Comment by cjken | Hacker News Reader

Comment by cjken | Hacker News Reader

While I understand there are moral and ethical complications with the vast sums of wealth and influence attached to RenTec, the tone in these comments is disappointing...

There is no fraud at RenTec, and there is nothing magical about what they do. It's simply an amazing technical and scientific organization, operating with almost unthinkable efficiency and scale.

I haven't read the book, but I'm pretty sure this isn't in it: I've been told by reliable sources that if you pick any one strategy (however you are able to separate/define that) from the Medallion portfolio and it will not be individually remarkable--probably less than a 1.0 Sharpe (net of trading costs, gross of fees). There are countless hedge funds with equally performant models and sub-strategies.

What makes RenTec different is their ability to generate orthogonal strategies at a remarkable scale. They generate more ideas with less philosophical and empirical overlap than anyone else, by a wide margin. The software and theory required to do this for a fund as large as Medallion is absolutely as rare and valuable as their returns have proven.

Wrote more about it here: https://www.bridgealternatives.com/medallion-isnt-magic-prob...

This is really interesting, and what I'm about to say makes me feel more bleeding-heart than I feel I am most days, but there's something deeply melancholy about the fact that this collection of the best intelligence our species has to offer, working together to achieve something utterly unheard of - so unheard of that many other smart people think there's something criminal going on - is exerting its collective effort to - when you put it in plain English - hack a casino.

We're hurtling at an accelerating rate to ecological ruin, with millions (hundreds of millions?) of deaths a plausible outcome in the next 100 years, not to mention a fall in the standard of living for basically everyone, and our best and brightest are doing the Manhattan Project of cash.

As a stupid person, I can't do much other than shrug - hell, I can't even say I wouldn't do the same as these brain-genius PhDs if I had their capabilities. But it still kinda sucks, is all.

The problem is that our society is terrible at rewarding positive externalities. Even worse than we are at punishing negative externalities.

I do object to your phrasing. Quantitative finance isn't hacking a casino. It does generate actual value. The problem is that finance is one of the few fields where you can expect to be rewarded in proportion to the value you generate because the amount of value you generate is easy to measure. Cue all the smart, realistic people rushing into finance instead of having a larger impact for peanuts doing fundamental science or something.

Thanks for this. What you say about proportion of compensation makes a sort of sense, but I don't have the chops or the knowledge of the field to evaluate it. The 'easy to measure' thing is definitely insightful and useful to me as I think about it. Money does have that clarity to it.

The "hacking a casino" thing I'll defend, though: to the extent that getting better at gambling games and finance both can involve prediction, probabilities, data collection, and the like, I don't see how the analogy fails on anything but its crudeness, which I'll happily grant (while also saying I was going for a chuckle with it). I didn't mean to imply that getting good at either is something to be embarrassed about, only that it feels a little ... maybe "small", next to other concerns. I think that superlatively intelligent people do have god-given opportunities the rest of us don't have, and that while they're free to do as they please, the rest of us sometimes hope they'll use them wisely (and, selfishly in this case, to our benefit in some small way).

I'll also say that I meant "hack" in the older, more optimistic 1970's way, like "figure out what makes it tick and do cool things with it" instead of the more sinister modern sense. I don't attribute any malice or ill intent to Simons/RenTec, at least not without evidence.

I guess I could reinterpret/update my comment in light of what you've said to now say that "whatever value these men and women are creating inside this secretive firm, there's a strong case to be made that it's not the most urgent or needed kind these days".

I'm curious and sincerely so, though, when I ask: what actual value does quantitative finance create?

My experience is limited, so take with a grain of salt: my sense so far is that it helps stamp out any statistical/numerical inefficiencies in the markets that humans would otherwise be inefficient/slow to adjust to. For instance, if a straight up arbitrage opportunity exists across exchanges, automated strategies ensure that it goes away very quickly, much more quickly than discretionary human traders would. If there are proven statistical trends to the markets, then those should be acted on as well, because it means we'll arrive at the fair price of an asset sooner rather than later. A simple example: if a stock closely tracks the price of oil, and there's a quick uptick in the price of oil, it's better for the price of the stock to get immediately adjusted upwards rather than after a delay (and purely quantitative, automated strategies make this happen). I think the name of the game is that you have a bunch of people acting in their best interest, and thereby giving us an efficient market, which benefits the rest of the world by ensuring low slippage, fair prices, high liquidity, etc.

Basically this. I'll slightly elaborate on why an efficient market is a good thing.

It means that anyone can change money into a different currency without having to worry about being ripped off. There is one exchange rate and you'll be paying that plus a small margin.

It means that anyone can invest in publicly traded companies without having to spend an inordinate amount of time and effort trying to value them. Pension funds would be next to impossible without this. To the extent that the market is efficient, you don't have to worry about the imminent collapse of IBM. If anybody knew, the prices will reflect it even if the rest of the world has no idea why the prices are as they are. (The further markets get from being efficient, the further this gets from being true. Compare investing in the S&P 500 to the shenanigans happening with penny stocks. Be glad that your pension fund gets to invest in the former so it can pass on the latter.)

It means that companies can raise money without too much difficulty. They'll sell a part of themselves, and a legion of quants will give them as fair a price as humanly possible. If the price were unfair, someone could exploit it to make money , correcting the price in the process. Ergo the price will be fair. While this sounds far removed from the welfare of the people, this is what greases the engine that runs the jobs of virtually everyone in the developed world. It also lets people pool risk to try risky but worthwhile things. The impact this has on innovation cannot be overstated.

Of course, I agree with the above poster that finance probably isn't the best place for smart people to spend their lives. I'm just claiming that finance people aren't overpaid, everyone else is ludicrously underpaid.

This is a really good case for quantitative finance, and it's also really clear, so thanks for both. Consider my perspective changed for the better.

There's still a bit of dissonance in this for me, but it's abstract and strays a bit what you're saying, so don't feel a need to respond: I think, for example, about the friends and acquaintances I have in finance who I've often heard lament about the lack of meaning, utility, and social value in their work despite the good pay. They're smart men and women, every single one, so I'm sure they know they case you're making - so what gives? (This is clearly more a question for them than for you.)

I also wonder idly what proportion of the explosion in the finance industry since the 1970's is taken up by the sorts of plainly beneficial and useful efforts you describe, and what proportion is simply craven, greedy bullshit. Clearly the latter is more salient in the cultural and moral imagination, in no small part because of the Madoffs and the Beskys and the Milkens of the world, not to mention everyone involved in the 08 crisis. That the former isn't as salient makes me think, like, how many Jack Bogles are there for every Gordon Gekko? I know a ton of Gekkos - I went to college with them! - but few Bogles.

I feel both of your questions and have no answer for either :(

One way I think of Renaissance and some of these other quant funds is almost a retirement package for so many of these academics and researchers.

As has been mentioned elsewhere, these are some of the best and brightest people from their fields who have established reputations and are well-known in their fields. I would assume most of these people have spent the bulk of their professional lives working in academia or in pure research, so I do wonder how many of the RenTech employees are people have been working for (relative) peanuts in academia before making the switch towards the end of their careers and "cashing out" essentially. Pretty sweet if you ask me.

Thanks for sharing this, I'm diving into the 3 videos that you highlighted:

Part 1: Mathematics - https://www.youtube.com/watch?v=HVqxs0YBp4g

Part 2: Finance - https://www.youtube.com/watch?v=srbQzrtfEvY

Part 3: Philanthropy - https://www.youtube.com/watch?v=w8o-qC8E5ic

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