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Medallion Fund “Stretches Explanation to the Limit,” Professor Claims

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Re: Medallion Fund “Stretches Explanation to the Limit,” Professor Claims

#11

Post by relham »

eaenki wrote: post #6

The nasdaq 100 leveraged x3 on a daily basis returned like 50%+ YoY during the last decade. And that’s an index. Buffet himself said he could return 50% YoY consistently with a small(ish) amount of money. (He manages like half a trillion) there’s no reason why with $10B trading all asset classes one can’t return 70% YoY. You must note that the fund is capped, the execution costs are incredibly low and that over the l…

3x levered nasdaq 100 would give you an annual volatility of at least 30-50%, occasionally much much higher. The crazy thing is that medallion presumably achieved this with a very small volatility and no significant drawdowns. Nasdaq 100 was down -42% in 2008, so levered 3x you would be out of business.

Re: Medallion Fund “Stretches Explanation to the Limit,” Professor Claims

#12

Post by Tycho »

empath75 wrote: post #7
Tycho wrote: post #5

Seems to me there's an obvious flaw in the efficient market hypothesis. It states that, essentially, you can find no sustainable edge because the market rapidly reacts to information. Meaning, if there is some information relevant to expected investment performance, investors will immediately act on it, extinguishing the information advantage. But what if the opportunity is some kind of abstract pattern that doesn't…

I think the idea is that once someone figures out how to exploit it, others will soon.

But I don't see why that would be true if we're talking about arcane patterns in data. Who's to say anyone's even looking at the same data, let alone the same pattern? If we were talking about intuitive patterns that map to logic and investor psychology, then sure, others will reliable stumble upon the same ideas. But if we're talking about unintuitive patterns in non-obvious datasets, the search space is far too big to assure that effect.

Re: Medallion Fund “Stretches Explanation to the Limit,” Professor Claims

#13

Post by eaenki »

scottious wrote: post #10
eaenki wrote: post #6

The nasdaq 100 leveraged x3 on a daily basis returned like 50%+ YoY during the last decade. And that’s an index. Buffet himself said he could return 50% YoY consistently with a small(ish) amount of money. (He manages like half a trillion) there’s no reason why with $10B trading all asset classes one can’t return 70% YoY. You must note that the fund is capped, the execution costs are incredibly low and that over the l…

If it's so easy and straightforward to return 50% YoY, why aren't there a proliferation of funds doing this?

You might not know how funds work? You don’t try to get the best returns, with quite a bit of risk. You try to get the best returns with zero risk of losing all the money. You get paid 2% + 20% of profits. If you lose all the money you lose your reputation too.

If you were levered x3 on the nasdaq in 2001 you would have lost all your money. Heck, even 1.2 would have lost you everything. Ditto 2008.

Having all your assets levered long term, that much, it’s risky and something you would only do with your personal capital anyway. Funds usually do that for shorter amounts of time and with a small percentage of the total assets.

Re: Medallion Fund “Stretches Explanation to the Limit,” Professor Claims

#14

Post by nateburke »

How big are the external funds? If they are large enough, it wouldn't be hard (quantitatively) to shave a percent or two off of their returns in bad medallion years to keep the winning streak alive.

The inflows inspired by the mystique shrouding medallion alone could make this easy

Re: Medallion Fund “Stretches Explanation to the Limit,” Professor Claims

#15

Post by eaenki »

relham wrote: post #11
eaenki wrote: post #6

The nasdaq 100 leveraged x3 on a daily basis returned like 50%+ YoY during the last decade. And that’s an index. Buffet himself said he could return 50% YoY consistently with a small(ish) amount of money. (He manages like half a trillion) there’s no reason why with $10B trading all asset classes one can’t return 70% YoY. You must note that the fund is capped, the execution costs are incredibly low and that over the l…

3x levered nasdaq 100 would give you an annual volatility of at least 30-50%, occasionally much much higher. The crazy thing is that medallion presumably achieved this with a very small volatility and no significant drawdowns. Nasdaq 100 was down -42% in 2008, so levered 3x you would be out of business.

Of course. It’s not an apple to Apple comparison, it’s just to point out those returns are possible. Also, would you rather have invested your salary from 2003 to 2020 not leveraged or always leveraged x3, bust in 2008, and then cash out today? Probably the latter. And that’s pretty consistent. After a recession, you usually have a decade of growth. So not exactly hard to do either.

Re: Medallion Fund “Stretches Explanation to the Limit,” Professor Claims

#16

Post by scotty79 »

There are two simple explanations for this:

- somebody lies.

- one out of hundres of thousands may seem (and be) incredibly lucky for quite long. Until it isn't.

With the amount of transparency involved in this case for all I know they could be just laundering money for mafia by doing too many transactions that anyone could ever audit and claiming profit on them.

It's way easier explanation than "random walk is not random" and even easier than "they got 30 years of luck on random walk where second best got 5 or sth." which still is not so implausible as the first one.

Re: Medallion Fund “Stretches Explanation to the Limit,” Professor Claims

#17

Post by thedudeabides5 »

empath75 wrote: post #7
Tycho wrote: post #5

Seems to me there's an obvious flaw in the efficient market hypothesis. It states that, essentially, you can find no sustainable edge because the market rapidly reacts to information. Meaning, if there is some information relevant to expected investment performance, investors will immediately act on it, extinguishing the information advantage. But what if the opportunity is some kind of abstract pattern that doesn't…

I think the idea is that once someone figures out how to exploit it, others will soon.

Sure, but isn't this as much an argument for efficient markets as anything.

Literally hundreds of thousands of folks have died on the very hill Medallion is holding.

The fact that there is just one firm with this track record is evidence that markets are pretty hard and relatively efficient.

Whether markets are so perfectly efficient that no firm can really beat the market, well that just seems like a pretty academic and unhelpful question.

You don't need some grand perfect market hypothesis to say 'man those returns look a bit too good to be true, what's really going on in there?"

Re: Medallion Fund “Stretches Explanation to the Limit,” Professor Claims

#19

Post by jkhdigital »

As the article hints at, Medallion isn't really an investment fund so much as a pool of capital which is employed in the business of providing tactical liquidity to markets. This is a business where one's competitive advantage rests upon their technological advantage, and Renaissance has been exceptionally adept at building and maintaining that advantage.

The EMH is a theoretical concept that must be tempered to account for the frictions inherent in reality. As my PhD advisor likes to say, "all models are wrong; some are useful." Liquidity is a major friction in real-world markets, and providing liquidity (i.e. a means of moving capital into and out of specific assets) is a service that is compensated accordingly.

In other words, I think Renaissance is simply better than anyone in the world at finding the markets where traders are willing to pay the highest premiums for liquidity, and providing it in a timely and measured dose that ensures they skim the cream off the profit opportunity. There are a limited amount of such opportunities, so they must limit the amount of capital employed to maintain the high rate of return.

Re: Medallion Fund “Stretches Explanation to the Limit,” Professor Claims

#20

Post by fsckboy »

the magic $10 billion number capping the size of the fund also seems curious because why would it be impervious to change over a period of 25 yrs in which the scale of trading volumes, market capitalization, etc. have all grown?

also, groups of people don't perfectly share ideas, outlooks, etc. especially over time. Humans tend to argue, debate, tug of war. If this task (the puzzle they are solving) requires a team of people, the 1st tiers and 2nd tiers, again, how does that translate to a steady $10 billion "working capital" portfolio and steady returns over 25 yrs, this money sucking tick parasitically attaching itself to a stochastic market that has undergone vast changes, but itself staying so consistent?

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