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Renaissance Technologies Medallion fund is one of the most successful hedge funds - ever! Yet it is very secretive.

Do you have information on the strategy used that is not yet mentioned in the Wikipedia article above?

Is there really something fundamental going on (the Holy Grail of investing) - or will this be the next Madoff?

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@vonjd: [From wiki] "Started in 1982 by James Simons, Renaissance currently has more than 15-billion in assets under management. Since 1989, the company's 5-billion Medallion Fund has averaged 35% annual returns" - what am I missing, why is the fund only 15-billion 30 years later if it pulling an average annual returns of 35%? – blunders Apr 18 '11 at 12:15
@vonjd This seems like a really loaded question; the wording makes it appear you've already made your conclusion. As an aside, RenTec (mostly) doesn't have outside investors. – chrisaycock Apr 18 '11 at 13:23
@chrisaycock: do you have references for these fascinating facts about HFT shops? – vonjd Apr 18 '11 at 14:42
@vonjd Tradebot has been profitable every quarter since 1999 and has not had a losing day in four years. Tradeworx affiliate Thesys Technologies recruits traders with a Sharpe of 10-15+. – chrisaycock Apr 18 '11 at 15:34
There's a very long, multi-year post on Nuclearphynance about Renaissance. It's all pure conjecture, of course, but there are some grains of interesting information in there. link – I-CJW Apr 19 '11 at 9:35
up vote 11 down vote accepted

There are a some information about Renaissance Technologies available in The Quants from Patterson.

Basically, and it's also what I heard in general, they are using intensively algorithmic trading, and from what I understood there are using Information Theory (they worked with Shannon if I remember well).

I'd say it'd be harsh to say it's the next Madoff given the background they have, I can easily see them being simply better than the rest...

It's just my opinion of course...

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+1: After doing some browsing in the book it seems as though they are using techniques from cryptography and speech recognition - impressive, thank you! – vonjd Apr 18 '11 at 14:31
yeah, Information Theory is all about pattern recognition. quite cool indeed. – SRKX Apr 18 '11 at 14:36
I created a follow-up question: quant.stackexchange.com/questions/1004/… – vonjd Apr 18 '11 at 14:39
i'm sure thats not all they use even for there main funds... – pyCthon Jan 19 '13 at 0:14
@pyCthon I never implied that.... – SRKX Jan 19 '13 at 15:51

The Medallion Fund doesn't take outside investors. They returned the original investor money years ago. So: if it's a Ponzi scheme, then they've figured out how to profit by ripping themselves off. That's nice work if you can get it.

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@user764: Well, I guess it is a little more complicated than that. They have other funds which are not turning down outside investors. So maybe their Madallion fund is the wannabe wunderkind acting as a teaser. But again: If it really works they seem to have found the holy grail of investing - and I am interested in that too ;-) – vonjd Apr 18 '11 at 19:34
Renaissance only opened the two other funds in 2005 or so. They made ~40% annualized returns (after fees) for at least 15 years before that. – user1115 Apr 19 '11 at 16:51
this made me laugh +1 "profit by ripping them selves off" – pyCthon Oct 16 '12 at 13:48

"There is no secret sauce!" - Inside the Black Box: The Simple Truth About Quantitative Trading, by Rishi K.Narang

In this book, which is well worth reading to get a good conceptual overview of the different components of a quant trading system, the author tells about "one of the most successful" quant funds hiring only the best academic researchers and outperforming competitors every year. However, he claims (by quoting a former employee of the fund if I am not mistaken) that what makes the fund so profitable is the constant and meticulous improvement of every aspect of the system. From technological aspects such as hardware and software platforms, to extremely well researched parts of the system which others may not traditionally focus greatly on. Of course, they have a rock solid alpha model, but order execution algorithms, data streams/cleaning processes, and transaction cost models are considered (at least) equally important.

The point being made by the author is in other words that the strategy itself, although naturally very advanced and "top-notch", is merely one part of a very well oiled machinery where extreme focus is put by every single component, to shape something that is bigger than the sums of the individual constituents.

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I think the key to fund performance is the use of own money, not borrowed. In this case, it is possible to implement strategies that ordinary hedge funds can not use due to risk management.

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Given their choice in hiring mainly academics from the fields of NLP and cryptography(at least in their early days), my guess is that they have been using something derived from information theory and/or hidden markov models.

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I live very close to their office on Long Island and went to Stony Brook University, where they hire from at times - and the only few couple of people I know that got hired there were pure genius. I really doubt they are a ponzi scheme! I drive by their gates every now and then, definitely secretive but totally legit in my books.

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It is neither Holy Grail nor next Madoff, although it could be perceived as the former if it continues to do well or could be perceived as the latter if it crashes and burns ... but that's just because the general populace [including the financial news media] are so clueless about economic theory, quantitative finance and the practical details of how trading is done ... the methods of Renaissance pretty straightforward; they are not about some sort of magic talisman voodoo witchcraft OR aggressively seeking out idiots and tricking honest people to believe in some sort of magic talisman.

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What are their methods? If you can claim that they're straightforward then that implies that you know what they are. – Jase Jan 19 '13 at 3:30
It's like watching the best painter or sculptor in world...or a martial artist...or a musician. Understanding the general nature of the methods is a lot different than really understanding the art. Genius is in the artful application of [relatively] simple methods ... of course, getting lucky doesn't hurt, except in what it means for overconfidence -- so it's more important to work on capital preservation and the margin of safety. – markbruns Feb 18 '13 at 5:59

The Wiki pages seemed to have been upgraded :)


Investment strategy

Renaissance uses computer-based models to predict price changes in easily-traded financial instruments. These models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions.

[Teitelbaum, Richard (2008-10-27). "Simons at Renaissance Cracks Code, Doubling Assets". Bloomberg. Retrieved 2009-06-02.]

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