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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

#111

Post by throwaway2048 »

RookyNumbas wrote: post #103
jjoonathan wrote: post #39

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 mon…

This would only explain the performance for the last 10 years. There were no "sucker" funds for the first 20.

How do you know?

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

#112

Post by SirLJ »

gjm11 wrote: post #97
SirLJ wrote: post #71

Earlier quoted context omitted.

any successful academic in economics making money in the stock market? Or I am missing something? Maybe a Nobel winner from Chicago?

I don't know what that "in economics" condition is there for. I expect there are plenty of economics professors doing very nicely in the stock market, but it tends to be mathematicians and physicists who found hedge funds. Successful academics who have done that and made shedloads of money in the stock market would include, er, Jim Simons, founder of Renaissance Technologies, the very firm under discussion in this th…

The author of the study was not a math professor, so your example is not relevant to my comment...

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

#113

Post by RookyNumbas »

dcolkitt wrote: post #87
RookyNumbas wrote: post #33

Earlier quoted context omitted.

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 sta…

Providing liquidity doesn't necessarily mean HFT. It doesn't even necessarily mean classical market making. Here's how I like to think about liquidity. It's the market's ability to absorb random imbalances in the non-informed order flow (while still correctly engaging in price discovery for informed order flow). In other words it looks a lot like what economists call price elasticity. Having a lot of participants who…

I don't disagree with anything you've written. But if you name a strategy, I can make a case for why it's providing liquidity.

On the one extreme, some firms truly are paid to make liquidity. This is the basis of the maker-taker model. I think Rentech is at the other end of the spectrum.

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

#114

Post by throw0101a »

dcolkitt wrote: post #90
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…

The efficient market hypothesis is a lot like Newtonian gravity. It's not a perfect theory, but it's a pretty close approximation that pretty much covers most any domain outside very exotic conditions. If somebody comes up to you, a random Joe Schmoe, and tells you they have an investment that consistently beats the market on a risk-adjusted basis. Well... You can pretty much guarantee that they're full of shit. Even…

I was under the impression that the Fama-French (3/5) factor model do pretty well at explaining why certain stocks/sectors do better than the market average.

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

#115

Post by dmwallin »

jerf wrote: post #45
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…

Your assessment assumes a perfectly rational, 100% transparent market. The market obviously has a distribution of rationality and transparency. The most efficient parts of the market are going to be the parts that are largely rational and/or highly transparent. Making money in the remaining more irrational/opaque parts of the market is not as simple as just identifying it as inefficient, it requires either finding a pattern in the irrationality or a way of unlocking hidden information(ideally legally).

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

#116

Post by throwqwerty »

dogman144 wrote: post #78
orbifold wrote: post #50

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 trad…

seems like you know your way around the topic, do you mind putting this into more simple English? Wikipedia on gauge theory was impenetrable from step 0 for me unfortunately

imagine all the wind on the earth's surface right now. that's a vector field or gauge (as physicists call it). there are many units that it could denominated in (meters per sec, feet per second, etc). changing from one to the other is a gauge transformation (unit change, rescaling).

okay now suppose you want to compare the wind at two points. you can't just take the vectors at those two points and take a dot product because they're not in the same vector space (each of them is in a vector space tangent to the point they're anchored at). to figure out the issue with doing this watch this video

https://youtu.be/p1tfZD2Bm0w?t=170

you have to perform parallel transport. one way to do this is to track how much moving the vector changes it (messes with its orientation). that's the connection and the covariant derivative. you can then take a look at how that connection itself changes over the surface of the earth. if it's curl free (recall curl free vector field from multivariable calculus) then you don't have eddies in your wind charts i.e. you can't get faster by going around in a loop.

absolutely none of this applies to currency or equities because the surface of the earth is smooth and curved. neither of this is true about equities or securities or currency.

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

#117

Post by throw0101a »

dmwallin wrote: post #115
jerf wrote: post #45

Earlier quoted context omitted.

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…

Your assessment assumes a perfectly rational, 100% transparent market. The market obviously has a distribution of rationality and transparency. The most efficient parts of the market are going to be the parts that are largely rational and/or highly transparent. Making money in the remaining more irrational/opaque parts of the market is not as simple as just identifying it as inefficient, it requires either finding a…

> ... or a way of unlocking hidden information(ideally legally).

One example of which is hedge funds using satellite imagery:

* https://news.ycombinator.com/item?id=20243810

* https://newsroom.haas.berkeley.edu/how-hedge-funds-use-satel...

* https://www.theatlantic.com/magazine/archive/2019/05/stock-v...

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

#118

Post by femto113 »

SirLJ wrote: post #70
ceejayoz wrote: post #59

Earlier quoted context omitted.

Do they have to lose $100B, or just underperform? People have accepted 2% fees on managed funds despite underperforming an index fund for decades .

100B is what Medallion made during those years, the money have to come from somewhere...

If you layer credit into the wormhole it seems like you don't even need "losses" in the sucker funds. In essence Medallion establishes that it is "low risk", it is then able to borrow money more cheaply than other parties. Through the wormhole it can then indirectly "reloan" that money to higher risk sucker funds at higher rates. The sucker fund can still win, but it pays Medallion back more in interest than Medallion pays to the original source of money. Medallion's capacity is constrained by the amount borrowed by the sucker funds and the margin between what it can borrow vs lend at.

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

#119

Post by chollida1 »

RookyNumbas wrote: post #110
stanferder wrote: post #100

Earlier quoted context omitted.

I find it really hard to believe that the fund can be generating returns so consistently by pursuing a variety of different strategies over time. It seems very unlikely that Renaissance/Medallion constantly finds these things, whereas other operations almost never do. The conspiracy theorist in the back of my brain thinks that Renaissance/Medallion hires a lot of eggheads so they can plausibly claim to keep finding m…

These eggheads (very) occasionally move to other firms and see similar returns. Of course rentech then sues those other firms for all the profits they make. And they win.

> These eggheads (very) occasionally move to other firms and see similar returns. Of course rentech then sues those other firms for all the profits they make. And they win.

Not true at all as far as I know.

Name one member of RenTech that went else where and made similar returns; I don't think you can because its never happened as far as I know.

The closest I can think of is Pavel Volfbeyn and Alexander Belopolsky leaving to join the Millenium fund.

Their performance there was so poor even not comparing their performance to what RenTech did so much so that they were let go even after Millenium settled the lawsuit with RenTech that allowed them to stay at Millenium.

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

#120

Post by jandrewrogers »

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'

Many years ago, Jim Simons took an interest in my theoretical work on discrete topology (still unpublished) in the context of this fund. Among other things, this research provided a powerful mechanism for finding relationships in data that are effectively intractable to discover by more conventional means. Many of the mathematicians associated with Renaissance at the time had diverse and impressive theoretical backgrounds, all focused on different areas of mathematics that could loosely be applied to discovery of signals that, importantly, would be difficult to find via more conventional statistical analysis.

My immediate impression was that this was not a coincidence. Having talked to many other hedge funds over the years, I've come to realize that this is even more anomalous than it seemed at the time. While you will sometimes find a person on the cutting edge of these kinds of mathematics at other funds it tends to be an isolated case. Many hedge funds have boringly simplistic approaches to signal discovery. People overestimate how widely distributed and available this kind of expertise is.

Renaissance are not better at investing per se, they are better at signal discovery than anyone else and invested heavily in maintaining that (meta-)edge over the years, the investing part is relatively mechanical after the signal is discovered.

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