HN Theater @HNTheaterMonth

More of a Musk fan myself.

Since you mentioned him, Jim Simons has a really good interview too and it was pretty cool to hear his story [1]. Worth a watch if you haven't seen it and are into RenTec.

[1] https://www.youtube.com/watch?v=QNznD9hMEh0

Numberphile have done a pretty good interview with him which is worth a watch. There is both a full length 1 hour interview [0] and a cut down interview running 18 minutes [1].

[0]: https://www.youtube.com/watch?v=QNznD9hMEh0

[1]: https://www.youtube.com/watch?v=gjVDqfUhXOY

There is a Numberphile interview with him that I remember being pretty interesting https://youtu.be/QNznD9hMEh0

Funded by billionaire mathematician and hedge fund founder, where the algorithms make all the decisions

https://m.youtube.com/watch?v=QNznD9hMEh0

1976 winner of the Oswald Veblen Prize in Geometry

https://en.m.wikipedia.org/wiki/Oswald_Veblen_Prize_in_Geome...

⬐ tobmlt

Aka, the Simons in Chern-Simons theory.

(Albert Schwarz formulated Chern–Simons theory, a topological quantum field theory, using the Chern-Simons form)

⬐ thechao

The person referenced above is “James Simon”.

⬐ superbcarrot

Simons*

Mostly known for being the founder of Renaissance Technologies which is one of the largest and most successful hedge funds.

⬐ angry-tempest

Also the Simons Foundation, which funds the Simons Institute, which is just fantastic

Collected takeaways from “The Man Who Solved the Market” - a (good) book about Jim Simons and RenTec that ring plausible to me at https://twoquants.com/decoding-rentec/. A good Simons interview (by Numberphile) is https://youtu.be/QNznD9hMEh0.

> The Medallion fund has been closed to external capital since 1993, and analysis of the flagship fund’s annual returns suggests that significant distributions are made each year to keep the fund about the same size. For example, despite the fact that Medallion reported annual net returns above 29 percent every year between 2010 and 2018, the fund’s assets under management stayed at about $10 billion throughout that period.

This suggests to me that whatever opportunities they're exploiting, they would vanish quickly if they would increase the fund's size (e.g. by compounding returns).

It's worth taking a look at the Numberphile interview with Simons (https://www.youtube.com/watch?v=QNznD9hMEh0). There he suggests that they're mostly using ML and other relatively simple techniques, with a bit of more advanced math when it comes to predicting how a trade will move the market. This chimes in well with the idea that they have to keep their trades relatively small in order to remain this profitable.

Heres Numberphile interviewing James: https://www.youtube.com/watch?src_vid=gjVDqfUhXOY&v=QNznD9hM...

He's a MIT/Berkley Math professor.

⬐ dhruvmittal

I met him a few times when I was a grad student at Stony Brook (Physics). I can't speak for his particular math skills, but he's in possession of an incredibly sharp mind.

The Simons Center for Geometry and Physics has an art gallery and an associated lecture series, and James often shows up to participate in these events. Luckily, these events are free to enter for all graduate students. At one of these events, I'd commented that a particular piece reminded me of a crystalline structure I was interested in studying (as a li-ion cathode). James overheard me and came over to quiz me on some of my group's work. About 8 months later, I ran into him at another lecture. While he didn't remember my name, he asked how my hollandite simulations had turned out.

This anecdote doesn't really prove anything, other than that Dr Simons is a pretty cool dude.

the full length one is very good. it gives an understanding as to why simons has been so successful.

https://youtu.be/QNznD9hMEh0

I don't subscribe to wsj, so I can't read the article, but Simons was on Numberphile a while back.

https://www.youtube.com/watch?v=QNznD9hMEh0

⬐ hellofunk

That’s why there is a web link above.

⬐ Stratoscope

Ah, the glory days when that used to work with WSJ. I can't even get the freewsj.com trick to work any more.

⬐ dangoldin

There's an AMP workaround I found a few years ago that surprisingly still works. Basically open up the article as an AMP page and then disable the HTTP request to the access module.

More context here: http://dangoldin.com/2017/04/16/amp-and-subscription-paywall...

⬐ hellofunk

Worked for me just fine.

⬐ chockablock

Worked for me just now. ‘Web’ link took me to a Google search page, clicking through to article gave me full text.

Article is about this book that will be released on Tuesday.

https://www.amazon.com/Man-Who-Solved-Market-Revolution/dp/0...

This Numberphile interview with him is interesting:

https://youtu.be/QNznD9hMEh0

For anyone interested in a great story about a world class mathematician who built a company that has used algorithms to beat the market for the last few decades, James Simons has an impressive record:

https://www.ted.com/talks/jim_simons_a_rare_interview_with_t...

https://m.youtube.com/watch?v=QNznD9hMEh0

https://en.m.wikipedia.org/wiki/Jim_Simons_(mathematician)

One other thing, the Simons Foundation funds Quanta Magazine, whose articles frequently appear on HN:

https://www.quantamagazine.org/

⬐ inerte

Someone will always beat the market, because that's what we're looking for.

I think it was on "Thinking Fast and Slow" that I read it's pointless to analyze the stock market winners, since it's a random process. Imagine there are 30 million entities that own stocks in the US - individual, companies, funds, etc... If on a given year half of them did better than average (with some rounding liberty):

  1st year: 15M better than average
  2nd year: 7.5M better than average
  3: 3.25M
  4: 1.6M
  5: 800k
  6: 400k
  7: 200k
  8: 100k
  9: 50k
  10: 25k

And so on... after 20 years, probably 25 traders will have beaten the market for 20 years straight. Next year, same thing, 25 traders will have beaten the market, and so on. In the US, there's always someone who has beaten the market over the last few decades - there's nothing special about them. Randomly picking stocks would give you the same end result. But since we're storytellers, we build an explanation and go with it.

⬐ melling

Who said it’s a random process? Stock prices don’t go up randomly over the long term.

Joel Greenblatt had 50% yearly returns for a decade.

Renaissance Technologies uses algorithms.

Also, I don’t think you would expect someone to beat the market every year, but over a ten year period, for example.

⬐ ryandrake

I’ve got a roulette “system” too. Trust me, it even has algorithms and machine learning. I’ll sell you the book.

The discussion reminds me of a fun exercise we did in one of my B-school classes: everyone stands up and flips a coin. If you flip heads you sit down and stop the game. Everyone who flipped heads flips again, with the new tails flippers sitting down. At the end when there’s one person left, the prof interviews him, asking “how did you become so skilled at flipping heads?” and “what advice can others take to get as good as you!”

This is what we are doing when we admire stock pickers and try to figure out what their secret is.

⬐ mruts

Well Claude Shannon and Ed Thorpe did figure out how to beat roullette. And BlackJack. And then Thorpe figured out Black Scholes and made a killing in the markets trading warrents.

See my above comment about how statistics does not bear out your fooled by randomness theory.

⬐ gbronner

See also the Eudaemonic Pie

⬐ kasey_junk

I don’t have a dog in this fight but Ed Thorpe has one of his funds liquidated via RICO. He’s usually used as an example in the positive case for “only bad behavior gets outsized market returns” argument.

Scholes & Merton got famously wrecked in the markets.

⬐ bob_theslob646

This is the perfect example of broken telephone. (If you don't know the full story and fail to post any source)

The reason why they got the RICO.

"From 1969 to the end of 1987 the amount invested rose from $1.4 million to $273 million. Its limited partners saw their wealth grow at 18.2 percent annualized after fees. PNP had no losing years — and not even a losing quarter."

The regulators thought that it was a Ponzi scheme based off that information or did they...

"But most knowledgeable observers believed that the charges — filed under the Racketeer Influenced and Corrupt Organizations (RICO) Act — were also intended to get the Princeton Newport principals to testify against Michael Milken, the controversial “junk bond” trader who had upended Wall Street conventions and who had dealings with PNP."

The regulators thought that it was a Ponzi scheme, when in reality, they mastered the tax code and created losses via hedging, which was legal at the time.

"The resulting charges were related to trades that PNP had made to create losses that would offset corresponding gains that arose during the firm’s hedging maneuvers."

"The Princeton Newport attorney, Theodore Wells, a Harvard Law and Harvard Business School alumnus known for high-profile white collar criminal defense, argued that the trades were allowed under IRS regulations. They even had a former IRS commissioner, Donald Alexander, prepared to testify in their defense. The judge would not permit it."

>I don’t have a dog in this fight but Ed Thorpe has one of his funds liquidated via RICO.

First off, his name is Edward O. Thorp https://g.co/kgs/jfpjL1 not "Thorpe"

>Ed Thorpe has one of his funds liquidated via RICO.

Please post a source because almost all of the charges were overturned.

"Ed Thorp, who was not greatly affected by the criminal charges, was able to restart his hedge fund activity. In 2012 Thorp’s net worth was estimated at $800 million."

All of this information came from this source.

https://communitynews.org/2017/02/28/from-fat-cat-to-rackete...

⬐ rebuilder

Yes, given enough traders, you very much would expect some of them to beat the market consistently, over a decade or more.

⬐ neaden

An important difference. You would expect someone to beat the market every year for ten years just by chance alone, you wouldn't expect it to be any specific person. I expect someone is going to win the lottery, I just don't expect that someone to be me.

⬐ kolbe

If you think everything is just random, you should educate yourself the impact of superior information sources or technology on producing returns. Are you telling me someone who runs the fastest market data feed between Chicago and New Jersey, doing arbitrages between S&P futures and S&P ETFs is just getting lucky over and over again, and it will eventually be revealed that they just won 30,000 coin tosses in a row?

⬐ inerte

Correct. There are numerous studies showing professional traders (individual or companies) are in fact no better than randomly picking stocks. Just the sheer number of players and variables will eventually produce winners, then we will justify why it happened in the first place.

⬐ lbotos

I just watched a video today via this thread talking about 10k SEC documents.

Pull up Goldman Sachs, go to page 95ish:

https://www.goldmansachs.com/investor-relations/financials/c... (p. 95)

https://www.goldmansachs.com/investor-relations/financials/c... (p. 94)

look at the distribution chart. That's days where rev was positive vs. days not.

In the video they covered 2014/2015/2016 which I why I went a looked at 2017/2018. They are right a LOT. And year over year.

I don't think it's magic. I think they are paying attention and using information to their advantage.

⬐ bowcoy

This is a contradiction. You first assume complete market efficiency (assets are priced in) to support that the market is random and unpredictable. Then you say that a hedge funds' payroll is no better than random guessing (something you could scale up without hiring anyone). This means that quants are grossly overpaid (assets don't reflect their true price) and that the trader's market is highly inefficient... That's having your cake and eating it too: a rational irrational market.

And it is a hypothesis that can't be disproven or proven, since, in a round-about way, it concerns non-computable concepts like Kolmogorov Complexity/Randomness (The efficient market hypothesis basically states that the stock market is an optimally compressed computer program, there are no discernible patterns left to reduce the "file" size).

There are numerous tried and tested ways to beat the market, including:

- Have more information than other players - Have better models than other players - Make faster decisions than other players - Have enough energy to perturb the system and predict the outcome (this is the big one that is out of reach of most individuals and non-Physics PhD's).

Survivor bias is of course a very real phenomenon, but like other incomplete information games that can be won, or even solved, algorithmically: Poker, international diplomacy, ..., we would not conflate pure luck with the real skills required to play those games consistently well.

⬐ justinmeiners

Think about how the underlying market works though. Is success or failure actually a random process? Or are cause and effect relationships happening? Isn't it possible to identify traits of a good business that others aren't recognizing.

⬐ kolbe

Do you understand that 'studies' are not necessarily reality? I know the "I fucking love science" crowd has replaced priests with professors, but professors, their data and their logic are also highly fallible.

How about you go ahead and mock up a probability model about how a company like Jump Trading can make 100s of market neutral bets every day for ten years, and end up being lucky to make money on 95% of those days. The probability of that happening due to randomness around a 50% probability on each trade is probably lower than 1 in the number of atoms in the universe.

⬐ ryandrake

Reminds me of a fun exercise we did in one of my B-school classes: everyone stands up and flips a coin. If you flip heads you sit down and stop the game. Everyone who flipped heads flips again, with the new tails flippers sitting down. At the end when there’s one person left, the prof interviews him, asking “how did you become so skilled at flipping heads?” and “what advice can others take to get as good as you!”

⬐ Guph

It's not really random, the value of stock has more to do with popularity of stock than the data people like to analyze.

As long as people keep buying a stock, it's price will continue to go up. Same thing the other way.

Now also keep in mind I can sell stock and you buy it, and we can both make money as I bought my stock lower than you.

⬐ mruts

Okay, let’s do the math buddy. Let’s assume the null hypothesis (the market) has a mean return of 10% and vol of 10%. RenTec’s Medallion Fund has made 80% annualized return before fees in the last 20 years. Assuming the market is a random walk (it’s not), the chance of RenTec making >50% (I don’t think they’ve ever made less than that in 20 years) every year for 20 years is...

3.486 x 10^(-91)

The actual probability is a lot smaller btw.

Why do people keep posting this tired argument over and over? It’s not true. There’s no evidence that it is true. The math strongly suggests (see above) that you can beat the market.

⬐ ZephyrP

Somewhat unrelated but how did you derive the constants? It looks like you're trying to compute the straight-up probability of an 3.486%-odds event happening 90 times in a row and not attempting to characterize the probability of a random walk.

I didn't attempt to model this as a Markov process but took the simple route of computing the 1-CDF of 50, assuming mean returns of 5% and totally pulled-out-of-my-butt variance of 75. The number is still pretty unlikely (1.048*10^11) but it's within the realm of powerballs and not the more rarefied odds of finding 4 MD5 hash collisions with a single random try.

⬐ Macross8299

>Why do people keep posting this tired argument over and over?

Sour grapes. Easier to pretend _nobody_ beats the market than honestly admit you're not willing to put in the effort to constantly discover new alpha. And it's fine to not be willing to do that -- it takes a lot of effort and skill to discover alpha and most people will be better off improving their skills in their day job and just tracking indexes.

Doesn't mean it's impossible to beat the market, especially as a small investor where you have some advantages over larger players (your orders aren't large enough to move markets and reveal valuable information)

⬐ downandout

The math, at least when it comes to the Medallion Fund, says that you are wrong. The odds of being able to achieve 40%+ returns (net of very steep fees) over 20+ years are astronomically low. In fact, the odds of simply being in the top 25% of hedge funds for 20 straight years, through “randomly picking stocks” as you put it, are 1/(4^20), which is roughly 1.09 in 1 trillion. There have been less than 25,000 hedge funds in US history.

Yours is the kind of folksy explanation that appeals to the masses. It seems like the kind of thing Bernie Sanders would say in a speech. But in this case it leads to an astoundingly inaccurate conclusion.

⬐ actually_trades

This is the correct response.

For whatever reason, people seem to think "50/50 chance of beating the market" = 50% chance of generating 40% return on any given year.

Try randomly picking stocks over the last 20 years, and run 1 billion simulations and see if you get anywhere near that (even letting you have survivorship bias for free)

⬐ simtel20

> people seem to think "50/50 chance of beating the market" = 50% chance of generating 40% return on any given year

Yeah, quants like to coyly say they're figuring out where pennies might drop, and then they bring in leverage. Without the leverage, they'd be beating the market by less than a percent in so many cases.

⬐ 4ntonius8lock

Also, the people I've known who call themselves day traders, were inevitably people who weren't too bright and were unemployed with independent income (mostly trust fund babies, but some others who had supplemental income) - From my own personal experience, these people don't even know what EBITDA adjusted earnings are.

If a world class mathematician says he will do something, I see the probability of success wildly higher.

It's like when you go to a writing class, and someone inevitably is admonished for doing run on sentences, and then they say "well Charles Dickens did it". Why yes, he did. But you probably aren't going to have Charles Dickens levels of talent.

⬐ Silhouette

In my entire life, as far as I know I've only ever met one person who played the stock market manually and did well at it. It was almost a hobby for him. He enjoyed analysing individual businesses very carefully, and would look for clearly financially sensible opportunities that were effective at relatively small scales but overlooked by the big players.

A favourite type of investment that came up now and then would be a stock that had seen a sudden sharp drop in share price triggered by some announcement that sounded scary but actually made perfect sense if you understood the industry, so it panicked investors who were only looking at the numbers and left the price-to-book low or sometimes even below 1 at the time he bought. That's probably as close to a certain profit as you're ever likely to find trading stocks.

In any case, he almost always invested in "real" businesses and for the long term. He would set stops to protect himself, but he wasn't really a day-trader in the sense we're talking about here.

The last I heard, his average annual returns were something like 15-20% before taxes and fees, which is a pretty impressive record given he'd maintained it for many years and through both bull and bear markets. I doubt most people could do what he did -- the amount of patience and discipline he had were extraordinary -- but it was fascinating discussing it with him, and strangely satisfying to watch him do well by going with common sense and considered choices against a market that was temporarily confused about something.

⬐ lbotos

This is warren buffet style value investing.

"Day Trading" is actively taking positions with the intent to sell in the "short-term".

⬐ Silhouette

Yes, exactly. My point was just that anecdotally, literally no-one I know who has attempted "day trading" style investing has made good money from it over the long term. In contrast, the one person I know who has attempted "value" style investing and done it seriously actually has made quite good money from it consistently. This is in line with the article's conclusions, but in another context: it looks like an individual trying to day-trade in today's markets is probably setting up to fail.

⬐ Kranar

Renaissance Technologies did not use algorithms to beat the market... they used tax schemes to do so:

https://www.bloomberg.com/news/articles/2019-04-10/renaissan...

When you factor in the money they saved from dodging taxes and how they managed to compound the growth on that money, their returns end up being no more impressive than any other hedge fund.

Even if it turns out that what they did wasn't illegal, the bulk of their profits beyond what would have been made just investing in an index fund came from their tax scheme rather than from any kind of insight into the financial markets.

⬐ nickles

> Renaissance Technologies did not use algorithms to beat the market...

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%.

⬐ blunte

From what has been published, secrecy within Renaissance is so extreme that perhaps only 2-3 people actually know what is going on. So for an outsider, I say it's pure speculation.

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.

⬐ nickles

> So for an outsider, I say it's pure speculation.

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...

⬐ tim333

There was a video interview with the founder where he explained pretty much how they do it. The employ a lot of bright PhD maths/physics types, get them to come up with all the algorithmic strategies they can think of, run tests with historic data and live trading to see which ones work and then scale up those.

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.

⬐ cheez

They could lie about that too and just use linear regression.

⬐ eximius

A linear model on a heretofore unknown predictor is basically how all hedge funds make money.

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.

⬐ cheez

That's my point. They hire the smart people so they can really abuse the simple stuff.

⬐ Dowwie

No mention of leverage?

⬐ tim333

I'd take leverage for granted but it only works if the underlying bet you are leveraging is in your favour.

⬐ turk73

I still don't buy it. There's no way that anyone can be that good for so many years running without having insider knowledge or somehow manipulating what is going on. It's not a matter of how many brilliant PhDs you have.

⬐ PorterDuff

That sounds too much like this:

https://www.amazon.com/When-Genius-Failed-Long-Term-Manageme...

As I remember, beaucoup back testing, hilarity ensues anyway.

⬐ simtel20

The issue with LTCM wasn't just that they didn't test sufficiently - the problem is that traders could take positions without supervision and any accountability. My understanding is that any firms that survived that period (and I believe they were all pulling the same shenanigans as LTCM, just maybe to a lesser degree) now have risk management because unlike Lehman/Bear they can't just foist that risk off onto the public market. No one at the head of a multi-billion dollar hedge fund wants to stop being there if all they have to do to endure is pay for risk management.

*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.

⬐ PorterDuff

As I remember the book, they back tested quite a lot. It's just that whenever they went live with trading reality changed on 'em. Go figure.

⬐ tim333

One thing backtesting misses is the other market participants may see what you are up to in live trading and try to take advantage. That was a big factor with LTCM.

⬐ simtel20

They were exposed to a margin call. Trading reality changing or no, if you can get taken out by your prime broker at the end of the day, you need to account for that too and they didn't.

⬐ ad

> their outsized gains are due to market manipulation, front running, or other insider activities (as in, illegal/unfair).

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.

⬐ shostack

Question since you are informed about them and the space...

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...

⬐ ad

It is feasible, although I would be surprised if it something like this were at play. For one thing the other CEO Brown and Simons himself are on the opposite side of the political spectrum. That's not any guarantee but my point is that these organizations aren't monolithic...if there were geopolitical impacts hopefully someone would leak. But even if rentech were completely amoral, they probably still wouldn't do it just because the risk/reward asymmetry is too great. Sounds like it'd fall more to the FBI than SEC; much higher penalties. Too much of the rest of the business is profitable. These people have a lot to lose. And when hedge funds engage in bad behavior, it tends to look more like this [1]. Perfectly legal, yet still harming society, in my (less informed) opinion.

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...

⬐ melling

The article says that this scheme occurred during specific years.

During the 1990’s they also beat the market.

“Medallion, which is open only to current and former Renaissance employees, has generated returns of about 40 percent after fees for decades by using computers to spot market patterns. It’s distinct from the funds Renaissance makes available to outsiders, such as the Institutional Equities Fund.

Medallion earns most of its money through short-term trading of securities and other assets. Such earnings typically get taxed at the same marginal rate as salary. The tax code rewards longer-term investments with a preferential, lower rate.

The dispute centers on transactions the firm carried out with Barclays Plc and Deutsche Bank AG between 2000 and 2015 that had the effect of transforming short-term trading gains into long-term returns. Rather than own securities directly, Renaissance instructed the banks to buy and sell them within a portfolio of assets. It then bought an option from the banks tied to the portfolio’s performance”

⬐ Scoundreller

I’m confused. Doesn’t the recipient pay these taxes, so it wouldn’t show up when comparing fund returns?

⬐ simtel20

I'm not a finance guy, but I think the idea is this:

Ren says "we bought an option and held it for a year". The option's counterparty was a bank, I guess, so they just form a company to hold the bag, and the company that is created reports to the IRS that they don't have any assets, just a basket of assets to offset the option they're responsible for.

At the end of the contract (and there can be more than one of these going on at the same time) the assets can be sold, and would be sold, in order to pay for the option contract which was now held for a year. Some money would go to the broker for executing the trades over time, etc. but much less than the taxes that would otherwise be paid.

So, the part that has the tax man scratching his head is that if Ren was directing the buying and selling of the assets in the basket constantly, is that really holding on to an asset, or is it just a lie? They say they got a tax lawyer to sign off on it, so it goes to court to see if it's a defensible position. If not, they'll probably pay a slap on the wrist and won't get to do it again.

It's not done in isolation IIRC. This sounds a lot like how I understand swaps are done, so it may be that this is only slightly unusual.

⬐ kolbe

> When you factor in the money they saved from dodging taxes and how they managed to compound the growth on that money, their returns end up being no more impressive than any other hedge fund.

That's a bold claim that you should be prepared to defend. If not, you should remove it.

⬐ mlevental

you've been rightfully skewered by other people but I just want to point that this is what happens when someone reads one article about a controversial thing they don't otherwise know anything about and then goes around presenting that finding as if they're some kind of expert.

⬐ mruts

You have absolutely no idea what you’re talking about. RenTec is the most profitable money making machine the world has ever seen (and likely will see). RenTec’s Medallion fund has an annualized return for over 30 years in excess of 35% net of fees. I’m not sure what their management fee is, but their performance fee is like 45%. This means they are making like 80% returns YoY before fees.

I suspect you don’t work in the industry, because what you’re saying is absolutely ludicrous. The S&P 500 lost like 40% in 2008. Meanwhile Medallion doubled up after fees. So a total return of 145%. What you’re saying is simply not possible with a tax loophole.

There’s not a single hedge fund analyst or PM on the Street who doesn’t think that RenTec is anything less than amazing. No one thinks they are as good as those guys, no one. If you want the real story about Simmons and RenTec, check out the MIT Sloan fireside chat with him on YouTube.

⬐ imtringued

You can't just conjure a 45% ROI out of nothing.

It either means inflation is incredibly high, productivity growth is incredibly high, there is some exotic "dark market" that most investors cannot access (probably made out of dark matter) or other people are losing a lot of money.

Except inflation isn't high, productivity growth isn't high and I just made up the "dark market" so only one explanation remains.

⬐ mruts

Like they’re very very good at what they do? Simmons is a genius ans the people that work st RenTec are some of the best and brightest minds in the world.

Even so, I must admit, their profability and success is outstanding. But then again, so are Apple’s and Google’s. The only difference is thst no one knows how RenTec makes buttloads of money.

⬐ tim333

This is another reason individual day traders lose - it's a zero sum game and in liquid markets you are competing against outfits like RenTec.

⬐ mruts

Beta (by definition) is not a zero sum game, but alpha is.

⬐ RandomBacon

I'm not in the industry, but I wonder: did people have the same kind of reverence for Madoff?

⬐ ivalm

Madoff was a ponzi scheme that relied on new investment (since it was simple pyramid). Medallion fund limits outside investment (so there is no outside source of money) and has operated for many decades (ie more money was withdrawn from it than put in).

⬐ esmi

I know nothing of Medallion, but I'm curious if only private insiders can invest, how do you know they're not just lying about how much they return?

⬐ ivalm

It allows family and former employees, so it is actually A LOT of people. Kind of hard to keep a conspiracy with 100+ people for 30+ years. Why would all these people lie?

⬐ rwmurrayVT

All the family, employees, and former employees have a maximum investment. Every year they withdraw funds so that the principle never exceeds a certain threshold.

⬐ tcbawo

Such returns would not be possible if they grew to a certain size. By closing the fund, they can keep it small enough to limit scaling issues.

⬐ imtringued

That's illogical because people don't get paid in ROI. They get paid in absolute dollars. Earning a 30% ROI on 200 billion dollars is better than earning a 30% ROI on 100 billion dollars.

⬐ ivalm

But they do have other funds. It's simply they want to keep their money in higher return fund and other people's money in the bigger, lower return fund.

⬐ tcbawo

My point is that once a fund grows to a certain size, ROI at that scale becomes impossible. I wouldn't be surprised to learn that some of their funds have investment restrictions and mandatory distributions.

Quanta Magazine has been producing a lot of stories that have been appearing on HN lately.

An interesting aside it that Quanta was started by James Simon’s Foundation. James Simons is an interesting person. He doesn’t get the publicity of a Gates, Buffett, or Bezos.

https://en.m.wikipedia.org/wiki/James_Harris_Simons

https://www.youtube.com/watch?v=QNznD9hMEh0

⬐ consumer451

The Numberphile YT channel managed to get a rare interview with Mr. Simons.

https://youtu.be/QNznD9hMEh0

⬐ melling

That’s the same link I posted.

⬐ consumer451

I'm sorry, I should have checked. I would delete my comment if there was not another interesting child.

⬐ olivermarks

thanks for link!

⬐ nikofeyn

that interview is really great. i have watched it a few times. i think it makes it clear why simons has been so successful. he doesn't seem to really second guess, just does things, delegates well, and despite being obviously brilliant, he seems to have a very practical and humble mindset.

the TED interview (https://www.youtube.com/watch?v=U5kIdtMJGc8) is also good, despite the host's frequent vapid questions. in that interview, simons elaborates on his funding of origins of life studies and efforts.

The Numberphile interview with Jim Simons is a good watch/listen

Numberphile video: https://www.youtube.com/watch?v=gjVDqfUhXOY

Full length: https://www.youtube.com/watch?v=QNznD9hMEh0

RenTech is unparalleled and Medallion has proven itself for decades.

This interview with Jim Simons is fantastic: https://youtu.be/QNznD9hMEh0

⬐ jcmoscon

Very interesting guy! They should show this to every high school in the USA. Teacher: "See this, that's why you need to learn math!"

⬐ dogruck

Jim founded an organization, Math for America, to help: http://www.mathforamerica.org/about/board/james-simons

(This story appears to have nothing to do with Trump, despite the headline.)

What's your view on cases like Renaissance Technologies? There's an interview online on James Simons (https://www.youtube.com/watch?v=QNznD9hMEh0) - and he explicitly talked about using math models to detect anomalies, e.g. trends. It's also known that they've used Hidden Markov Models, at least in the early days.

⬐ zacharydavid

I like the responses to this already. But I'll add that there's a difference between what I loving call throwing poop at the wall, and using machine learning to estimate non-linear functions of structural models or combining signals that already have alpha.

ML can be very useful if you have some signal or if you have a model.

⬐ dsacco

Rentec uses machine learning, but more importantly the firm curates massive amounts of high-signal data. The most significant part of their work lies in process automation and the rapid testing of hypotheses, which empowers the optimal use of mind-numbing amounts of data that most other firms simply can't take advantage of. Very early on their success was due (in part) to the willingness of Simons et al to use correlations in disparate datasets which could be proven but which didn't really make sense, and which wouldn't be explained by anything intuitive.

In other words, Rentec is not just pointing machine learning models at data, they're investing in a very robust data processing pipeline. Everything before the analysis is just as important as the analysis at funds like theirs.

⬐ roksprok

Is there really that much high-signal data that is not already being used? Is their advantage in finding signals in data that other people overlook, or finding new data sources?

⬐ dsacco

> Is there really that much high-signal data that is not already being used?

Yes.

> Is their advantage in finding signals in data that other people overlook, or finding new data sources?

Yes.

I won't go into any particular detail, but there is a lot of signal in the market for those who are imaginative. The obvious and low hanging fruit is long gone, but there are still many places that offer an edge.

⬐ RealAnalysis

also, is this high-signal data publicly available? or only for purchases from vendors?

⬐ dsacco

It's public (technically it has to be in order to be strictly legal for use). But for the most part it is unintuitive, unclean (needs to be heavily normalized) and not easily accessible. There are a variety of vendors that source it, clean it and analyze it to make it salable to firms. Quantitative firms also have teams devoted to doing all of that internally.

⬐ RealAnalysis

how does one go about getting a quant position? (PhD, bachelors, masters?) I feel like there's a bias towards PhDs...

⬐ RealAnalysis

I wish there was some sort of full intro tutorial on finding strategies; ie: an example of a former signal (now traded away), the thought process, the data sourcing, statistical analysis, trading/signal strategy, etc..

⬐ dsacco

The thing is that no one is really motivated to make a complete tutorial on finding strategies because it's economically irrational. You're either giving away specific sources of alpha or you're empowering potential competitors. This is why it's virtually guaranteed that anyone selling courses that teach trading or related skills is a fraud - they have essentially no incentive to just ramp up their own trading capital instead.

The industry is also extremely secretive (necessarily so). You'll hardly ever find a good treatise on finding novel signals, but there are tutorials on algo trading in general with examples of production strategies that used to work which have been, as you say, traded away. For that purpose I'd recommend you start here: http://www.decal.org/file/2945

⬐ ata6187

Just want to second this comment, their data processes are the key strength of Medallion. Grandparent comment by murbard2 also talks about the importance of this component to quant work (in the last paragraph: "finding new data feeds that provide valuable information")

While Jim Simons is a mathematician and Rentec clearly has hired many brilliant people with PhDs, it's maybe worth mentioning the actual mathematics being used in their work isn't super high level difficult, impossible or secretive. Many of the PhD's working there do not have a PhD in math, but rather something like Physics, so I would say if you are familiar with graduate level math courses you can understand the math needed for this type of work. Math isn't where their edge comes from. Also Medallion is 30 years old, their early work in the mid 80s was done on computers with less processing power than your phone, "Machine Learning" as the term is being used lately or access to supercomputing hardware no one else knows about is also not where their edge came from.

⬐ dsacco

Well said. Where most funds have the same problem 'chollida1 describes here[1], Rentec (and other similar firms) moved past that by establishing the right culture and investing in the right technology from the outset.

They need smart people, but hiring the smartest people and having the most sophisticated models won't do you any good if you can't acquire high signal data, can't clean that data properly and can't rapidly backtest. And if you can't do any of that, adding more data is just going to add more noise.

_____________________

1. https://news.ycombinator.com/item?id=13139638#13140352

⬐ ata6187

Know all about it, was a data lackey B* at a HF (not Rentec) when I first graduated from school.

By the way for anyone reading this, Rentec is hiring, need to know C/C++ and a "basic knowledge of statistics" is preferred but not required.

⬐ RealAnalysis

but i feel like they're looking for PhDs and Math Olympiads.

⬐ dsacco

Given your background, I'd be interested in picking your brain a bit for a few projects I'm working on. If you're looking to remain anonymous would you mind sending me an email (in my profile), or throwing an email up in yours?

And they used algorithms:

https://www.youtube.com/watch?v=QNznD9hMEh0

Ah, now I understand. For others:

Simons Foundations --> James Simons, who is a hedge fund mananger worth ~ $14billion.

Excellent interview with Numberphile here:

https://www.youtube.com/watch?v=QNznD9hMEh0

⬐ antognini

In addition, James Simons was a mathematician prior to his work in the finance industry, hence his partiality toward funding a magazine that often writes about pure mathematics.

⬐ bradleyjg

I believe he is now back at Stony Brook in the mathematics department. Not full time, he has a lot going on, but some kind of affiliation.

⬐ xviia

I bet being an academic is a lot better when you don't have to worry about being a post-doc searching for a faculty position :/

⬐ tikhonj

To be fair, he was a successful researcher who became professor and later chair of the Mathematics department at Stony Brook before starting Renaissance, so he got past all that the normal way.

The title makes it out like he is a reclusive lone wolf programmer. He is the CEO of renaissance technologies, a hedge fund with 275 employees. I really feel misled and like they trying to portray him as a mysterious, dangerous loner. As a computer programmer, I take offense.

Here is an interview with James Simmons, the founder of Renaissance, fascinating guy.

https://www.youtube.com/watch?v=QNznD9hMEh0

Here's another interview with him: http://youtu.be/QNznD9hMEh0

If you found this interview interesting, there is a longer interview that goes into most of the same topics as well as several others here https://www.youtube.com/watch?v=QNznD9hMEh0

Yes, I know that. We have all watched James Simons, right?

http://www.youtube.com/watch?v=QNznD9hMEh0

What does that have to do with being a more appropriate news headline? I was responding to the 'clickbait' comment.

⬐ mattlutze

The title is click-baity because we're supposed to say, "oh, there's someone old and not in hedge funds getting into it, he must have some crazy cool thing he's going to do."

Except, if he was employed by one of the top hedge fund management firms, none of that impression is true. So, click bait and misleading.

⬐ melling

No, the title is suppose to be catchy and accurate, which it is.

https://en.m.wikipedia.org/wiki/George_Zweig

Some Hacker News "title police" who thinks it's more accurate to simply say "former hedge fund employee" is simply wrong. There are millions of former hedge fund employees.

Why can't people add real value to the conversation or say nothing? Understanding how the trading algorithms work, for example, would be interesting.

⬐ mattlutze

From the article,

> It is Mr. Zweig’s first foray into the hedge-fund world since leaving the famously secretive and profitable quantitative hedge-fund firm Renaissance Technologies LLC in 2010. He agreed when he left not to compete against Renaissance for four years.

later,

> Mr. Zweig first turned to hedge funds as an investor while amassing a nest egg for his disabled daughter. In 2003, he interviewed for a job with East Setauket, N.Y.-based Renaissance, founded by former Cold War code breaker James Simons. Renaissance has achieved near-mythical status for the performance of its Medallion fund, which has averaged returns of more than 35% a year since the late 1980s through 2010.

> After seven years at Renaissance, where he said he developed a system that allowed the firm to trade certain instruments for the first time, Mr. Zweig signed the noncompete agreement with Renaissance. Renaissance declined to comment.

For the last 12 years he's been in the world of hedge funds. It's not like he's coming off theorizing the quark and saying "let's try this hedge thing". Indicating his expertise would have been more factual.

It would also have made the link less interesting to click on WSJ's home page. I don't fault WSJ for getting clicks, but lets call it what it is, yeah?

It's great when you can use math, and remove humans from the process once the algorithms are written, to do something people thought was impossible. Was never trying to imply that's the pinnacle. You've got Gordon Gecko and then you have James Simons.

http://youtu.be/QNznD9hMEh0

Maybe the U.S. wouldn't rank so low in math and science if kids saw a few more career possibilities.

http://www.pewresearch.org/fact-tank/2015/02/02/u-s-students...

⬐ Retric

The algo part of High frequency trading is generally overstated. The real value is the number of transactions as even really simple algorithms can make money if there are no transaction fees.

EX: Hold one stock for every cent in the current price. 1.53$ = 153 shares. Buy one stock per cent if the stock price moves down one cent and sell one stock if it moves up once cent. You now make a half cent every time the price moves up or down one cent. Note, this only works well for stocks with low share prices, lots of movement, and no transaction fees, and if the price doubles you have sold all your shares.

⬐ lisper

You have this exactly backwards: you are guaranteed to lose 0.5 cents/transaction. Suppose the price is $1.00 so you hold 100 shares. The price move up to 1.01 so you buy a share (at 1.01). Now the price moves back to 1.00 so you sell a share (at 1.00). You just lost 0.01.

There is no algorithm that guarantees you will make money in a fair market. The only way to guarantee making money is arbitrage or trading on inside information.

⬐ Retric

Ops, flipped it. If the price moves up you sell, if the price moves down you buy.

The reason this is not 'optimal' is if the price moves up to far you have sold every stock and run out, also you need a reserve to handle the price moving close to zero and if the stock goes bust you now own a lot of worthless stock.

PS: So, you will make money on a bounded random walk, but potentially far less money than holding the stock. In the end all this does is trade unbound potential gains for a finite income stream. Which is what all algo provide there effectively choosing which game to play in Vegas or shifting risk around etc.

⬐ lisper

> Ops, flipped it. If the price moves up you sell, if the price moves down you buy.

But then you aren't maintaining the invariant that you hold a number of shares equal to the current price.

> So, you will make money on a bounded random walk

Yes. If you know ahead of time what the price is going to do (even probabilistically) then you can make money. If you don't, you can't.

⬐ Retric

aren't maintaining the invariant Yes, it’s just the starting point for a really simple example.

If you know ahead of time what the price is going to do (even probabilistically) then you can make money. Exactly, you pick a model and make money ‘if’ reality fits that model. However, fast dumb models can make lots of money and complexity adds risks.

Anyway, many people get stuck with the idea you need the smartest people in the room while ignoring how much it costs to have the ‘smartest people’ in the room. Arguably, many companies are simply doing this to attract investors not because it maximizes returns as managing money is a great way to make money.

⬐ lisper

> fast dumb models can make lots of money

Sure, and they can also lose a lot of money.

> complexity adds risks

Not necessarily. Modern portfolio theory is a lot more complex than (say) buying and holding a single stock. But it's a lot less risky.

> you need the smartest people in the room

Maybe you don't need the smartest people in the room, but it helps not to have too many stupid ones. The real problem is that it can be really hard to tell which is which.

⬐ None

None

⬐ tfgg

What I love about Simons is that he's funding to solve the problem of my field, the Many Electron Problem:

https://www.simonsfoundation.org/mathematics-and-physical-sc...

It's so important for physics, materials science and chemistry, but feels so esoteric. It's wonderful that there's someone like Simons with both money and the ability to understand the problem :)

edit: He also possibly implies that the best way to help maths and theoretical physics is to leave the field, attempt to get rich in finance, and pump money back in.

⬐ chii

It's sad that this is a good way to fund fundamental research. Why is it that finance make more than what seems to be more important and useful like math or science!?

⬐ fleitz

Because keeping the current people we have alive and happy is also important.

The trick is finding the balance, science and math are probably more important than growing food, until you don't have any food to eat.

⬐ darkmighty

Being sad about it is not so useful. You can actually help! Either becoming rich and helping basic science (of course) or voting well and influencing government decisions.

Simons is clearly very talented at what he does, his firm (how it is run, etc) seems quite amazing. And he's "doing" more science this way. It makes an awful lot of sense.

⬐ chii

> And he's "doing" more science this way.

but he's not "doing" science anymore, and if i were in love with doing science, i really wouldn't want to go into finance, do lots of stuff i don't personally feel passionate about, get really rich, then pay other researchers to do science.

⬐ fleitz

And that is why people in the market get paid lots of money, no one wants to do it, yet it's essential to the functioning of society.

Most people call this being an adult, instead of 'following your dreams'.

⬐ nmrm2

This is an intellectually and morally bankrupt sentiment that is all the more worth calling out because it is both impractical and nonsensical.

1. This sentiment is nonsensical. Scientific funding often funds more than just salaries, and when it does fund salaries, those salaries are almost always modest. Furthermore, many of the salaries it funds are for non-scientists: technicians, software engineers, etc. The tired trope that scientific funding is primarily funnelled to wide-eyed loners who produce nothing but "useless" abstract ideas is demonstrably inaccurate. And to the extent that this caricature is accurate, Simons himself is a counter-point to the argument that this is a bad model.

2. This sentiment is impractical. Basic science is important to society as a whole and there's almost always no way to become ultra-rich doing basic science(++). All of society benefits when a good lot of our best and brightest go into science (rather than e.g. consulting or finance). And the best way to ensure that great minds go into science is to ensure science remains funded so that it is possible to work on truly important problems.

3. This sentiment is intellectually bankrupt. A great mind following its dreams without prioritizing financial reward is responsible for most of the major scientific developments that make it possible for you to bash their would-be descendents from behind a keyboard.

4. This sentiment is morally bankrupt. Punishing passionate people who give up highly lucrative careers to do something that is good for humanity is nothing short of vindictive -- I hate my work day so everyone else has to as well!

(edit: As an aside, you really think CEOs don't like the rush from having lots of power and making important decisions? They may work long hours, but I guarantee most of them fucking love their jobs. I also bet there's a pretty strong correlation between top-of-clas software engineers who command high salaries for their expertise, and software engineers who love their job.)

(edit2: Furthermore, science has lots of drudgery and hard, frustrating work to it; it's not all sitting in an office and drinking coffee. The idea that scientists unequivocally work on fun problems all day and never bash their heads against the wall to solve problems that they're more extrinsically than intrinsically motivated to work on is also pretty wrong.)

(++) Simons explicitly answers the question in his interview: No. Nothing we do at Renaissance -- no matter how impressive from a finance perspective -- is useful to science. It's just useful for making a handful of people rich.

⬐ darkmighty

About Simmons specifically, he's actually published some research with a ton of applications in recent physics developments, which I think came out of his Chern-Simmons form. He had a good run in science before he switched. And he's been doing good mathematics lately it seems.

What I am talking about is mostly compassion with both fellow scientists and humanity -- thinking basic science is really important for society as a whole and enjoyable, and it should be a good career path because of that. If you consider only feeling passionate about, you could say "It's really sad people who are really passionate about Frisbee aren't paid to do so." (nothing against Frisbee of course, but you sure could do it only as a hobby! ).

Besides, Simmons has been doing what he likes and what he feels important, I think it's pretty cool. It sure doesn't hurt he's made an awful lot of money too.

⬐ dsugarman

I am from Stony Brook, he has done a lot for the community including a nice nature preserve but I can not read his name and not be sad. Despite all this money, his life has been very tragic, two of his three children died young, one drowning and one in a car crash.

⬐ cherry_su

Minor correction: he has 3 living children; he had 5, but 2 died. Source: http://www.bloomberg.com/apps/news?pid=nw&pname=mm_0108_stor...

⬐ yownie

Not only that, they once funded the collider experiments at a physics laboratory where I worked when NSF had cut funding drastically, we're talking millions of dollars here.

https://en.wikipedia.org/?title=Relativistic_Heavy_Ion_Colli...

http://www0.bnl.gov/newsroom/news.php?a=21314

⬐ lmg643

Also engaged in one of the most ridiculous tax dodges of all time. Uses a "derivative" with his brokers that allows a bunch of short term trades to be taxed at long term capital gains rates.

http://www.bloomberg.com/news/articles/2013-07-01/simons-str...

⬐ laichzeit0

Are you implying that he shouldn't do this even though it's not breaking any laws?

⬐ vixen99

Nothing ridiculous about any legal interpretation of tax laws that allows one to minimize one's contribution. It's common sense. Even more so given the outrageous way in which government wastes the revenue it gets.

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"

Lord Clyde gave this famous quote (in taxation circles) in the case of Ayrshire Pullman Motor Services v Inland Revenue [1929] 14 Tax Case 754, at 763,764:

⬐ discardorama

His Medallion Fund seems to have done really well. From another article:

Simon's flagship fund, Medallion, requires aminimum investment of several million dollars and charges a 5% management fee and a jaw-dropping 44% performance fee. The fund is closed to new investment and has returned an astounding annual average net of 38% (remember, that's after the high fees). Since its 1988 launch, the fund has lost money in only one year, 1989, which saw a drawdown of 4%.

But I have to ask: why limit the fund to multi-millionaire investors? Why not open it to the other investors too and let them benefit for a change? This is just the "rich-getting-richer". If anybody needs a 38% average annual return, it's most certainly not a multimillionaire; it's more likely a middle-class person who could use the gains.

I apologize for sounding negative here, but this inequity is something that bothers me.

⬐ mark212

first off, there are strict SEC rules on what constitutes a qualified investor. But second, nobody in the hedge fund world wants to hand-hold a bunch of limited partners -- the fewer the better. And if you've got a track record like Simon (and Steve Cohen and Ray Dalio and Paul Tudor Jones and DE Shaw and a few others) then you're likely way oversubscribed whenever you want to open a new fund and as a result can be very picky about whose money to take. Hence the 44% carry.

⬐ evanpw

The Medallion fund is a bizarre outlier. For the most part, high expected return => high risk, which is not what you want for a middle-class wealth-generating engine. It would be much better to tax the hedge-fund winners (at the end-point, with a consumption tax), and redistribute that.

⬐ Tycho

The Medallion Fund is not only closed to new investors, it's closed to anybody who doesn't work at the firm itself.

The interesting question becomes what are they doing with all the money they make.

⬐ bgilroy26

I would imagine they're reinvesting it

⬐ melling

Well, there used to be a limit in the number of investors. I think it was only 500 people. Does that limit still exist?

You aren't guaranteed returns. Many hedge funds fail:

http://www.forbes.com/2009/03/18/hedge-fund-failures-busines...

⬐ blue11

Even if RT removed their limits, there are still government imposed ones (supposedly to protect unsophisticated investors from risk): https://en.wikipedia.org/wiki/Accredited_investor#United_Sta...

RT's limits are much higher though, and that probably is done with the goal of limiting the number of individual investors. Dealing with investors is a distraction for the fund managers. But the main issue is proprietary information. The more investors you have the higher the risk of information leakage to your competitors.

⬐ Tloewald

He states another reason in the interview — if the fund gets too large their models will stop working because their decisions will have too much influence on the market.

⬐ proksoup

I also wonder why those limits exist more generally, not just for this fund.

Maybe those limits affect the timelines on which money is invested and in which it is withdrawn, where-as actually having rules about such things would not work as well.

⬐ gech

Was thinking about this as well. In the interview he talks about the act of making a trade moves the market itself. You can't create too much trading volume or you will have distorted the market so much that you can't trade effectively after. I would imagine he can move and make money at a certain volume (a bank roll of 200 million) and guarantee returns because that level won't distort. But if he had hundreds of billions he couldn't guarantee returns because the moves he would have to make would be so large as to distort the market beyond their measuring. Much like the observer effect in physics, possibly a trader's effect here.

⬐ lumberjack

Maybe it operates in someway by taking advantage of small time private investors.

⬐ auntienomen

Maybe it operates in someway by taking advantage of big time private investors.

⬐ icu

The simple answer to your question is this: regulation.

The U.S. Securities and Exchange Commission (SEC) prevents hedge funds, private equity firms and other private investment managers from marketing their products to a wide audience.

High risk funds, like the Medallion Fund, are limited to fund raising to an exclusive group of investors that must meet the following criteria:

a) those with a net worth of at least $1 million excluding their primary residence, or

b) annual income of more than $200,000 in each of the two most recent years.

The deeper answer to why the SEC does this is: protection of the 'lowest common denominator' investing public.

By and large the investing public are not what you might call:

1) 'professional' (keeping an eye on the market as part of their job), or

2) 'sophisticated' (as in have a knowledge of the multitude of securities, how they work and how to trade them), or

3) Have a high risk profile and matching capacity for loss.

I think these points, from the SEC's point of view, make the selling of the Medallion fund to the general public inappropriate. I would imagine that from the SEC's perspective, the Medallion fund would be a 10/10 risk profile (highly speculative) and therefore the SEC would want an investor to make an investment fully understanding what they were investing in, and having enough wealth to suffer a total loss of money invested.

This leads into another point, the wording of your post implies that the 'astounding' annual average of 38% net of fees is practically a 'sure thing' when you say that since the fund's launch it took one drawdown in 1989.

However, you miss the obligatory warning that past performance is no guarantee of future results.

Speaking as a retail trader I can quite happily say that for different levels of risk I can make (and have made) the following returns (net of fees):

a) 1% per month with a high level of confidence with what I would call a very low risk trading strategy (annualised to 12% per annum),

b) 2% per month with a medium to high level of confidence with what I would call a medium risk trading strategy (annualised to 24% per annum),

c) 3% per month with a low to medium level of confidence with what I would call a medium to high risk trading strategy (annualised to 36% per annum), and

d) 4%+ per month with a low level of confidence with what I would call a high risk trading strategy.

The point I'm making here is that:

* If you know what you are doing,

* You have the capital (and capacity for loss), and

* You have the risk profile,

Then you can make decent market returns too. Technology has democratised the markets so there really isn't any reason for being negative and bothering about inequality.

You would however have to work for it and if the Medallion Fund are making 82% per annum (38% + 44%) before management fees they are working extremely hard for that.

⬐ nostrademons

a.) It's much easier to maintain high returns with lower amounts of invested capital. Warren Buffett has talked about this at length; when you're investing $5M, there are a large number of undervalued opportunities where you can gain outsized returns, but when you're investing $500B, you are the market, and it's extremely unlikely that you'll get above-average returns.

b.) Private capital with a personal relationship to the fund manager is usually more patient. Many public funds have a problem where all the individual investors head for the exits at the slightest sign of trouble, but the best investment opportunities are usually available when everybody else is panicking.

Basically, if you want to do well in investing, you really need to do it yourself, and you need to have an information advantage on everyone else in the market. It's a field that rewards being smarter than everyone else, not being more cooperative.

⬐ melling

If it was really that easy to identify undervalued companies, you'd think more people would be doing it. I don't think many managers, or individuals, beat the market by a lot, if at all.

⬐ nostrademons

I agree, but people who entrust their money to others to manage beat the market by even less. Remember that on average, you should expect to earn an average return minus fees; the one part of that equation that is given are the fees.

⬐ nmrm2

Simons specifically talks about a) in the video, and how this limits them to a niche.

⬐ Tycho

Information on Renaissance Technologies is so incredibly sparse. It must be a fascinating workplace! It's fun to speculate on the nature of their success (specifically the Medallion fund).

3 possibilitiese spring to mind: 1. Best in class execution on winner-takes-all strategies. Eg. 10 hedge funds all try the same arbitrage trade but only the quickest one make money. 2. A killer app that no one else knows about. Like, I dunno, artificial intelligence... 3. Medallion is just a legend built up to lure investors into their public funds and collect the fees.

Joking on that last one.

What I drew from this interview was that while Simons is obviously incredibly smart, they key thing was that at Stony Brook he learned how to put together a team of other very smart people, and that more than any individual financial insight has generated his success in investing.

⬐ abulman

I can also recommend the rest of the Numberphile videos https://www.youtube.com/channel/UCoxcjq-8xIDTYp3uz647V5A - as well as the other channels by the same person.

⬐ melling

For people who enjoy this video, I recommend this book:

http://www.amazon.com/The-Physics-Wall-Street-Unpredictable/...

Simons is mentioned but he refused to be interviewed for the book. However, it covers the history that leads up to the current day.

It's interesting that Simons' fund is pure algorithmic trading. No one decides that a position is too big, for example. Humans are out of the process after they write the algorithms.

⬐ burger_moon

Here's a link without some unnecessary endpoints http://www.amazon.com/The-Physics-Wall-Street-Unpredictable/...

⬐ dangero

That is incredibly facinating. The way he talks about the quant models in the interview they sound simple in comparison to his prior work. My suspicion is that mathmeticians are involved in the front end model creation purely to create efficient ways of finding performant models but the models themselves are pretty mundane. The idea of purely data driven models is fascinating because it's generally rejected as too limited and inefficient. I wonder what types of anomolies they have discovered and what data sets they find useful. Also how does historical simulation work when the computer models you were competing against 10 years ago are so different than now?

⬐ melling

His fund is one of the best on the street, and he has been in business since 1982.

http://blogs.wsj.com/deals/2009/03/25/the-hedge-fund-worlds-...

http://www.insidermonkey.com/blog/here-is-why-jim-simons-is-...

⬐ jgalt212

For me, James Simons, is first and foremost a tax dodger.

Renaissance Technologies LLC used contracts with the banks to establish the “fiction” that it wasn’t the owner of thousands of stocks traded each day

http://www.bloomberg.com/news/articles/2014-07-21/renaissanc...

⬐ vixen99

As elsewhere in these comments: tax dodging is an obligation for any intelligent person.

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"

Lord Clyde gave this famous quote (in taxation circles) in the case of Ayrshire Pullman Motor Services v Inland Revenue [1929] 14 Tax Case 754, at 763,764:

⬐ jgalt212

except for the fact that the tax dodging services Barclays helped enact for Rennaissance were illegal.

⬐ gaadd33

Where does it say that in the article? Or that Rennaissance was found guilty?

⬐ jgalt212

Please don't be so naive. It's only because Renaissance is so rich and powerful that they are not in jail. If some piker tried the same strategies, they'd be in jail. The politicians are afraid to jail billionaires.

> The Democrat stopped short of saying that any of the activities that allowed Renaissance to lower its tax bills were illegal, and said it appears the banks stopped offering them after the IRS started to question the financial arrangements.

http://thehill.com/policy/finance/212875-probe-banks-hedge-f...

⬐ tim_sw

The full (hour long interview) is here https://www.youtube.com/watch?v=QNznD9hMEh0

⬐ dang

Thanks. That seems covered by the original source rule, so we changed to this from https://www.youtube.com/watch?v=gjVDqfUhXOY.

⬐ mathgenius

Wow, I love his brooklyn accent. Makes him sound so grounded. I guess Feynman has (had) a similar accent; and i was similarly enthralled hearing his voice (recording) for the first time.

Somehow I always presume these guys should speak with an English accent, like Penrose. Hehe.

⬐ davnicwil

Or Hawking.. oh wait :-)

⬐ telcal

Brooklyn accent?? No, not at all. He grew up in Brookline, Massachusetts, a much different place... and accent!

⬐ argumentum

Also worth reading about is his co-founder & the former chief scientist at renaissance, Nick Patterson. If there's anyone whose literally a "mad scientist" he's it (in a good way). A close friend of mine at MIT collaborates with Nick, and when we asked why he left finance to return to academia he said "well, James is into boats and he wanted a bigger one". Nonetheless, both great guys.

http://www.nytimes.com/2006/12/12/science/12prof.html?pagewa...

⬐ matthewwiese

Anyone happen to have a transcript or alternative site to view the video from? I'm stuck behind the GFW without a VPN, and I'd love to watch this now as opposed to waiting until I get back to the States.

⬐ orthoganol

Just sign up for a free trial for Astrill. Being in China without a VPN is insanity.

⬐ mhomde

Here's another really interesting documentary about the Black-Scholes formula

https://www.youtube.com/watch?v=lmvxZgnwwD4

⬐ athesyn

I always wonder if this type of success what naturally happens when someone this highly intelligent uses all their brainpower for gaining wealth.

⬐ adventured

No, right place / right time / right choices etc still plays an overwhelming role in the wealth generation.

For every thousand geniuses that try to get really rich, there's one Simons or Buffett that pulls it off. You could run a simulation with a large number of people of equal mental capability, almost all of them would fail. Just the broader requirements alone would be enough to instantly flunk most people out of the running (the other skills required that Simons possesses beyond his intellect).

⬐ yownie

He was also part of the team that audited Lucifer an early precursor to DES, that Steven Levy mentions in his Crypto Wars book.

⬐ asanagi

Help this rich guy get richer by buying his book!

⬐ chollida1

If anyone is interested in more reading on the history of algorithmic trading, I've posted a screen grab of the top half of one of my book shelves.

Some of this maybe a repeat to people as I often get asked for recommendations on how to get into algorithmic trading.

http://imgur.com/OdzB4aW

http://www.amazon.ca/Fortunes-Formula-Scientific-Betting-Cas... The history of hte first real quant

http://www.amazon.ca/Dark-Pools-Machine-Traders-Rigging-eboo... The history of the rise of algorithmic trading

The phyisics of wall street was mentioned by someone else, great book

http://www.amazon.ca/Quants-Whizzes-Conquered-Street-Destroy... This profiles 4 famous traders including Simons, alos a great book

http://www.amazon.ca/Heard-Street-Quantitative-Questions-Int... A must read if you want to get into quantitative finance.

As always, email if you'd like to chat.

⬐ Havoc

>screen grab of the top half of one of my book shelves.

aka a photo?

Pretty cool regardless of name. :)

⬐ jason_slack

I have some of those same books. Is there anything interesting on the bottom half of your bookshelf?

⬐ chollida1

Sure, here you go http://imgur.com/zdLSEek

⬐ jason_slack

I am going to ping you via e-mail too. I'd love to talk about trading..

⬐ splike

Do any of the books go into detail explaining how and why successful strategies worked? Historically that is. I wouldn't expect any strategies outlined in a book to be profitable today, but I would be interested in how a strategy was formalised.

⬐ darkmighty

I prefer to pick that sort of thing up from mathematical texts or a textbook.

The principles are pretty simple from a probabilistic perspective: it's just a matter of making inferences from the available information and choosing an optimal course of action from that. Information theory provides a nice framework for this basis, imo.

You can find this introduction (including topics like Kelly's criterion etc) in Cover's Elements of Information Theory, a good introduction to information theory in general if you like.

https://en.wikipedia.org/wiki/Gambling_and_information_theor...

⬐ gbersac

Totally agree. A description of his model and how he created it would be awesome !

By the I really enjoyed dark pools. No practical knowledge, but a pleasure to read.

⬐ evanpw

I've found this blog to be really excellent: https://mechanicalmarkets.wordpress.com. Example: https://mechanicalmarkets.wordpress.com/2015/04/30/market-da...

⬐ graycat

Really nice interview.

For those who don't know who he is:

https://en.wikipedia.org/wiki/James_Simons

The interview is incredibly fascinating.