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

institutionalinvestor.com

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

#31

Post by macspoofing »

jkhdigital wrote: post #19

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 acco…

>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.

Why are they better?

This still requires the same kind of explanation as 'they are simply better at investing than anyone in the world'

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

#32

Post by Noughmad »

ajmurmann wrote: post #22
scottious wrote: post #2

I'm no finance expert but doesn't this all seem way too good to be true? At first I was reading this and thinking "how is this not exactly like Bernie Madoff?" Then they say "The Medallion fund has been closed to external capital since 1993 ... whatever profit they make, they pay out". So clearly it can't be a ponzie scheme? Still, it seems too good to be true. If financial experts are stumped as well then that also…

Could they been moving money from their open to investments , less successful funds to the medallion fund? Maybe even thought the market via trades?

This makes a lot of sense. Sacrificing a percent of profit from other funds won't make that much of a different in the minds of possible investors, but managing a fantastically high fund must be a good advertisement.

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

#33

Post by RookyNumbas »

jkhdigital wrote: post #19

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 acco…

I'm not sure how accurate this tactical liquidity picture is, at least for much of medallion's history. For a good portion of their existence they called in all their trades twice a day. Them being fairly late to the automated trading game was one of the the surprises from the book for me. Any "HFT" as mentioned in the article is not done by renaissance, but through execution services.

The big picture seems to be statistical arbitrage done with extreme precision and leveraged to a massive scale. Add in some quasi-legal agreements with banks, and likely tax-fraud, they are able to do this at a magnitude no one else can.

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

#34

Post by huffmsa »

scottious wrote: post #2

I'm no finance expert but doesn't this all seem way too good to be true? At first I was reading this and thinking "how is this not exactly like Bernie Madoff?" Then they say "The Medallion fund has been closed to external capital since 1993 ... whatever profit they make, they pay out". So clearly it can't be a ponzie scheme? Still, it seems too good to be true. If financial experts are stumped as well then that also…

I don't think they could keep it up for that long without slipping up at least once. Enron started around the same time and got tripped up in 2001.

If it were a one man investment shop, then maybe it leans more towards fraud. But if they obviously employ dozens of quants, and have obvious hardware outlays, it seems less likely.

It makes a lot of sense to me that they just win a bit more than they lose, play a lot of hands, and treat everything with pretty even money, so they're never overexposed in any one place.

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

#35

Post by macspoofing »

thomak wrote: post #9
scottious wrote: post #2

I'm no finance expert but doesn't this all seem way too good to be true? At first I was reading this and thinking "how is this not exactly like Bernie Madoff?" Then they say "The Medallion fund has been closed to external capital since 1993 ... whatever profit they make, they pay out". So clearly it can't be a ponzie scheme? Still, it seems too good to be true. If financial experts are stumped as well then that also…

Financial experts aren’t stumped. The article found one guy who’s trying to get attention, but in general, folks are both impressed and pretty sure it’s real.

You have one fund that is an extreme outlier in performance over decades (!!) that nobody can explain and yet 'financial experts' aren't stumped and are 'pretty sure it's real'?

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

#36

Post by peteradio »

macspoofing wrote: post #31
jkhdigital wrote: post #19

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 acco…

>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. Why are they better? This still requires the same kind of explanation as 'they are simply better at investing than anyone in the world'

It could be an incumbent position that is just not possible to overthrow.

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

#37

Post by smabie »

scottious wrote: post #25
eaenki wrote: post #13

Earlier quoted context omitted.

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 as…

Yes very possible I don't understand what you are trying to say... I know what leveraged investing is but a lot of the details may be beyond me. This is not my area of expertise. Correct me if I'm wrong: my understanding is that you're saying that they could have taken a huge risk using a lot of leverage and they didn't lose all their money so they get their 5% + 44% (found this from a Bloomberg article). Essentially…

RenTec does use a lot of leverage, but they only can do it because there Sharpe ratio ((return-riskfree)/volatility) is over 7x. This means that if there fund had a unlevered return of 3.5% then their vol would be 0.5%. Let’s say their risk limit is to cap vol at 10%, this means that their theoretical return would be 70%. It doesn’t exactly work like this because of volatility drag. If you’re interested check out my blog post on the topic: https://smabie.github.io/posts/2019/10/04/vol.html

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

#38

Post by fnord123 »

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…

>The nasdaq 100 leveraged x3 on a daily basis returned like 50%+ YoY during the last decade.

And from 2000 to 2010, it was down 23%.

>there’s no reason why with $10B trading all asset classes one can’t return 70% YoY

There are plenty of reasons. First, if you have a small amount of money, it remains liquid. This is why HFT firms can have Sharpes around 8 - they can move the money fast because they are smaller firms.

If you have 10B USD you cannot respond to the market. You have to trade slowly and choose your positions to last a while. This leaves you with a Sharpe of around 1 if you're optimistic. Otherwise in your fantasy, you could turn 10B into 1T in 8 years.

Another reason is that as your portfolio scales, it becomes harder and harder to find uncorrelated returns.

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

#39

Post by jjoonathan »

Of the wild theories I've heard to explain the Medallion Fund, my favorite is the "money wormhole." I have no finance qualifications whatsoever -- I just stick my money in index funds -- but I love a good conspiracy theory, so here goes.

The idea is that you have two theoretically unrelated funds that take complementary positions with uneven odds. One sacrifices performance for the other, effectively transmitting money. The trick, of course, is doing this in a manner so that you have plausible deniability with regulators and, more importantly, so that other market players don't grab the money in flight, because that's what an efficient market would do. Still, consistently creating and hiding complementary pairs of good/bad opportunities is a much easier problem than consistently beating the market.

OK, so you've got a way to transmit money from a "sucker fund" to a "winner's fund" with plausible deniability, what do you do with this ability? In reality you'd probably have many "sucker funds," rotate the one that gets sucked, and limit the extent to which it gets sucked, but still, nobody's going to just buy the sucker fund, not for long, anyway. That's how efficient markets work. Well, one major, well-known, boring inefficiency is the principal agent problem: trusting others to invest your money. They can't just steal it, because that's illegal. They can't just invest in a private fund that they just happen to oversee and which just happens to pay them an enormous salary, because that's illegal. However, if they were to invest in one side of a money wormhole, which is designed to look like a perfectly reasonable investment on its own, in exchange for a cut of the proceeds from the other side of the money wormhole, who's to say the theft even happened? Such an accusation would need to untangle the coordination behavior of the money wormhole to make its case, and those inner workings could be made very convoluted indeed, hidden deep inside complementary pseudorandom behavior.

So, in short, the conspiracy theory says it's a heist -- but one that's well hidden under the veil of statistics and plausible deniability. It provides investment managers looking to monetize the confidence placed in them a way to make that happen without getting caught.

It's probably a dumb theory, but it's enough to entertain someone who knows as little about finance as I do :)

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

#40

Post by smabie »

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.

3x leverage ETFs rebalance daily, so you would still have some money since the biggest single day loss of Nasdaq is ~10%.
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