Someone Please Convince Me Jim Simons Isn't Complete BS
Hey WSO -
No real reason but something I've long thought about has been the claimed returns of the Medallion Fund / Jim Simons.
There are a few things I can't put my finger on which, when put together, make things fishy to me - I'm going to list them and I just wanted to start a discussion to see if any industry vets / people in the "know" can shed some more light on this topic so I can accept his success.
Note - numbers denote subbullets to main bullets, I don't know how to use formatting well on this website.
Things Often Quoted
- 66% CAGR for 30 years
- In that same fund, the fees were 5/44 instead of the traditional 2/20
- Only employees invested in it with no outside capital (not for its entire lifetime, but for the latter and a significant part of it)
Some Other Facts Often Not Quoted / Contradictory Items
- Returns are only ever claimed by investors, and since the fund isn't open to the public, they are unverifiable - have they ever been verified by an external, unbiased 3rd party? I haven't seen it
- In 2021, Renaissance affiliates paid the largest tax settlement in US history (~$7bn) because they were abusing a tax loophole to make all of their capital gains fall under LTCG instead of STCG; I read once that this wiped out an enormous amount of their outperformance for many years
- Does this not imply a massive part of their strategy was that they employ HFT / other tactics leveraged by algorithmic trading firms and simply dodged paying taxes? Hardly elegant or sophisticated in a trading sense and it implies their strategy really wasn't that differentiated.
- Instead, they were just scamming the government and didn't even get away with it. Further, I think there are statute of limitation laws - they were only investigated for 5 years, so theoretically, couldn't a huge portion of their gains also have benefitted from this loophole, they just couldn't be penalized for it?
- How could they charge management fees at all, let alone 5 / 44, if all the investors are insiders / principals of Renaissance (Jim himself)??
- What algo did they have that could work with several billion dollars but not a few billion more? I admit this is my naivete showing in the HF space with strategies, but I can't fathom it. Successful investment platforms have scaled from the $100mms into the $10bns - what gives?
- Where did these execs then invest their money? If they are that smart and beat the market so soundly for years, why would they ever invest elsewhere? Could Renaissance not come up with slightly less successful trading algorithms that work with 10x the capital?
- Their performance has sucked ass at times in their other funds, yet they've barely ever lost money in Medallion?
Conclusion
I have no doubts Jim Simons was a genius and I'm sure he was a billionaire but there is so much secrecy surrounding his fund (intentionally I'm sure - too much attention means prying eyes, which leads to things like their tax settlement...) and I find it hard to believe everything you read online.
I am skeptical by nature, but at worst I think the Medallion Fund is the greatest piece of marketing ever invented for Renaissance to collect fees from LPs invested in all their other strategies while they get to tout unverified returns year after year.
Would love to discuss this with anyone and everyone on this forum.
Not addressing everything because I’m lazy and I’m not a quant. But the point of fees was to push LPs out of the fund. Eventually they kicked them out because they wouldn’t leave even with the absurd fees.
About finding different algos (again not a quant)…if you can trade your own money with Ren tech’s results and reinvest to where you are constantly at capacity I have no idea why you’d want to find a way to increase a few b aum and halve your own returns. Look at the top prop firms nowadays they are prop firms for a reason…there is limited capacity for high velocity, high sharpe strategies where they are contributing to a vast majority of volume on said market they are trading. It’s very easy to become correlated to other algos you are running and other HFT’s strategies.
Finally, an older guy I chat with here and there is actually friends with Howard Morgan. The shit I’ve anecdotally heard from him is pretty crazy.
On fees, I guess that makes sense but I've never heard or seen that before - is it stated anywhere? Makes sense to charge exorbitant fees as your own wallet grows in size, until the point where you can "fill" the capacity of the fund based on its strategies... however this leads to my next point.
If you trade your own money and supposedly (lets keep it simple) generate 66% annually, they would eventually be "at capacity" even after they'd kicked out all other investors, right? Like once they hit $10bn of their own money (however many years ago that was) the next year they'd be $6.6bn over capacity immediately? So, where does that money go? What is viable at $10bn that isn't at $16.6bn?
On your last point, that's super interesting. Any cool, not extremely identifying stories you can share here or in my DMs? Would love to know.
He's the 2nd richest HF manager in history behind Kenny G and has the best annual % returns ever.
/thread
You're just quoting what everyone else says, which is exactly what I'm calling out... and you have rockets and GME in your name.
I was snarkily answering your snarky clickbait title buzzed at 4am on mobile in an uber ride home from the casino, so being concise was key. What "everyone else says" is of course filled with some degree of speculation because as you said there's intentionally a lot of secrecy around him/the Medallion fund. So you're not calling out anything, you're just choosing not to believe what's been verified (to the extent these types of claims can be) by sources that have spent far more time researching the subject than anyone on this forum. Also fun fact, GME is one of the last securities Rentech bought while Jim was still alive. So go ahead and be condescending, I'm content making >2x your salary off simple condors on my shares.
The simple answer to your title is just how rich Simons was. The only reason Kenny G took the #1 HF manager spot is because Jim is under the ground. A startup founder or charismatic HF manager (e.g Billy A) can get to a few Bs with good marketing, some lucky 1-off calls, and keep compounding it with moderate performance for the rest of their lives. But to be personally worth 10s of billions and have kept growing it at the rate he was on its face indicates there's a degree of truth to what they/others claim they're doing. But to answer your questions:
No. And there's no reason they'd let anyone, because even if they're only performing 50% as good as they say they do why would they ever want to open their books to some mongaloid CPA and even risk the chance there's a leak if they don't have to. There's 0 upside to doing so and it can only hurt them. Textbook negative freeroll.
They're literally a quantitative hedge fund / prop trading firm... so yes, obviously they use algo trading and elements of HFT. That's not something they try to hide. They're not "investing" in companies or securities in the traditional sense. They're indifferent to what the underlying entities are doing and aren't trying to form a long-term view on them. They're working with so much data that their only concern is detecting correlations on the edge that no one else can see and exploiting them till they're no longer there. If the price of iron in Japan had some nigh undetectable relation to the yield of avocados in Mexico, they'd find a way trade it.
To say that isn't elegant is pure opinion and entirely based on your perspective on investing. To a value or PE investor like Buffett or Kravis it's probably nonsensical bordering on blasphemy to have a computer tell your how to manage money. To guys like Kenny G or Tim Reynolds on the other hand it's probably one of the most beautiful things they've ever seen. There's more than 1 way to skin a cat, if there weren't we'd all be doing the same thing.
To say that it's neither sophisticated nor differentiated is just flat out dumb. It's arguably the most sophisticated strategy in existence which is why they're filling Rentech with the world's smartest PHDs in their respective fields instead of hiring the vaunted 2+2 Harvard/HBS golden boys 99% of people on this forum wish they were. And clearly it's differentiated since since nobody else can replicate it due to the talent moat they've built.
Depends on how you look at it. Is it really scamming the government if they found a loophole the rent-seeking bureaucrats in DC hadn't thought of or is it just the most profitable instance of being "technically correct" that's ever existed? Sure the IRS came for their pound of flesh years after the fact but that doesn't invalidate the impressiveness of what they built. It just means they were unfortunate (and guilty of some hubris) to have built it while living under the thumb of one of the most offensively greedy & oppressive tax regimes in history that has no qualms about weaponizing tax collection against actual innovators.
Anyone can charge any fee they want, it all depends on what other people, in this case their own employees, are willing to pay for the privilege of getting returns that net of fees still dwarf anything they could get from someone else. Those eye popping fee ranges often quoted are 100% accurate (I've personally verified this with the family member of a longtime friend who's a PHD that recently accepted a job there) which is another big flashing indicator that they're offering a product that's comparatively unique to anything else on the market. And there's straightforward reason for why they charge so much - they pay the people who work there nosebleed inducing mounds of cash to stick around and keep their mouth shut + have an army of lawyers on retainer to uncover the aforementioned loopholes that no one else (at least publicly) has figured out how to exploit.
I doubt Jim ever paid them but that's probably one of the perks of being the guy who built that magic money printer vs being one of the cogs in the machine. It's obviously better to be the king than his cup bearer.
This is a genuine question that a lot of younger folks will ask when they first learn about HFs and completely valid since at a glance it doesn't make much sense why that would be the case.
Every good investor can tell you that every strategy has a maximum capacity and a lifespan. The market's always changing so your thesis can shift from 1 day to the next and what worked yesterday might not work tomorrow if the Fed decides to suddenly cut/increase rates or the charismatic CEO of popular EV company got hit by a bus. And if you're trying to invest $1b you're not going to be able to do it the same way as the guy who's only investing $10m. There's a reason why TCI and Pershing Square aren't running activist campaigns on small caps and why Buffett is sitting on a pile of cash that would make a dragon jealous. They have too much money and need to deploy it at scale - in the aforementioned example, investor A only needs a 10% return to achieve the same outcome as a 10x for investor B, the latter for obvious reasons being orders of magnitude more difficult to achieve.
At a certain point the sheer size of the position you're trying to take will effect the underlying in a way can make it no longer profitable to do the trade in the first place and makes your original thesis worthless. There is not 1 single firm anyone can name who has scaled from 100s of millions to 10s of billions that is doing the same thing they did when they were only managing 100s of millions. Part of scaling is figuring out new ways to deploy money to generate returns, and there are much fewer places you can safely park $10b than you can find for $100m. If the Medallion fund is capped it indicates that the opportunities they're identifying are within a certain band of size and trying to trade on them with anything more than what they choose manage would taint the strategy and make it worth less or worthless.
Harken back to their aforementioned secrecy and embrace the wise words of Lil Wayne - real Gs move in silence like lasagna.
Here is an extreme and over simplified example but the principles are roughly the same: Pretend you discovered a 1 in a million trade that consistently lets you turn $20m into $200m with relatively low risk that you can reuse for many years without alerting other market participants to what's happening (because if you're making it, someone's losing it). Now you get greedy and decide to put $100m into it a single time because patience is for the birds which then "breaks" its capacity. Maybe it cuts returns in half and you're getting 5x ($500m) instead of 10x. $400m profit vs $180m is still pretty sick right? You made >2x more that 1 time, but maybe trading in and out of positions at that scale happens to alert the other market participants that someone is raw dogging them. They hate that. As a result, they change their behavior, making the trade riskier than before or the opportunity evaporates all together. Now you can't keep doing the same thing and you have to go sift through another 999,999 ideas to find the next 1 in a million trade, whereas if you'd just not been a greedy little shit and stuck to $20m capacity nobody would've been the wiser and you could've made the trade 10+ more times before anyone caught on. So to make an extra $220m in the short term, you've missed out on $1.8b+ you could've made.
We circle back to the capacity constraints and desire to maintain the talent moat. Is it more profitable to keep it all to myself in the short term or spread it around a little so for many years to come I can continue poaching the best minds to build & improve my magic money machine? And as great as having all that money is, diversification is a thing and nobody that smart wants all their eggs in one basket just in case the Fedbois decide to come a knocking and fine my firm for circumventing their stupid tax regulations.
If you had a magic money machine, would you share it with a bunch of pain-in-the-ass pension funds who will constantly be knocking on your door for updates or keep it to yourself? Say these pensions know you have the magic money machine and that you won't share it (big mad). You then go to them saying you've built another, institutional-sized machine, that's not as magical as the one you've got at home but it still does well and definitely won't lose all their money. How much do you want to bet they're going to trip over themselves to hand you fat stacks (again recall 10% on $1b is = 1000% on $10m and these pensions have to park big checks somewhere)? That 2nd machine suddenly becomes a great place to dump all your reject/broken strategies that aren't A+ enough to use/keep in the Medallion but are still good enough to do something with. Now you've got a much lower effort money printer that you don't have to think about and you stop getting bothered by allocators because you made a product specifically for them.
In conclusion, yes, the Medallion fund is probably the greatest piece of HF marketing ever conceived of. It's also the best money printer ever built, and would probably have remained so if people didn't find out about it and talk about it to the point that the government realized something was sus. But sadly, nobody can stay #1 forever.
Returns as reported by funds are before any taxes, since the different LPs will have different tax rates to pay (many of them such as endowments or offshore entities will pay zero taxes).
So the tax "scheme" you describe applies to the personal investment of Renaissance employees, but has nothing to do with the returns of the fund.
Considering when they started doing this, I am not surprised the first mover advantage still has weight.
Read the Jim Simons book - it’s really interesting.
Aside from the other comments on this thread regarding returns pre tax and unnecessary risks on adding more capital, I have long wondered if they had purchased proprietary access to data feeds on 100 year terms or something way back when no one prescribed any value to them. That’s just my conspiracy theory though, which is kind of shot to shit when you ask why this hasn’t ever been leaked.
With that being said, all those HFTs kept their private fiber optic lines a secret for a long time, and that’s physical infrastructure!
They are really a prop trading firm but structured and known to the public as a hedge fund which gives them an inflated reputation (though obviously merits a very good one regardless).
Take Jane Street as a comp, it does ~15B in P&L at a very high sharpe firm wide which is the same order of magnitude as Medallion, and if you calculated a return on principal number it would also be a silly high number. The 5/44 is just a split of P&L between the founder & employees (the fees create the ability for employees to earn more P&L than the stake they have invested in the fund, which is important to be able to compensate people who aren't already rich) and is probably not too far from what prop firms pay their revenue generating non-partner employees as a share of total profits. Other prop trading firms have gotten to a similar spot or are on that trajectory as well in terms of P&L, return on capital used, and consistency of profits.
My somewhat educated guess is Rentech originally started off more like a traditional systematic hedge fund, but over time they dug into prop trading style strategies (which is the only place you can still super consistently generate these kind of profits today) which is why they were originally set up as a hedge fund but bent that definition over time to get the effective set up of a prop trading firm / look so different than other funds. And of course the media loved to spin this and draw attention to the crazy return numbers.
This is correct. I worked at a prop firm with similar historical performance as RenTech.
What people on this forum don't understand is that if you have a strategy that works this well, it does not make sense to start a hedge fund. It only makes sense to start a hedge fund if you have a strategy that kind of sort of works but not something that earns 40% annualized with ultra high sharpe. There are a LOT of prop funds with similar performance as RenTech. Jim Simons publicized his track record because he wanted outside investors for his strategies that didn't work very well. The reason why you haven't heard of the performance of many of these prop funds is that they have not wanted to raise outside money. Even many of the firms that have raised outside money for certain strategies (like PDT) seem to leave outside investors blissfully unaware they are letting others invest in their less attractive strategies.
This is an alternative explanation of the efficient market hypothesis that I think is the "true" answer. The reason why most fund managers underperform is that, if they did outperform by a wide enough margin they wouldn't publicize it or raise outside money.
I'm firmly convinced that the reason why most hedge funds underperform is primarily because there is a large cohort of prop funds that just "take" alpha from hedge funds. Because these is in the "dark corners" of markets, most market participants are left blissfully unaware.
What's incredible is he didn't even publicize it - he just threw out a number no one could verify and it stuck!
Brilliant by him.
The name of the game of HFs and PE shops (not really relevant but just mentioning for my point) is to generate fees on assets held. Interesting thought that these largely unknown prop trading firms are the ones generating real alpha.
Very insightful, thank you
If you have 4 hours take the time to listen to Acquired's episode on RenTech (1.5x helps). Definitely not BS, they just genuinely figured out causal relationships better than anyone else (and why they're better described as mathematicians / scientists than investors... they couldn't tell you anything about the companies they invest in, just the relationships between various events occurring)
Fascinating, thank you
There is a book you can literally read about all of this.
In the end of the book they use this table and source it - you can believe whatever you want from that, but would seem kind of crazy for the author to not diligence this. As others have said, there are other firms using similar strategies with high returns.
To the other posters, I don't understand the point of differentiating between a "prop strategy" and a "HF strategy" outside of the fact that you have investors, but maybe I am missing something.
Jim was a fairly private guy - he wanted to raise money outside of medallion to essentially make people richer and continue to fund medallion AFAIK. I had the pleasure of meeting with him a few times. He would be the first to say that he wasn't the reason why medallion did so well.
They also make it very clear that RIEF and the other funds will not have returns similar to medallion - so yea maybe it is still all marketing bs, but seems like a very counter-productive marketing scheme.
Another fun fact, almost everyone there does a backdoor roth with their medallion investments. You got admin people compounding their roth IRA at blistering rates, and that is pretty awesome.
The prop strategies are high turnover, low capacity with intraday holding periods, sometimes market making, compared to a quant fund that rebalances positions daily or monthly. The corporate structure of these firms and how they decide pay also tends to be different from a fund.
It's more useful to look at dollar pnl than percent returns, because there are tons of little HFT firms with higher returns at much smaller capital sizes. The Medallion returns are not reinvested back in the fund and they have separate outside firms to put this money into L/S and real estate. Also their external funds seem to be doing very poorly and have had big redemptions since 2020.
Ahh I see - more so it renders the whole % return conversation a bit pointless as we are mostly focused on PnL capacity for any given strategy
+ marketing something as an investable strategy or alt. investment isn't really apples to apples with what you'd consider their activities to be
I'm sure the lines get blurred at the platforms that have quant teams though... is there a reason why some prop strategies decide not to take outside capital (in effect you could potentially grow your AUM base and get richer?). Guessing the constraints are largely: 1) regulatory + having to register activities / potentially lose some of your ability to hide what you do 2) marketability 3) capacity constraints on any given strategy
That MFer can live in a Roth? Assumed they would hit you with UBIT (or similar). Those greedy fuckers usually find ways to make sure you're paying your "fair share".
A related question.
Many claim that their flagship fund is high frequency prop trading business with 10B capital. Citadel Securities, Jane Street, XTX etc all have smaller size (or probably equal for JS) and everyone already know that they have significant market share in certain asset classes (XTX for FX, JS for ETF). Then what does Rentech specialize?
High-level espionage. Front-running profitable traders at other firms. lol
I used to work in wealth management with UHNW people. We had a client who I worked with whose brother worked at Ren Tech and he was grandfathered in/allowed into the medallion fund with a $2 million investment. They sent him $500k-1 million back like clockwork basically every year (couldn’t leave profits in the fund bc it was capacity constrained).
This is all to say that I have literally seen the statements and wire transfers first hand. The returns are legit.
'Analyst 1 in IB - Gen'. Of course you'd doubt quants 😂😂😂. Not your lane mate 😂😂😂. Stick with Excel 😂😂😂.
Not trying to take all that on, but here are a few thoughts :
- HF employees generally invest in their own funds fee-free. I once interviewed an ex-RenTech guy who said his comp paled in comparison to what he earned on the capital he invested in Medallion
- HF returns are generally reported net of fees but gross of taxes. So whatever happened with tax authorities, for whatever reason , would be unlikely to affect reported returns
- I once spoke alongside a RenTech executive on a panel at a conference. It was one of the most humbling, impressive experiences of my life.
- Throw all the shade you want; they are legit as it gets. And Jim Simons was a no-fkkn-around builder of an amazing business, culture, and engine of innovation. And an unsung (on purpose) philanthropist on a scale most will never imagine.
If you take a moment and think of it he just showed them the ingredients and they ( Programmers ) perfected the sauce
Money laundering.
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