible to get sustained outstanding results without being part of the insider circle. As far as I know one of Warren Buffett’s close relatives was in Congress which probably also gave him access to people most regular citizens won’t have.

It's easy enough to do, but it requires a strong culture of honesty to not trick yourself. For instance you can regress performance based on 32 different lags on another variable and you'll almost certainly find spurious correlations. But in a more comprehensive framework you can adjust your score to account for such a search.

The people in the book state that they see the data no more than numbers and don't even try to come up with a story. And they can only do so because they trust their system to handle spurious correlations

1) Trading PnL is very steadily profitable for their main fund. It must be trading a lot and winning due to the law of large numbers.

2) Their futures fund has normal returns. It looks like a lot of other CTAs, which also are not trading on subsecond time scales.

Chances are they have some mix of liquidity provision and arb strategies in Medallion, which normally is not a hedge fund, but they started in an era where that was what people did, so they ended up with a hedge fund and gaining reputation as such. This is also why we know anything at all about the returns. Nowadays you would have a prop trading firm and nobody would know, but people who know, they know the returns are quite steady.

In fact IIRC the book mentions specific people they'd come across in the early days trading certain kinds of strats that are known to be profitable enough to beat your average hedge fund. My guess is they found a few of these and refined them.

For the CTA strat, they run a hedge fund because that's the appropriate vehicle for a thing with a sharpe/information ratio around the 1-2 range.

The thing that really makes it work for them is probably incumbency. They've been around forever, people in the business want do business with them, and they know where all the landmines are, both in regards to trading strategies and legal/business framework. Even if you knew the strategies you would struggle to set up all the infra, contracts, relationships, and so on.