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Comment by _Tev | Hacker News Reader

Look at their past performance, luck is just too unlikely for their string of successes.

Supose they had a 10% chance the fund is worth nothing in a given year. Over 20 years there is only ~12% chance a given fund makes it but taking such risks significantly boosts returns. Further, assume many such funds and you are only looking at the lucky ones.

This is why you need to make predictions of performance ahead of time instead of analyzing past performance.

PS: A standard trick is to start 20 funds and the 'best' one has high returns. Create another 20 funds to have a new 'best' when the old one reverts to the mean. Thus you need to analyze total returns weighted by funds size of a company not just individual funds.

This doesn't reflect how the industry actually works among funds that have alpha.

Clearly funds try and avoid going broke. However, many funds also have losses much greater than the market including the one we are talking about.

The truth is risk is hard to measure accurately and most Alpha is simply risk hidden from their investors.

Which is why a statistically significant Alpha takes more than a single funds past performance. And how someone just lost a 1 Million dollar bet on this crap.

Not so unlikely if you consider survivorship bias.

Actually yes, it's still quite unlikely. If you formalize your thesis here and actually do the calculation, you'll see that the chance of a fund achieving a consistently annual average 70%+ return over 20+ years is overwhelmingly unlikely to emerge with the number of funds that existed in the same time period.

"Survivorship bias" is a meme that is commonly thrown out, but to date no one I've challenged on it has empirically demonstrated that this accounts for the emergence of ultra-successful funds. Model this out a bit - what is your single unit of trading to judge and what is your time interval? How many other participants are there in the same interval, and how is each unit judged? You can't just judge on an annual basis - no firm has an actual 50% chance of beating the market each year. Funds like Renaissance make hundreds to thousands of trades each day. Moreover, different firms have different chances of beating the market each year.

Basically, I want you to rigorously formalize how a firm like Renaissance maps to monkeys throwing darts at the wall, because as much as people like to use these analogies (coin flipping, etc), they're never empirical. How do you account for a firm that beats the market by an overwhelming margin for 2 - 3 decades and never having a return poorer than the market (and in fact only rarely being down per quarter or month).

EDIT: Elsewhere: https://news.ycombinator.com/item?id=13797635

They don't consistently average 70% returns.

Feel free to list the years they had over 70% returns vs less than 70% returns.

That was a misnomer, you're right. But that doesn't meaningfully impact my point. An average annual 70% return, some years greater (notably, 2008) and some years lesser, but only a very small number of down quarters or months in the same time frame.

Don't forget to include the preceding 30% drop which reduces both the total returns directly and rate of return as the fund operated over a longer period.

Further, they stopped publishing returns suggesting an even lower long term average.

So, you are looking at a biased subset of a funds returns not total returns which greatly shifts the probability's.

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