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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

#171

Post by hogFeast »

dogman144 wrote: post #81
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…

The article and Mercer's explanation basically explains Virtu's approach, and therefore makes sense wrt known performance vs. methodology from a more public company (Virtu)

Virtu is doing something totally different. You are comparing a gas station with O&G exploration.

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

#172

Post by perl4ever »

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…

"so you've got a way to transmit money from a "sucker fund" to a "winner's fund" with plausible deniability"

I've been thinking about this actually for quite a while, on a small-time scale. Consider the following scenario:

1. You have a fair amount of money in a Roth IRA, and roughly the same amount of money in a taxable account.

2. The limit on contributions per year is like $6K, and even if you put money in a 401K and then convert whenever possible, that's limited to $19K/yr I think. How can you work around this?

3. Let's assume you're approved for options in your taxable account; and my understanding is that you can buy options in a Roth account - you just can't write them.

4. So, what if you create a synthetic long position by purchasing calls on a broad market fund in the Roth, and selling cash-secured puts on the same fund in the taxable account. And maybe buy some short term corporate debt fund in the Roth to make up for the missing dividends. Not sure if you could also earn some interest on the taxable side. If the stock market goes up in the long run, then you have most of your gains tax-free in the Roth, and minimize your taxable gains. If the stock market goes down for a while, you have most of your losses in the taxable account, and minimal losses in the Roth.

5. I think there are some practical problems, but Matt Levine could probably write about them much more engagingly than me, particularly after someone tries this and gets in trouble for it.

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

#173

Post by perl4ever »

hogFeast wrote: post #128
logicchains wrote: post #62

Earlier quoted context omitted.

>Why are they better? Possible explanation: there aren't any other firms founded by as great mathematicians as the founders of Renaissance. I saw a quote online attributed to them, something like: "We hire the A-grade mathematicians. Most other firms hire B and C grade mathematicians, and don't even know the A grade exists". This fits my experience, as a D-grade mathematician working in finance. Never heard of signif…

This is only half of it. If you look at all their early employees, Robert Frey/James Patterson have profiles, they were people who knew the maths AND knew how to apply it. If you look at AHL, they have lots of people who know the maths. They have their own institute at Oxford ffs (the number of people who don't have PHds from Oxbridge there is small), and they have crap performance, year-in, year-out. It is a typical…

"this simplicity is offensive but it is also why most people with technical backgrounds get destroyed by the market"

Figuring out things nobody else can is the hard way to achieve. Figuring out what you don't know and never betting on it is an alternative way that doesn't require being a genius.

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

#174

Post by thoughtstheseus »

perl4ever wrote: post #172
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…

"so you've got a way to transmit money from a "sucker fund" to a "winner's fund" with plausible deniability" I've been thinking about this actually for quite a while, on a small-time scale. Consider the following scenario: 1. You have a fair amount of money in a Roth IRA, and roughly the same amount of money in a taxable account. 2. The limit on contributions per year is like $6K, and even if you put money in a 401K…

This is called asset location. Structure where your investments are located to maximize returns.

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

#175

Post by thoughtstheseus »

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…

100% agree. A highly overcollateraled position (not drawn capital so it doesn't show up) can be used to magnify returns. If you're playing in marketable assets you can even have the lender hold the assets themselves while you trade.

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

#176

Post by orbifold »

hogFeast wrote: post #129
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…

You should read the book. Simons had almost nothing to do with the strategy (he managed money in the 80s, he got lucky but it didn't go well generally). They tried several complex ideas, none of them worked. And the advantages they had were doing simple things well (better execution, having better data, etc.).

Well the book certainly makes it look much more mundane, Simons appears to be more of a skilled people manager and the heavy lifting was apparently done by others for the most part.

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

#177

Post by DrAwdeOccarim »

thoughtstheseus wrote: post #174
perl4ever wrote: post #172

Earlier quoted context omitted.

"so you've got a way to transmit money from a "sucker fund" to a "winner's fund" with plausible deniability" I've been thinking about this actually for quite a while, on a small-time scale. Consider the following scenario: 1. You have a fair amount of money in a Roth IRA, and roughly the same amount of money in a taxable account. 2. The limit on contributions per year is like $6K, and even if you put money in a 401K…

This is called asset location. Structure where your investments are located to maximize returns.

Right, I didn't think what he was describing was all that risque. What I'm trying to figure out is if there is a way to sell a cash-secured put on a way OTM option from the IRA then buy that put in the taxable account. Then let it expire worthless. Could that transfer money into the IRA and nab a tax loss deduction in the taxable account?

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

#178

Post by knzhou »

throwlaplace wrote: post #106
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…

change of gauge just means a rescaling. of course currency is the perfect example of a change of gauge for an expository piece like that arxiv paper (it's relatable). it doesn't mean there's some fundamental relationship to gauge theory to markets. arb free here gets encoded as the curl of the connection being 0 but that's just saying you can't loop through the currencies and come out with more money. it's tautologic…

This was a fantastic comment, good to see misapplications of abstraction get pushback.

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

#179

Post by hogFeast »

perl4ever wrote: post #173
hogFeast wrote: post #128

Earlier quoted context omitted.

This is only half of it. If you look at all their early employees, Robert Frey/James Patterson have profiles, they were people who knew the maths AND knew how to apply it. If you look at AHL, they have lots of people who know the maths. They have their own institute at Oxford ffs (the number of people who don't have PHds from Oxbridge there is small), and they have crap performance, year-in, year-out. It is a typical…

"this simplicity is offensive but it is also why most people with technical backgrounds get destroyed by the market" Figuring out things nobody else can is the hard way to achieve. Figuring out what you don't know and never betting on it is an alternative way that doesn't require being a genius.

Just my 2c, and this is more based on my experience academically, almost no-one figures things out that nobody else can. Innovation is largely a combination of circumstance and timing. Some ideas just have their time. Having unrealistic expectations around this is part of the problem (AHL went in thinking they could just hire a bunch of "boffins"...but they are all average, they just have PHds or whatever).

I don't think it is only knowing what you don't know either. That is a component but people from academia are rarely overconfident, the opposite is usually true (they tend to react badly under pressure). These people have a "circle of competence", they know what they don't know...but they don't really have anything else. All these places are churning massive resources into education, into human capital...is that working? It clearly works in some places and not others. I am just very cautious of the "know what you don't know" argument because it tends towards thinking everyone should be specialists...and I don't think the world works that way.

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

#180

Post by 1024core »

ajay-d wrote: post #96
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…

That makes a lot of sense. And also explains why the the other funds aren't as 'stellar'. I mean all these quants are in the same company, how is one fund perfect, and the others lackluster.

I believe (not that I know more than anyone else) it's because their own money is invested in the Medallion fund (and not the other funds).
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