Monday, November 21, 2016

Inside Renaissance Technologies' Medallion Fund: A Moneymaking Machine Like No Other (and President-elect Trump's Sharpe ratio)

It must be something in the air or a meme bubbling up, we've had three or four mentions of RenTech in the last week.
From Bloomberg:
Sixty miles east of Wall Street, a spit of land shaped like a whale’s tail separates Long Island Sound and Conscience Bay. The mansions here, with their long, gated driveways and million-dollar views, are part of a hamlet called Old Field. Locals have another name for these moneyed lanes: the Renaissance Riviera.

That’s because the area’s wealthiest residents, scientists all, work for the quantitative hedge fund Renaissance Technologies, based in nearby East Setauket. They are the creators and overseers of the Medallion Fund—perhaps the world’s greatest moneymaking machine. Medallion is open only to Renaissance’s roughly 300 employees, about 90 of whom are Ph.D.s, as well as a select few individuals with deep-rooted connections to the firm.

The fabled fund, known for its intense secrecy, has produced about $55 billion in profit over the last 28 years, according to data compiled by Bloomberg, making it about $10 billion more profitable than funds run by billionaires Ray Dalio and George Soros. What’s more, it did so in a shorter time and with fewer assets under management. The fund almost never loses money. Its biggest drawdown in one five-year period was half a percent.

“Renaissance is the commercial version of the Manhattan Project,” says Andrew Lo, a finance professor at MIT’s Sloan School of Management and chairman of AlphaSimplex, a quant research firm. Lo credits Jim Simons, the 78-year-old mathematician who founded Renaissance in 1982, for bringing so many scientists together. “They are the pinnacle of quant investing. No one else is even close.”

Few firms are the subject of so much fascination, rumor, or speculation. Everyone has heard of Renaissance; almost no one knows what goes on inside. (The company also operates three hedge funds, open to outside investors, that together oversee about $26 billion, although their performance is less spectacular than Medallion’s.) Apart from Simons, who retired in 2009 to focus on philanthropic causes, relatively little has been known about this small group of scientists—whose vast wealth is greater than the gross domestic product of many countries and increasingly influences U.S. politics1—until now. Renaissance’s owners and executives declined to comment for this story through the company’s spokesman, Jonathan Gasthalter. What follows is the product of extensive research and more than two dozen interviews with people who know them, have worked with them, or have competed against them.

Renaissance is unique, even among hedge funds, for the genius—and eccentricities—of its people. Peter Brown, who co-heads the firm, usually sleeps on a Murphy bed in his office. His counterpart, Robert Mercer, rarely speaks; you’re more likely to catch him whistling Yankee Doodle Dandy in meetings than to hear his voice.2 Screaming battles seem to help a pair of identical twins, both of them Ph.D. string theorists, produce some of their best work. Employees aren’t above turf wars, either: A power grab may have once lifted a Russian scientist into a larger role within the highly profitable equity business in a new guard vs. old guard struggle.

For outsiders, the mystery of mysteries is how Medallion has managed to pump out annualized returns of almost 80 percent a year, before fees. “Even after all these years they’ve managed to fend off copycats,” says Philippe Bonnefoy, a former Medallion investor who later co-founded Eleuthera Capital, a Switzerland-based quantitative macro firm. Competitors have identified some likely reasons for the fund’s success, though. Renaissance’s computers are some of the world’s most powerful, for one. Its employees have more—and better—data. They’ve found more signals on which to base their predictions and have better models for allocating capital. They also pay close attention to the cost of trades and to how their own trading moves the markets.

But as computing power becomes ever cheaper and competitors sharpen their skills, will Medallion continue to mint money?

Quants seem like saviors to investors disappointed with how mere mortals have managed their money of late. In 2016 clients plugged $21 billion into quant hedge funds, while pulling $60 billion from those that do everything else. One noteworthy quant shop, Two Sigma, managed just $5 billion during the financial crisis and has seen assets jump to $37 billion. Even old-fashioned traders such as Paul Tudor Jones and Steve Cohen are adding to their computer scientist ranks in hopes of boosting returns....MUCH MORE
One of my favorite Jim Simons quotes shows the laser-like focus. From last June:

Climateer Line of the Day: RenTech's Jim Simons Talks Politics Edition
Today's winner of the prestigious CLoD is brought to us by DealBreaker.
DealBreaker, for when reality just isn't funny enough.
“Now even if those two candidates had the same expected return — which I doubt — but even if Trump’s was as good as Hillary’s, his volatility is so enormous that his Sharpe ratio is terrible,” Simons said....

The article says 'Renaissance Capital' but meant Renaissance Technologies.
RenCap is a research provider.
As we noted in the second link below:
...One interesting point about the recent election is that while Mr. and Mrs. Simons' politics skew left (99.99% this cycle), the firm's co-CEO Robert Mercer's, and his daughter's, skew right (100%) and in this election cycle were the fifth and ninth largest contributors nationally, at $$23,539,900 (Mercer) and $19,734,650 (Simons)...
This week:
Investing AI: "Why Machines Still Can’t Learn So Good"
Everyone wants to be the next Renaissance Technologies and are looking for undiscovered data sources and/or connections, some of it gets pretty strange, some links after the jump....
"The Devil in the Polling Data" (correlated error)