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?
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.
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.
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.
> 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.
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.