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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

#141

Post by anonu »

dcolkitt wrote: post #79
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…

> My long standing hypothesis on Medallion is that they figured out how to apply gauge theoretic techniques to financial markets. No. Listen to the Talking Machines podcast with Nick Patterson (who was a senior VP in research at RennTech for a long time). To paraphrase he says that the vast majority of their strategies are no more than simple linear regression. The challenge is that even though regression is conceptu…

Agree with this 10x. In my experience in high frequency trading, simple always wins out.

Building a workflow around simple concepts is where the engineering challenge lies.

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

#142

Post by anonu »

cynusx wrote: post #126

I have a much more simpler (not based on any evidence) theory which kind of explains the founders' alignment with Russian interests. Most of medaillon's returns are made with insider trading from hacking. The data science part is just come up with explanations that are complex enough and not easily disproven (e.g. find a correlating variable and explain that you had a magic algo that derived prediction from that corr…

I think the SEC and finra have probably poured over the surveillance data for countless hours. They would have found something.

Also they trade 1000s of stocks. So the insider trading theory would not hold up.

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

#143

Post by tehlike »

cynusx wrote: post #126

I have a much more simpler (not based on any evidence) theory which kind of explains the founders' alignment with Russian interests. Most of medaillon's returns are made with insider trading from hacking. The data science part is just come up with explanations that are complex enough and not easily disproven (e.g. find a correlating variable and explain that you had a magic algo that derived prediction from that corr…

Keeping something like this secret is... Hard.

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

#144

Post by hash872 »

tomp wrote: post #88
hash872 wrote: post #60

>Robert Mercer, the former co–chief executive of Renaissance Technologies, allegedly told a friend that Medallion was right 50.75 percent of the time when it came to its millions of trades — adding that “you can make billions that way.” Totally not a finance guy, but how can this be true with drawdowns? The losses are worse than the gains- if you had $100 and take a 33% loss, it would take a bit more than a 50% gain…

No, you bet 100 x $1, win 50.75% of the time, so you make $1.5 in profit. Now repeat 1bn times.

But if you're losing (undefined amount of money) on 49.25% of the trades....

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

#145

Post by smabie »

slumdev wrote: post #124
smabie wrote: post #95

Earlier quoted context omitted.

According to my models there are very few market environments in which you would make less money with a leverage ratio of 2.5x. In order maximize return your leverage should be: Expected Return/Expected Variance For example even if the expected return is 1% and the vol 5%, the ideal leverage ratio for maximizing return is 4x! In short, a 2-3x leveraged ETF is an excellent investment and should outperform the index in…

I can appreciate this, but the fund decay actually has nothing to do with leverage. All "leveraged" ETFs (to the best of my knowledge) are synthetic - they achieve their "leverage" using derivatives, not by borrowing. These derivatives are not free, and like an option, can expire worthless. That's how the value in these ETFs evaporates over time, regardless of how the market performs.

Of course not “regardless” of how the market performs, take a look at UPRO over the last 2/3 yrs. But those are in theory reasonable concerns, however empirically most leveraged funds have performed as promised relative to their benchmarks (with a couple notable exceptions I admit). The entire point of derivatives (as suggested in the name) is that they inherantly bear an underlying relationship to their underlying security.

If you look at UPRO, its daily returns almost exactly track 3x of SPY. There’s no long-term “decay”, unless you are referring to volatility drag. VIX etfs are the notable exception, in that they do suffer from persistant negative carry.

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

#146

Post by ilzmastr »

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…

I highly doubt it. Most of their hires were more machine learning with speech types from IBM, rather than topologists. I doubt the topologists they did hire were being hired for their expertise in fiber bundles rather than for their general intelligence and intellectual curiosity.

I think other commenters are correct when they say HMMs and linear regression made them much of their money in the 90's. I wrote an article [0] summarizing this.

But it is always tempting to think they must be doing something esoteric and mystical at Medallion. A part of me thinks that when interviewed the employees of Medallion say they do whatever simple XYZ technique from quantopian.com/lectures just so that the reporter with a distant memory of HS math leaves them alone. Another part of me does believe that you can do simple things at scale and still make money.

[0]: https://medium.com/@ilyakavalerov/the-man-who-solved-the-mar...

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

#147

Post by o_nate »

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…

Another analogy would be the theory of perfectly competitive markets. It makes sense for economists to assume this in many cases, even though that would imply that consistently profitable firms are impossible.

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

#148

Post by ilzmastr »

omarhaneef wrote: post #132
hogFeast wrote: post #130

Earlier quoted context omitted.

There is a book that explains what Baum did (it wasn't this).

Say more. Do you mean "The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution" which I read, or another book?

Yea I mean that book basically says that Baum wasn't interested in using his or any algorithm with trading. He just had hunches and a value system that he really believed in for what world events would do to currency prices. I think that part of the book is totally believable. Medallion didn't make a name for itself until long after Baum left.

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

#149

Post by sweeneyrod »

codingslave wrote: post #136
sweeneyrod wrote: post #105

Earlier quoted context omitted.

No, it's the exact opposite. The limit of how much money you can put through a given strategy mean there is an antieconomy of scale that encourages lots of small firms.

this is the complete opposite of true. I work in the industry, too busy to write up a response. But basically, the top five hedge funds are making most of the returns and are attracting most of the capital. the industry is consolidating

It's certainly plausible that the few best funds are outliers in terms of return. And I'm sure they attract a lot of capital in the sense that a lot of people want to invest in them, but that doesn't mean they allow it. As far as I can tell, the top 5 hedge funds by AUM have around 10% of the whole sector's capital. In comparison, the top 5 tech companies in the S&P500 have market caps summing to around 10% of the whole index (not just the tech sector).

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

#150

Post by SirLJ »

femto113 wrote: post #118
SirLJ wrote: post #70

Earlier quoted context omitted.

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 Medallio…

I think we already went to deep into the hole on this :-)
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