Inside a Moneymaking Machine Like No Other

Inside a Moneymaking Machine Like No Other

Bloomberg,

5 min read
5 take-aways
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What's inside?

The secretive, Long Island-based Renaissance Technologies is the most successful hedge fund in the world.

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7

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Recommendation

How did the highly secretive quantitative hedge fund Medallion become one of the most profitable in the world? Journalist Katherine Burton uses interviews with past employees and competitors to reveal how Renaissance Technologies achieved outrageous success since founding Medallion Fund. She gives introductions to the fund’s quirky core cadre of scientist-investors and discusses possible challenges Renaissance may face in the future. getAbstract recommends this article to everyone interested in quantitative investing or investment firm biographies. 

Take-Aways

  • Quantitative trading uses mathematical models that sort through financial data to locate buying and selling opportunities. 
  • Mathematician Jim Simons founded Renaissance Technologies in 1982. The firm’s Medallion Fund, founded in 1988, has generated $55 billion in profits since that time.
  • Renaissance’s quantitative investing models merge linguistics with computer science and mathematics.
  • Renaissance only allows its own employees to invest in the Medallion Fund – a rule which helps cement the firm’s sense of togetherness.
  • The Medallion Fund may face challenges in the future as other funds improve their own quant models and when the fund’s main scientists choose to retire.

Summary

Renaissance Technologies’ Medallion Fund has generated greater profits for its investors – who also happen to be its employees – than any comparable quantitative hedge fund in the world. The secret to Renaissance’s success is its incredibly powerful computers. These unparalleled models merge linguistics, computer science, mathematics and the expertise of top-notch scientists. This blend allows Renaissance to sort through a never-ending avalanche of financial data and identify the “signals” which indicate good short-term investment opportunities faster than anyone else. For example, Renaissance researchers discovered that on sunny days, markets have a tendency to gain. 

“The goal of quant trading is…to build models that find signals hidden in the noise of the markets.”

The Medallion Fund’s core employees are in many ways as unusual as the fund itself. Mathematician Jim Simons founded Renaissance Technologies in 1982 and the Medallion Fund in 1988. He began assembling the fund’s unique team in the early 1990s. These individuals include computational linguists Peter Brown and Robert Mercer, string theorist twins Stephen and Vincent Della Pietra, speech recognition tech expert Lalit Bahl, digital signal processing specialist Mukund Padmanabhan, and programmer David Magerman.  

“Either your models work better than the other guy’s, and you make money, or they don’t, and you go broke.” (computational linguist Peter Brown)

The challenge of creating superior quantitative models is only one element of what binds the Renaissance team: Renaissance only allows its own employees to invest in the Medallion Fund – a rule which helps cement the firm’s sense of togetherness. In fact, employees must invest 25% of their salaries into the fund. Employees not only share research ideas, but they spend their wealth vacationing together; the company has organized family trips to the Caribbean, Vermont and Florida.

“When rivals and former investors are asked how Renaissance can continue to make such mind-blowing returns, the response is unanimous: They run faster than anyone else.”

But the Medallion Fund “family” may face challenges in the future. True, it has already weathered a former employee’s attempt to sell fund secrets, at least one important “power play” by Russian-born researcher Alexey Kononenko and a crisis of faith in its models in August 2007 – when the subprime mortgage crisis began. Still, as other funds improve their own quant models, some wonder if Renaissance will be able to keep “running faster” than its competition. It’s also unclear who will have the ability to take the fund’s reins successfully when Brown and Mercer choose to retire from their leadership posts.

About the Author

Katherine Burton covers hedge funds for Bloomberg News in New York. She is the author of Hedge Hunters and has written for the International Herald Tribune and US News & World Report

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