Medallion Fund “Stretches Explanation to the Limit,” Professor Claims • Hacker News Board

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

#41

Post by RookyNumbas » Wed, Jan 29, 2020, 2:32 PM UTC

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?

No, the medallion fund existed for 20 years before these other funds were opened.

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

#42

Post by smabie » Wed, Jan 29, 2020, 2:37 PM UTC

codingslave wrote: post #3

Investing is like tech, its winner take all. This is like being surprised that Google dominates search

No it’s not. The market return isn’t zero-sum. Everyone can acheive it (by definition). Moreover, there’s a lot of different kinds of alpha in the market and no one firm is going to be able to capture anymore than a small chunk.

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

#43

Post by smabie » Wed, Jan 29, 2020, 2:41 PM UTC

codingslave wrote: post #21

endorphone wrote: post #4

Earlier quoted context omitted.

Only it isn't like that at all.

areas like HFT are

HFT isn’t investing. Moreover, RenTec isn’t a HFT firm. No one knows exactly what they do, but I suspect they are primarily a market neutral short-term factor model firm with a very very good execution and slippage model.

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

#44

Post by endorphone » Wed, Jan 29, 2020, 2:41 PM UTC

codingslave wrote: post #21

endorphone wrote: post #4

Earlier quoted context omitted.

Only it isn't like that at all.

areas like HFT are

There are dozens of HFT players, all endlessly leap-frogging each other. Despite the fact that HFT is actually a relatively tiny market (the crumbs claimed by the HFT market account for at most a couple of billion a year), and is grossly overstated in significance.

In the broader market there are tens of thousands of major players, and millions of smaller participants. There is no network effect, and the market is so enormous that it doesn't concentrate.

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

#45

Post by jerf » Wed, Jan 29, 2020, 2:44 PM UTC

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…

Nobody believes in the 100% efficient market. It's not even possible.

But if someone's got a bead on a 99.99% efficient market, they can make a lot of money, whereas if you say "Ah ha! The market is not perfectly efficient! Here, I can make money doing this!", you probably won't make much.

(Then there are those who think the market is like maybe 10% efficient, in which case my response is, if it's so inefficient, go make money. That would imply all sorts of arbitrage opportunity. Why slave away in whatever job you may have now when there's such an inefficient market just waiting for someone smart & clever to pluck it? The answer is that where ever the market may be on the range of 0-100% efficient, to the extent that such a measurement is even particularly definable, while it may not be exactly 100.00000%, it's much closer to that than the 0% side.)

(Remember, efficient doesn't mean good or moral, which I think is the most common mistake I see on HN. It means something much more like "there are no easy arbitrage possibilities". It hasn't got anything to do with "goodness" or "morality" any more than analyzing gravity or electromagnetism in terms of its goodness or morality makes any sense.)

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

#46

Post by smabie » Wed, Jan 29, 2020, 2:46 PM UTC

CPLX wrote: post #18

The hedge fund business is and has always been based on insider trading. Ockham’s razor looms large over this conversation.

If that were true, you’d expect that as a group they would have better risk adjusted returns. I personally have not witnessed any insider trading in the industry and suspect it quite rare nowadays. It was more common in the past, though.

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

#47

Post by toss1 » Wed, Jan 29, 2020, 2:51 PM UTC

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…

OK, what behaves like a Ponzi scheme that lasts too long?

Money Laundering of assets on a national scale, e.g., for oligarchs who have taken 95% of a nations' wealth. Their biggest problem is to get it "legitimately" into the international money system.

If the fund owners have really discovered a technological "secret sauce", why isn't it working in their other funds?

Not a conclusion, but a valid open question.

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

#48

Post by crawftv » Wed, Jan 29, 2020, 2:54 PM UTC

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…

The reason is that they are highly levered with many small short term trades. >dealbook.nytimes.com/2014/07/21/senate-inquiry-faults-hedge-funds-tax-strategy/https://dealbook.nytimes.com/2014/07/21/senate-inquiry-fault... “Jul 21, 2014 Within these complicated financial structures, Renaissance Technologies was able to borrow as much as $17 for every $1 in the account.”

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

#49

Post by onetimemanytime » Wed, Jan 29, 2020, 3:04 PM UTC

peteradio wrote: post #36

macspoofing wrote: post #31

Earlier quoted context omitted.

>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.

Ok, new Medallion-like fund accepts lower returns, meaning its partners get better deals then under Medallion. Why wouldn't they leave Medallion? This is since 1988 apparently. I don't buy that they are the "smartest people" or that they are doing something so amazing that others don't get.

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

#50

Post by orbifold » Wed, Jan 29, 2020, 3:07 PM UTC

My long standing hypothesis on Medallion is that they figured out how to apply gauge theoretic techniques to financial markets. This fits with Simons work that he did before he founded the fund. The fact that gauge theory is applicable to for example currency trading is folk knowledge in the Havard, Princeton, IAS circles (here is for example the lecture notes of a popular lecture by Maldacena that uses currency trading as an example of a gauge theory https://arxiv.org/pdf/1410.6753.pdf).

In currency trading example the curvature $F$ of the gauge connection $A$ vanishes precisely, when there is no arbitrage opportunity. Now what Chern and Simons discovered is a differential form K (https://en.wikipedia.org/wiki/Chern–Simons_form), which when taken as the action S(A) of a gauge field $A$, has a corresponding field equation $F = 0$ (i.e. in the finance case = no arbitrage). In these equations time does not enter, however there are several ways in which on can incorporate time into the picture (for a naive example see also the lecture notes). Assets in this framework live in associated vector bundles of the principal bundle defining exchange rates.

My speculative assertion is that it is possible to identify "topological invariants" which can be computed by sequences of trades, i.e. parallel transport along the gauge connection and that those can have provably positive expected return. The fact that the fund is limited to a small amount of invested capital might be related to the fact that the strategies require measurements, that would have self-interactions if they were too large.