RenTech Created the Ultimate, Tax-Free IRA Account for Employees

Do new employees get to participate in Medallion?

Berkshire Hathaway has two orders of magnitude more assets under management than the Medallion Fund.

Without knowing more, my default assumption would be fraud with returns driven by ponzi scheme.

Most of what we know about Rentech's strategies comes from Senate hearings regarding the sketchy things they do. The common theme is that they find strategies with fairly low returns (~3%), and very low risk. They then use massive (and illegal) amounts of leverage, as high as 16x, to turn those low risk, low return strategies into outstanding returns. James Simons and Robert Mercer are among the largest donors ever to both political parties, so it isn't much of a surprise that these hearings haven't really gone anywhere.

Of course it isn't just that simple. Leveraging a strategy should increase it's downside risk along with it's returns. But somehow Rentech does it while never actually experiencing that downside risk. That's their mathematical genius. And the fact that they employ so many brilliant mathematical minds leads me to believe that part may be real.

The latest Senate hearing link: https://www.hsgac.senate.gov/imo/media/doc/REPORT-Abuse%20of...

Return on capital isn't a super meaningful metric for capacity constrained trades. If a fund earns 80% returns, but has no means to compound the resulting profits through the same mechanism, whoever receives them naturally puts them into something with worse returns, so their wealth still grows slowly over time.

I think Medallion is somewhere between HFT and stat arb, probably a mix of multiple strategies along those time frames. The faster you trade independent opportunities, the more you recycle capital, and prime brokers extend tons of leverage. When I worked in HFT, our profits were bound by other factors way before cash, and my desk's ROC was far higher than this when doing well (even when doing poorly, ROC was quite high. It was the expenses of finding those returns that killed us).

If all the money is employees', Medallion is basically just a prop firm. The employees paid out of the fund are essentially partners/owners, and the rest earn discretionary payouts of management/performance fees.

Even within the fund structure, most profit is return on labor, not capital. I'm sure if you compare margins paid to partners in professional services firms like law or consulting vs. typical publicly traded companies, they're also far higher, but Cravath, McKinsey, etc. won't let you buy in as a passive investor; you have to work for it.

ETA: If you're wondering how it's possible to earn 80% returns, or even more: there are myriad tiny inefficiencies you can trade on given the right research and infrastructure. I'm sure 80% is simply the point at which Medallion makes the optimal $ per year relative to risk. They could probably throttle back, make less $ on smaller capital, but far higher percentage return, if they wanted.

It is definitely possible, though it becomes much more difficult at scale. Asymmetries in financial markets are pervasive, and it is technically quite difficult to methodically explore that space analytically. Going deep mathematically into modeling these things is beyond the ken of most funds. For the most part, they are biased to search for patterns in parts of the phase space where it is relatively easy analytically. Motivated individuals that want to search the technically more difficult parts of the phase space still find plenty of gold nuggets because so few people look there or the scale of the opportunity is too small for other funds. RenTech is just really good at systematically mining parts of the phase space that are mathematically out of reach of other funds.

While 80% is extreme, 15-20% is not and I know many people that can do that consistently. Anecdotally, one strategy I developed many years ago that was designed to be easily applied to retirement accounts (so that close friends and family could, and do, use it) has returned an average of 20% annually through boom and bust, outperforming the S&P500 every single year. It didn't require being super-clever, just observant and analytical.

I think we tend to overstate the difficulty of getting a good return to scare people away from pursuing naive and/or stupid strategies in a futile effort to find easy returns.

I know a few people who work at RenTech. I would be very surprised if the operation turned out to be fraudulent. It certainly could be, but I very much doubt it.

If you have your ear to the ground you can find many proprietary trading firms which have similar or even superior returns. It's much harder to find a fund deploying similar strategies at the same capacity.

As a corollary, every single new hire at the firm is expensive in more than the traditional ways. They only have so much room in Medallion, and so they tend to be both extremely secretive and extremely protective when hiring. They've lessened up on that somewhat recently, but it's still there.

There was a conspiracy theory making the rounds for a bit based on Simons connections to Columbia. He rode a moped down there in the 50s, and I think won a tile or carpet factory in a card game. I don't think anyone but the haters give it any credence, but it shows you what kind of person Simons is besides "smart."

I think it's a fair guess that they are just better at playing the game than most. The people I've known from there are all very good, and alums have included people like Lenny Baum (aka hidden Markov Baum-Welch) and Elwyn Berlekamp. They also were almost certainly the first or second (Thorp knew) fund to truly figure out optimal bet sizing via Berlekamp's association with Kelley. Mercer's work in speech recognition at IBM is also evocative; speech recognition has been around for a long time, but it's always been really difficult and inherently a time series problem, like markets. Lots of Mercer's old team got pulled into Rentech looking at different kinds of time series.

Tax optimization is just another part of the game. I know a bunch of guys who renounced their US citizenship and moved to Bermuda to run their fund; 36% compounds pretty quickly.

Article does not seem very well written. It presents margin trading as some sort of special privilege. It also makes some very vague suggestions about "large partnerships". And then it name drops RenTech, even though they really aren't that special in this connection.

> the suggestion that unlike the other outperforming hedge funds that turned out to just be insider trading, this one is real and they are just that smart.

They probably aren't just smart, they also have some process that isn't just about being clever. They optimize their execution, they make sure their research platform is top quality, they make sure they have the cheapest funding, they make sure people want to stay and work there, they keep an eye on what other firms are doing, and so on.

The thing about the investment business is there's a lot of focus on being smart, to the detriment of everything else that you need.

maybe it's market making. they act as a middleman between buyers and sellers of options and other financial instruments

The upfront deduction and credits help people invest. When I was a kid, it was about 25% of my investment.

Ignoring the tax rates is dangerous with the abuses of these programs, it’s going to happen.

Contributory IRA and regular 401K are basically the same thing: deferred taxes, required distributions.

Roth IRA is different: no required distributions, no tax. (or a least they promise no taxes).

You might want a Roth IRA because of ...

#1 Higher tax rates in future.

#2 You're not going to spend all your money, Roth IRA can provide tax free distributions for your heirs over their lifetimes. An inherited contributory IRA or regular 401K is taxed at distrubtion and distribution is accelerated (up to 5 years).

I'm assuming you're talking about Roth versus non-Roth. Mathematically, you're right, they are equivalent if your tax brackets don't change. It's pretty obvious once you get the correct formulas.

The are reasons to prefer Roth: higher contribution limits -- paying the tax liability up front lets you save more for later. You can also pull out contributions to the IRA tax + penalty free, and pull out earnings for limited purposes (medical, downpayment on a first home). And you're not required to withdraw which can save you down the line.

By saying "IRA vs 401k" I think you're misspeaking. There's a Roth IRA, and a traditional IRA. There's a Roth 401k and a traditional 401k. I think you're trying to make a Roth vs traditional distinction, not an IRA vs 401k distinction.

You're right that the article confuses various things. But you're wrong in your analysis. Capital gains rate has nothing to do with this. Whether it's Roth or traditional, and whether it's 401k or IRA, you never pay capital gains rate, you always pay income tax rate.

You're also wrong in saying paying up front is better in terms of tax rate. In terms of tax rates, Roth vs traditional both have the same rate (assuming you have the same tax rate now as in retirement) (and IRA vs 401k also both have the same rate, regardless of tax rates now vs retirement).

Roth does have several advantages though. It has a higher effective legal contribution limit. It also allows a higher density of value per dollar, which is useful in a fund like the Medallion fund that is limited to $10B.

No, they also have created legal advantages for their employees that aren't available to most people. E.g. I cannot do any margin trades in my IRA and am subject to settlement rules if I try to do day trading. Additionally, if I founded my own startup I would not be able to invest my Roth IRA money in it and let it grow tax free.

> It's basically insinuating that the techniques Renaissance used are somehow unfair because Medallion has such high returns, as if those returns were anointed by God instead of the work of the people at the fund

The general assumption I've heard from friends in the industry -- which may be justified or may not be, I am certainly not qualified to say -- is that they're juicing the Medallion fund with returns from their other funds, they're just using clever trading mechanisms to effectively "launder" what would otherwise be highly illegal transactions.

The advertising mileage they get out of Medallion alone would probably make the activity worthwhile, but I'm sure the tax-free income from the Roth IRAs doesn't hurt either.

Notably, Madoff hedge fund was also very undercover and hard to get into and had was quite picky who's money they accept.

> You are welcome to invest in their open, and very mediocre, funds though.

Are you really though? Show me how an individual can invest in any Renaissance fund (e.g. RIEF) They are only open to institutional investors as far as I know - i.e. those looking to invest say, 250m or more.

James Simons founded Renaissance in the early 80s (ish). He brought on Robert Mercer from IBM later. Then Mercer took the helm when Simons retired around 2010, if I recall correctly. Mercer himself stepped down last year (likely due to political blowback from the rest of the firm).

So the short answer to what you're asking: yes.

'The firm initially terminated its 401(k) plan for employees in 2010, a step that permitted them to roll the savings into traditional IRAs. Then, employees took advantage of a rule change that year allowing affluent Americans to convert their traditional IRAs into Roths. '

Looks like they rolled all their savings in to traditional IRAs and then converted them in to Roth IRAs. This procedure, known as a 'Backdoor Roth' conversion, effectively allows unlimited Roth IRA contributions beyond the income limits. If you are scratching your head and asking, why this is legal - so are many other people, but it appears to be accepted as within regulation by tax experts.

There is for direct contributions. However the strategy used here is sometimes called the backdoor Roth IRA because there are no income limits to rolling a traditional IRA into a Roth.

> The conversion opportunity was nice but has very little to do with what has happened

You can’t invest in a Roth account if you earn more than a fairly low level. You can, however, convert IRA assets into Roth assets at any income level provided you pay the tax on conversion.

Disclaimer: I am not a CPA. This is not tax advice.