Jim Simons: The Numbers King
newyorker.com
newyorker.com
Numberphile video: https://www.youtube.com/watch?v=gjVDqfUhXOY
Full length: https://www.youtube.com/watch?v=QNznD9hMEh0
He prefers problems that aren't hopelessly complicated, but I suspect this is exactly where computational biology falls into if you don't have the ability to perform causal experiments. And wet lab experiments aren't being funded by the Flatiron.
I'm not asking this rhetorically—I'm curious but also don't have much experience to bioinformatics.
For example, if he establishes some initial funding streams and keeps it open long enough to see commercial benefits (10+ years) and uses those to transition this setup to self sufficiency (as opposed to a few unicorns spinning off), he could have a major long term impact.
He ran a scam for almost 40 years right under the nose of regulators and Wall Street.
Rentech may 100% legit, but absence of criminal convictions is not proof.
As described in this article by Cliff Asness, https://www.institutionalinvestor.com/article/b14zbgrj5pflsc..., empirical research by Asness and others has shown there is strong evidence of “momentum” in markets.
RenTech and various other quant shops employ a number of strategies, among them momentum, arbitrage, etc.
Edit: also worth nothing that Asness was a doctoral student of Eugene Fama, perhaps the most famous proponent of the EMH.
Most of Asness-type funds run "rotating" strategies whereby they have 30 or so different "flavors" (one invests in small cap value, another in US low-vol, etc..). Due to probability, one of the "flavors" is usually doing very well and they put that on the front of flip books. If any of them do badly, they "fire" that strategy and therefore ensure that all their running strategies have decent histories. It's basically engineering selection bias.
Quant factor funds are barely related to Renaissance.
However, I’d stand by the academic research they put out. Especially because Renaissance famously eschews finance PhDs, preferring pure math and physics, AQR is still an industry leader in terms of the empirical studies they do.
The original comment in this thread asked about the EMH, I don’t think Asness’s returns as an investor should necessarily reflect on the academic research he’s done.
There is a large amount of public information about a company, and the source of edge in quantitative trading is
- Identifying what kind of information is likely to move prices
- Acquiring and processing the information as quickly and efficiently as possible
- Making good forecasts
- Combining the forecasts with a model for risk, financing and trading costs to form a portfolio with a high likelihood of positive returns
In the past it was enough to use highly structured, numerical data (market prices and volumes, accounting data, analyst forecasts) but the profit available from these sources has been diminishing, and the most important sources of information for forecasting stock prices are unstructured and non-numerical (e.g. text, speech, images).
Renaissance is a leader in its field, and has been for decades. It is perfectly possible for them to have produced the returns that they have, without using insider information.
RenTec has been successful for decades, but the are regularly shifting strategies as the $20 bills are "picked up" by the market.
A sibling post asked you which variant of EMH you are "convicted" about. You should know that if it is strong or semi-strong, you have a conviction about the financial equivalent of tequila being good for teething babies or using leeches to bleed out various diseases. And the weak form is so useless I am not sure it really qualifies as a hypothesis.
You will have to search out the old fogies in economics depts to find the true EMH adherents. Even Fama professes it, but if you listen to the substance of his speech and read his papers, doesn't really seem to believe it. (maybe he thinks he'd have to return his Nobel prize if he denounced it?)
That makes sense since the market is ran by humans; but what if it was solely managed by a computer.
While reviewing for a final, I learned that computers are extremely fast at detecting negative cycles. An application of this? Arbitrage.
If you graph the foreign exchange market with each vertex being a currency and a directed edge being an exchange rate, applying the logarithm operator to each edge and then running a DFS transversal, it would be possible to find paths of arbitration.
Their success is based on an unusual type of information asymmetry -- they have better mathematics than everyone else. They invest heavily in development of novel mathematics that can be applied to find new types of patterns analytically that are not discoverable with existing mathematical methods and algorithms. This allows them to mine patterns that no one else has discovered yet because the barrier to discovery is anomalously high since it requires esoteric invention. Most firms just rearrange the existing methods in new ways or with new data.
It is an efficient market but they are unusually profitable because they have little competition for the patterns they exploit.
That said, I don’t doubt that they’ve had an edge. Maybe they were doing trend following in the 90’s, or HFT in the 2000s. Most firms’ strategies eventually leak via lateral hires, but rentech is a small shop and no-one has managed to nab one of their employees. So there’s no way to know for sure.
I thought Rentech was closed to all outsiders, and only internal money was allowed?
> It makes more sense to me, due to a conviction on efficient market hypothesis.
I encourage you to walk back from that position, or at least reexamine which particular form of the hypothesis you believe in. Only one form of the hypothesis (the “strong” EMH) dictates that consistently beating the market is infeasible. Fama himself has since stepped away from that level of conviction, because there is no demonstrable mechanism by which the markets can price in all nonpublic information (and frankly, it’s silly to assert that the market does not have nontrivial inefficiencies at any given time, except for the most conceptually academic of cases). It’s a very hard pill to swallow, and it gets harder when you look at the number of funds that ostensibly beat the market without insider information (RenTech is the most infamous, but there are other firms comparable to it that like to stay under the radar).
The weak and semi-strong forms of EMH are much “neater” theories, both in intuition and empirical mapping to the real world. You can consider the weak and even semi-strong versions to be correct without precluding the capacity for certain exceptional firms to consistently earn better returns than the market average. It’s intuitively and demonstrably correct that public information is quickly “absorbed” into price consensus, but this is not at all clear for nonpublic information (though if insider trading becomes significant enough, it starts getting obvious to the market).
In contrast, accepting the strong form of EMH requires you to resolve two difficulties: 1) how do funds like Renaissance beat the market if strong EMH is true?; 2) what mechanism can empirically demonstrate that the strong EMH is in effect, as opposed to “merely” the weak or semi-strong EMH? You can try to solve difficulty 1 by asserting that any given successful firm is actually illegally trading on confidential information, but you still have difficulty 2. Further, you have the obvious follow up: if these firms are successful only by acting illegally, why has it gone on so long? Apply Occam’s Razor: is your explanation more reasonable than the alternative, which is that a minority of organizations are capable of accomplishing something very difficult but not impossible?
To circle back to your point about secrecy - it’s tempting to assume there is a decades-long conspiracy in play whenever rich companies are being extremely secretive, but it’s also a poor heuristic. A very simple and “Occams-compliant” explanation is that hedge funds are hyper-competitive, and go to great lengths to keep their intellectual property out of competitors’ hands.
Growing up he was one of my idols - leveraged what he learned in school to make money doing something difficult, achieving success and more importantly respect.
Basically, the Senate report alleges that Rentech evaded leverage limits (6x capital) and used the balance sheet of their broker to operate basically as an unregulated market maker. So the two keys to Rentech's strategy were a) illegal levels of leverage and b) evading taxes on short term gains to the tune of $6 billion. Once you dial down the leverage and pay taxes, the alpha disappears. One firm rejected the scheme as illegal and the emails from that firm are in the report. The scheme uses the broker as an illegal front, which is what the firm lawyer immediately recognized.
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...
https://www.opensecrets.org/news/2016/06/a-hedge-fund-house-...
If that's the stance you want to take, it works both ways. You are no more qualified an outsider than anyone else to evaluate their strategies. But given the available evidence, your position is on shaky ground.
> Second, the Medallion fund cherrypicks the best strategies, so we don't know what the global return is, just the Medallion return, which is reported for PR purposes. To the extent that the strategies have been revealed, as in this Senate report, the strategies rely on fraud and illegal levels of leverage.
This is more complicated than you imply. Medallion uses strategies which have lower capacity constraints and risk, which is why only employees are allowed to invest in it (they don't need outside capital, and they don't need to share risk with investors). Renaissance could close up shop to the outside world completely, but the fact remains that if they are consistently developing strategies for Medallion, they are consistently developing alpha. This alpha is not nullified because they have other strategies that perform worse, because on any realistic timeline they can abandon one and favor another. They would simply not use the strategies which they feel require risk pooling (i.e. capital from outside investors).
Furthermore, the returns are reported by various news outlets which do get to audit them, even if the general public cannot. If you're willing to pay for the information from hedge fund performance indices, you can get it. Which circles back to my original point - regardless of where you stand on the strategies documented in the Senate report, Renaissance has enjoyed those returns both before and after the use of the tax maneuvering.
Leverage does not create alpha or consistency on its own, it only amplifies the returns (positive or negative) thereof. To make my position very clear: again, I'm not saying I agree with the tax maneuvering; I simply disagree with your dismissive characterization of the firm's returns.
If so, where do the "loser" funds go? The clients?
No, it doesn’t. The first and most obvious observation: the basket options described in the report were not utilized until 2002. Renaissance already had 14 years of ~70% average annual returns (~40% net of fees) by that point.
Second, Renaissance stopped using these derivatives in 2014 (though they’re still fighting the IRS on back taxes, last I heard). Surprise: they’ve still been up ~39% in 2014, ~35% in 2015 and ~22% for the first half of 2016 (again, net).
To be clear, I’m not saying I agree with their utilization of the Deutsche and Barclays basket options. There is a lot of creative financial engineering that happens in the industry. But like most of the other topics that come up on Hacker News, the reality is far too nuanced to be dismissed in the offhand way you’ve done here.
At best, their tax maneuvering amplified the alpha already present. The basket options provided leverage, which obviously boosted returns. However, leverage will only improve a strategy’s returns, it cannot (on its own) improve risk characteristics or increase win rate consistency. Leveraged beta is still beta, and leveraged alpha remains alpha when you decrease the leverage (though the returns will be lower).
And in my previous comment to you, literally the one you replied to, I explained that this is not the case. Re-read my comment. Their strategies have alpha distinct from the leverage (because, again, leverage is not alpha), both historically before the tax maneuvering began, and since the conclusion of its use.
Then neither are you, and this entire discussion becomes rather meaningless, wouldn't you say?
What we do have are public numbers that indicate, whatever the strategies may be, their returns exist independent of tax-advantaged leverage.
This said, please elaborate, how exactly could they turn a strategy losing them money around by pumping more money into that?
If you were actually right about their tax cheating, the IRS would have been able to successfully mount a challenge to their tax returns at least once in the last 40 years. Despite his contributions to Democrats, Republicans have been in charge for much of that time.
And $6B in lower taxes for RenTech over the years is a tiny benefit in regards to their size.
"Simons has an air of being both pleased with himself and ready to be pleased by others. He dresses in expensive cabana wear: delicate cotton shirts paired with chinos that are hiked high and held up by an Indian-bead belt. He grew up in the suburbs of Boston, and speaks with the same light Massachusetts accent as Michael Bloomberg, with frequent pauses and imprecisions. He sometimes uses the words “et cetera” instead of finishing a thought, perhaps because he is abstracted, or because he has learned that the intricacies of his mind are not always interesting to others, or because, when you are as rich as Simons, people always wait for you to finish what you are saying"
Gawd, that was awful.
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3564498/
https://microbiomejournal.biomedcentral.com/articles/10.1186...
I have more references at home but cannot reach them now. There is a also a doctor here in Turkey who tried fecal transplant on an autistic kid. She was optimistic about the results but reluctant to publish just for one patient. This was months ago. I don't know the status now.
https://www.simonsfoundation.org/flatiron/center-for-computa...
But do they study microbiome in relation to autism? I could not find any such research.
Mercer's political views and activities had nothing to do with Rentech or Jim Simons.