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I'm not sure how accurate this tactical liquidity picture is, at least for much of medallion's history. For a good portion of their existence they called in all their trades twice a day. Them being fairly late to the automated trading game was one of the the surprises from the book for me. Any "HFT" as mentioned in the article is not done by renaissance, but through execution services.

The big picture seems to be statistical arbitrage done with extreme precision and leveraged to a massive scale. Add in some quasi-legal agreements with banks, and likely tax-fraud, they are able to do this at a magnitude no one else can.

Providing liquidity doesn't necessarily mean HFT. It doesn't even necessarily mean classical market making.

Here's how I like to think about liquidity. It's the market's ability to absorb random imbalances in the non-informed order flow (while still correctly engaging in price discovery for informed order flow). In other words it looks a lot like what economists call price elasticity. Having a lot of participants who are very price sensitive makes prices stable by keeping demand responsive to small fluctuations.

On the very short horizon that's done by market makers and HFT participants. They're quoting a tight two-sided market so that as orders arrive the price remains stable. But HFTs keep very small inventories[1]. They're unable to absorb the typical imbalance seen on the scale of hours, or even minutes.

There exists a secondary class of participants, usually grouped under the catchall category of "stat-arb", that exist to fill this need. They're still trading directionally, but that direction is very sensitive to recent price moves on the scale of hours or even minutes. Moreover they tend to overwhelmingly trade in a mean-reverting manner.[2] Effectively these participants "provide liquidity" in the sense that they're stepping in and absorbing imbalances in the natural order flow.

[1]https://www.cftc.gov/sites/default/files/idc/groups/public/@... [2]https://web.mit.edu/Alo/www/Papers/august07.pdf

I don't disagree with anything you've written. But if you name a strategy, I can make a case for why it's providing liquidity.

On the one extreme, some firms truly are paid to make liquidity. This is the basis of the maker-taker model. I think Rentech is at the other end of the spectrum.

>Renaissance is simply better than anyone in the world at finding the markets where traders are willing to pay the highest premiums for liquidity, and providing it in a timely and measured dose that ensures they skim the cream off the profit opportunity.

Why are they better?

This still requires the same kind of explanation as 'they are simply better at investing than anyone in the world'

It could be an incumbent position that is just not possible to overthrow.

Ok, new Medallion-like fund accepts lower returns, meaning its partners get better deals then under Medallion. Why wouldn't they leave Medallion? This is since 1988 apparently. I don't buy that they are the "smartest people" or that they are doing something so amazing that others don't get.

Medallion is for employees of Renaissance. It doesn't have customers/partners. If you accept that Renaissance is good at what it does, it's simple to posit that Renaiisance reserves its most profitable activities for its own employees as preferred customers/partners, as a compensation vehicle and a PR/recruiting tactic to make Renaissance look more impressive. Medallion is like Google's "X", in that sense.

This explanation shows why Medallion's high returns are possible, and also why Medallion not actually better than Renaissance's overall average performance (that is, could not be replicated as an indepdent spin of without the rest of Renaissance to extract value from), beyond an acconting illusion to make ordinary wages look like investing.

It's not at all surprising that this could be how Medallian works, since that's just an application hedging, which is Renaissance's core business.

I think that the "partners" in that comment refer to trading counterparties.

as @jkaptur said, with "partners" I meant their trading partners, clients, service providers. The OP suggested that maybe Medallion has an advantage and kept it. I suggested that a new hedge fund would pay the Medallion partners more and accept less in profit than Medallion.

Because they would be litigated to hell. It might not even be that employees are key to this hypothetical incumbency.

>Why are they better?

Possible explanation: there aren't any other firms founded by as great mathematicians as the founders of Renaissance. I saw a quote online attributed to them, something like: "We hire the A-grade mathematicians. Most other firms hire B and C grade mathematicians, and don't even know the A grade exists". This fits my experience, as a D-grade mathematician working in finance. Never heard of significant mathematical prizewinning researchers working at any of the firms I know (lots of maths olympians, but there's a huge difference between winning a maths olympiad and conducting groundbreaking mathematical research).

Haha this was basically LTCM's publicly stated approach, to be fair.

They were economists... Which might explain the outcome.

This is only half of it. If you look at all their early employees, Robert Frey/James Patterson have profiles, they were people who knew the maths AND knew how to apply it.

If you look at AHL, they have lots of people who know the maths. They have their own institute at Oxford ffs (the number of people who don't have PHds from Oxbridge there is small), and they have crap performance, year-in, year-out.

It is a typical flaw of human nature to assume that when someone else does something extraordinary that they have some secret knowledge you don't. People on here talking about discrete topology and all kinds of craziness...read the book, one of the big early advantages that RenTech had was they sent some guy down to the Fed to transcribe by hand data that no-one else had. Another example is their stat arb strategy didn't work for years, until they worked out how to get good execution.

I am not saying that it is only this but if you read the book, there are several instances where RenTech try to apply something complex and it doesn't work...and the success they have is after doing something simple, marginally better than anyone else...again, to a certain kind of person, this simplicity is offensive but it is also why most people with technical backgrounds get destroyed by the market.

Also, one thing that is kind of unclear. Simons had almost nothing to do with the perf. By the early 90s, he wasn't personally active anymore (he was spending most of his time on venture capital). The step change was hiring Brown and Mercer (again, two guys who clearly knew the maths but had spent most of their time in industry). Ppl assume that Simons is in the boiler room doing all kinds of crazy technical stuff...he wasn't (most of the time that he ran the fund, it didn't do well at all).

"this simplicity is offensive but it is also why most people with technical backgrounds get destroyed by the market"

Figuring out things nobody else can is the hard way to achieve. Figuring out what you don't know and never betting on it is an alternative way that doesn't require being a genius.

Just my 2c, and this is more based on my experience academically, almost no-one figures things out that nobody else can. Innovation is largely a combination of circumstance and timing. Some ideas just have their time. Having unrealistic expectations around this is part of the problem (AHL went in thinking they could just hire a bunch of "boffins"...but they are all average, they just have PHds or whatever).

I don't think it is only knowing what you don't know either. That is a component but people from academia are rarely overconfident, the opposite is usually true (they tend to react badly under pressure). These people have a "circle of competence", they know what they don't know...but they don't really have anything else. All these places are churning massive resources into education, into human capital...is that working? It clearly works in some places and not others. I am just very cautious of the "know what you don't know" argument because it tends towards thinking everyone should be specialists...and I don't think the world works that way.

Knowing what you don't know doesn't correspond to a level of confidence or humility, in the way I meant it.

You can have low confidence and discount the value of things you know, while still assuming you know things you don't.

>Possible explanation: there aren't any other firms founded by as great mathematicians as the founders of the Renaissance.

I'm skeptical. There are a lot of smart mathematicians, and given that the incentive is billions in profit, there is no way you can maintain that kind of competitive advantage over decades. Again, we're not talking about a company stumbling on a massively profitable, but undiscovered space. In that case, yes, as a first-mover you'll make billions. But you can't maintain that for decades as others will move in.

The other item that makes it kind of crazy is that nobody actually knows how they are doing it in, even in theory. Take the example of Google's search monopoly. They were one of the first to create a specific kind of search product that led them to billions in profit. Two decades later, they still maintain that competitive lead and the product is still highly profitable, but nobody is confused as to how they actually do it even if only Google knows the nitty-gritty details of the infrastructure or algorithms that back this product up. The Medallion Fund might as well be magic since nobody can explain the mechanism by which they maintain their outlier status.

Many years ago, Jim Simons took an interest in my theoretical work on discrete topology (still unpublished) in the context of this fund. Among other things, this research provided a powerful mechanism for finding relationships in data that are effectively intractable to discover by more conventional means. Many of the mathematicians associated with Renaissance at the time had diverse and impressive theoretical backgrounds, all focused on different areas of mathematics that could loosely be applied to discovery of signals that, importantly, would be difficult to find via more conventional statistical analysis.

My immediate impression was that this was not a coincidence. Having talked to many other hedge funds over the years, I've come to realize that this is even more anomalous than it seemed at the time. While you will sometimes find a person on the cutting edge of these kinds of mathematics at other funds it tends to be an isolated case. Many hedge funds have boringly simplistic approaches to signal discovery. People overestimate how widely distributed and available this kind of expertise is.

Renaissance are not better at investing per se, they are better at signal discovery than anyone else and invested heavily in maintaining that (meta-)edge over the years, the investing part is relatively mechanical after the signal is discovered.

I can understand that there are a limited number of people who can understand and apply the math necessary, but not that it could remain proprietary for 30 years.

Usually if a company has secret sauce, someone will leave and spin off on their own. Even Google can't retain everyone. So unless I'm missing something, any explanation has to account for why this hasn't occurred here.

They pay waaaaaaay more to keep their people. And there are powerful incentives at work - competition would seriously diminish their rewards.

Very tight NDAs (that they actually litigate) coupled with enforceable non-competes ("garden leave" where they pay your salary for, say, a year as part of the deal before you can leave for a competitor) is part of it.

Really high comp is another.

Perhaps a bigger deal is the fact that they actively return money over the roughly $10BN fund value, implying that the strategy doesn't work past that point. A competitor would then be stuck in a zero-sum game battling for a slice of a fixed pie rather than being able to grow the market.

The article and Mercer's explanation basically explains Virtu's approach, and therefore makes sense wrt known performance vs. methodology from a more public company (Virtu)

Virtu is doing something totally different. You are comparing a gas station with O&G exploration.

Maybe...still 66% every single year for 20+ years is odd. Since there's so much money involved, nothing stops funds to invest tens of billions to duplicate their success.

In any investing environment, the tactic with the best returns are only available up to some limit of invested money before the "raw material" is consumed.