Jim Simons rennaisance technologies - is value învesting not the only way ?

[TwoCitiesCapital]

Is there a way to extrapolate this sort of cumulative return of rennaisance into an annual compound return assuming reinvestment?

 

I mean, yea you could extrapolate and calculate, but part of the reason their returns are what they are is because they DIDN'T compound.

 

You probably couldn't do what they have done managing the amount of money Buffett does. Too much scrutiny from regulators, too much at risk of it goes wrong, too hard to move quietly in the markets, and gets hard to continue running leverage at 30x if you manage $100 billion.

[Jurgis]

An interesting exercise might be: assume you get RenTech return but not compounded. Assume you then invest it 60/40 index/bonds or whatever. Are you better off than investing in BRK 10/20 years ago? What if 100/0 index? Not sure if there's enough data to model this.

[Poor Charlie]

Is there a way to extrapolate this sort of cumulative return of rennaisance into an annual compound return assuming reinvestment?

 

One thing mentioned in the book I thought was telling was Simons’ Madoff investment.  Madoff built his scheme around the idea he could deliver steady 12 to 13% returns.  So what is Simons doing withdrawing from his fund, which is earning 66%, and investing in a fund earning a purported 13%?  If anyone could/should have been reinvesting in Medallion it was Simons.  And this wasn’t when he was running billions of dollars; this was in the early 90s when the fund had less than $100 million in capital.

 

It’s tough to come up with a valid compounded return figure for Medallion given that (a) nearly all the fund’s earnings were distributed and (b) the guy running the fund was reinvesting his distributions at a much lower rate (even when the fund was small). 

[scorpioncapital]

It's interesting. To me it boils down to do you have the guts to put and compound 100 percent of your net worth each year. So many investors get wild returns on 1/10 of Their portfolio but ask them would they put everything in and they wouldn't. But if you don't put everything in your return on total growing capital is going to decline.  I can be a genius on some ten bagger but if i put 10 Percent in my capital isn't going up 10x . Seems Amazing when an investor can compound all capital every year at anything above 15 percent.

[Guest cherzeca]

simons is an anomaly. a quant who caters to quants and who is willing to give them everything they ask for.  only a quant would do that, and most firms aren't run by quants.  I saw a video of simons explaining his keys to success, and the one thing that struck me was when he said he gives his employees the best infrastructure there is.  if you think about it, how do you attract and retain great employees?  with a tough NDA and noncompete? no, with a great organization that says yes to any reasonable employee request.  harkens back to his days at the think tank where everyone could do 50% of their time in whatever they wanted.  if one realizes that if you give employees the massive computing power, massive data access and supportive culture they want, they will stay...and make damn good models.  they may even have a good cafeteria...

[sleepydragon]

simons is an anomaly. a quant who caters to quants and who is willing to give them everything they ask for.  only a quant would do that, and most firms aren't run by quants.  I saw a video of simons explaining his keys to success, and the one thing that struck me was when he said he gives his employees the best infrastructure there is.  if you think about it, how do you attract and retain great employees?  with a tough NDA and noncompete? no, with a great organization that says yes to any reasonable employee request.  harkens back to his days at the think tank where everyone could do 50% of their time in whatever they wanted.  if one realizes that if you give employees the massive computing power, massive data access and supportive culture they want, they will stay...and make damn good models.  they may even have a good cafeteria...

 

He also provide permanent employment. Nobody ever got fired from there I think.

 

[scorpioncapital]

https://www.marketwatch.com/amp/story/guid/EC683D1E-3939-11EA-9DD7-1C195141DE2B

 

I wonder if tepper's 27 year return of 25 percent referenced in this article is also compounded or straight annual return without reinvestment

[Kaegi2011]

 

One thing mentioned in the book I thought was telling was Simons’ Madoff investment.  Madoff built his scheme around the idea he could deliver steady 12 to 13% returns.  So what is Simons doing withdrawing from his fund, which is earning 66%, and investing in a fund earning a purported 13%?  If anyone could/should have been reinvesting in Medallion it was Simons.  And this wasn’t when he was running billions of dollars; this was in the early 90s when the fund had less than $100 million in capital.

 

It’s tough to come up with a valid compounded return figure for Medallion given that (a) nearly all the fund’s earnings were distributed and (b) the guy running the fund was reinvesting his distributions at a much lower rate (even when the fund was small).

 

I knew a guy who I worked with and he ended up on the value investing side of the RenTech empire (name escapes me at the moment).  He told me that one of the attractions of the job was the ability to put (limited) capital into Medallion, to which I asked isn't it weird that the benefit of working at a hedge fund is the ability to invest in another fund?  Don't they want to align interests?!  That's when I learned that Medallion doesn't compound - not sure why but it's constrained to ~$5bn (at least as of a while ago). 

[TwoCitiesCapital]

 

One thing mentioned in the book I thought was telling was Simons’ Madoff investment.  Madoff built his scheme around the idea he could deliver steady 12 to 13% returns.  So what is Simons doing withdrawing from his fund, which is earning 66%, and investing in a fund earning a purported 13%?  If anyone could/should have been reinvesting in Medallion it was Simons.  And this wasn’t when he was running billions of dollars; this was in the early 90s when the fund had less than $100 million in capital.

 

It’s tough to come up with a valid compounded return figure for Medallion given that (a) nearly all the fund’s earnings were distributed and (b) the guy running the fund was reinvesting his distributions at a much lower rate (even when the fund was small).

 

I knew a guy who I worked with and he ended up on the value investing side of the RenTech empire (name escapes me at the moment).  He told me that one of the attractions of the job was the ability to put (limited) capital into Medallion, to which I asked isn't it weird that the benefit of working at a hedge fund is the ability to invest in another fund?  Don't they want to align interests?!  That's when I learned that Medallion doesn't compound - not sure why but it's constrained to ~$5bn (at least as of a while ago).

 

It doesn't compound b/c they leverage that stuff like 20-30x to make the returns they do. Much easier to leverage $5B up to $100B then it is to leverage $100B up to $2 trillion. Makes the economics/returns better too than simply letting it compound up to $100B and losing the leverage.

[Kaegi2011]

 

It doesn't compound b/c they leverage that stuff like 20-30x to make the returns they do. Much easier to leverage $5B up to $100B then it is to leverage $100B up to $2 trillion. Makes the economics/returns better too than simply letting it compound up to $100B and losing the leverage.

 

I get it - wasn't trying to add insight as much as sharing an anecdote on what he/they do with their capital that they cannot put into Medallion.  Also, your example is a bit extreme.  Seems like if they can do those types of returns at $5bn (assumption), how much degredation happens when it's $6bn, or $7bn, or $10bn?  Nobody except people who work there knows why the limit is what it is. 

[TwoCitiesCapital]

 

It doesn't compound b/c they leverage that stuff like 20-30x to make the returns they do. Much easier to leverage $5B up to $100B then it is to leverage $100B up to $2 trillion. Makes the economics/returns better too than simply letting it compound up to $100B and losing the leverage.

 

I get it - wasn't trying to add insight as much as sharing an anecdote on what he/they do with their capital that they cannot put into Medallion.  Also, your example is a bit extreme.  Seems like if they can do those types of returns at $5bn (assumption), how much degredation happens when it's $6bn, or $7bn, or $10bn?  Nobody except people who work there knows why the limit is what it is.

 

My bad. I guess I misunderstood where you're coming from.

 

But to your point, assuming that $100B is the limit they can invest effectively, the degradation from $5B to $10B would cut their returns in half due to the increase in equity and reduction in leverage.  Still attractive, but not anywhere near as much so.

[Kaegi2011]

 

But to your point, assuming that $100B is the limit they can invest effectively, the degradation from $5B to $10B would cut their returns in half due to the increase in equity and reduction in leverage.  Still attractive, but not anywhere near as much so.

 

If you assume returns beyond $100bn to be zero, then the conclusion holds.  I just don't know if it's that clear cut.  To be clear, it's a bunch of top top quants we're talking about, so I don't doubt that the amount they utilize has been optimized to hell.  Having said that, market conditions and their opportunities change, their alternative investment opportunities change, so I do wonder how they decide between putting money into the Medallion fund vs. other markets.  Either way, we're just speculating out here... 

[ratiman]

I don't understand the argument that Rentech uses 30x leverage. It's illegal for hedge funds to use more than 6x leverage. The Senate report on Rentech's fraudulent tax avoidance scheme shows that Rentech managed to avoid the leverage limits by pretending that it was really the banks leveraging up, not Rentech. The Senate report shows pretty plainly that Rentech was running an unregulated market making operation. I searched for the Senate report in the online version of the Zuckerman book and saw that he dedicated one paragraph to it, which seems a little strange. No hedge fund manager gets better press than Simons. Imagine if the Senate had issued a report on the fraudulent tax scheme of Einhorn or Kovner.

[ratiman]

Here is a Bloomberg story from November on how Simons owes billions in back taxes.

 

https://cc.bingj.com/cache.aspx?q=november+tax+scheme+avoidance+simons+basket+options&d=4639647130720657&mkt=en-US&setlang=en-US&w=SDVl7gJy0Xg93gNtGkn-yXTI8aXQx2NH

[dwy000]

I don't understand the argument that Rentech uses 30x leverage. It's illegal for hedge funds to use more than 6x leverage. The Senate report on Rentech's fraudulent tax avoidance scheme shows that Rentech managed to avoid the leverage limits by pretending that it was really the banks leveraging up, not Rentech. The Senate report shows pretty plainly that Rentech was running an unregulated market making operation. I searched for the Senate report in the online version of the Zuckerman book and saw that he dedicated one paragraph to it, which seems a little strange. No hedge fund manager gets better press than Simons. Imagine if the Senate had issued a report on the fraudulent tax scheme of Einhorn or Kovner.

 

Where are you seeing that it's illegal to use more than 6x leverage?  Futures contracts offer more leverage than that for exchange trading and OTC derivative contracts can be way more leveraged.

 

Mutual funds are limited in their leverage but hedge funds (esp offshore) don't have the same regulations.

 

Note the book speaks to how they have used swaps and derivatives to lever up (it's the basis for the tax argument as well).

[ratiman]

Apparently Rentech set up a "joint back office"  with a broker and the leverage limit in that scenario is 7.6:1, which I misremembered as 6:1. But Rentech enjoyed much more leverage than that. From the senate report:

 

"If RenTec had utilized a normal prime brokerage trading account at Deutsche Bank or Barclays, it would have been subject to the margin limits in Regulation T.  But by using the basket option structure, which RenTec used to trade securities in virtually the same manner as normal prime brokerage trading accounts, the hedge fund claimed it could operate free of the federal margin rules imposing leverage limits.  Because the basket option accounts were opened in the name of the banks and the account assets were also held in the name of the banks, the banks treated funds deposited into those accounts as supplying money to themselves rather than lending money to the hedge funds, which meant the federal leverage limits did not apply.  The banks took the position that they were not lending money to the hedge funds, even though the hedge funds paid financing fees for use of the bank funds; the hedge funds’ premiums provided collateral to secure the financing; and the banks described the options as a way to provide financing to their hedge-fund clients. RenTec used the billions of dollars deposited into its option accounts by the banks to conduct millions of trades per year, and reported to the IRS that Deutsche Bank made “available to Renaissance” leverage as high as 17:1, secured only by the assets purchased with the borrowed money.  At its peak, with bank financing, RenTec’s basket option securities portfolio reached an outstanding notional value of more than $50 billion. The banks and hedge funds claimed the option accounts could operate entirely outside of the federal margin rules, even though those accounts operated in the same way as prime brokerage accounts subject to margin rules.  Circumventing margin rules by relabeling a prime brokerage account as an “option” account is not, however, a legitimate business purpose."

 

[ratiman]

Having now read this, I still don't get how the underpayment of taxes by $6.5 billion (according to the IRS) isn't a bigger part of the story. $6.5 billion is a lot of money! There is only one footnote to the senate report on Rentech's tax situation, and Zuckerman mostly takes the side of Rentech that all the liability had been shifted to the broker and the most Rentech could lose was the collateral. That's not the position of the banks, the senate, or the IRS. Zuckerman also omits the juicy quote from the Deutsche Bank lawyer that operating as a "front" for a hedge fund would be illegal. Zuckerman's explanation for the "basket option" thing is that after 2000, Rentech wanted less risk, but if Rentech wanted less risk, why did it hugely increase leverage after 2000? That's not how to reduce risk. One explanation is that it at once increased leveraged and moved to a safer shorter term strategy, but would the strategy have been worth pursuing without exceeding leverage limits? Hard to know, but the answer is probably no.

 

You could say that the options strategy didn't affect the fund's returns, just the post tax returns, but untaxed cap gains are a zero-interest loan from the IRS, and zero interest loans will affect returns.

 

Of course, it's not really fair to criticize the book for what it's not. But what I find strange is that Simons has mostly skated by without nearly any bad press about his tax situation. I guarantee if the Kochs or Icahn or Kovner owed the IRS billions, that would be the story, not philanthropic donations. My guess is that Zuckerman's book is part of a premeditated press strategy to get ahead of the bad press about the tax payment. The first line of Simons obituary will probably be "Jim Simons, a billionaire who paid the largest tax penalty in IRS history, . . . "

[ValueArb]

I don't understand the fuss. Jim Simons is a smart guy, but limiting yourself to $5B - $10B maximum is a huge advantage over Warren Buffett. Simons is evidence for my thought that Warren should have limited Berkshires size, or gone back to investment partnerships to keep control over the portfolio size.

 

Can you imagine if Warren was still running the Buffett Partnerships and getting 25% of annual gains? He'd probably be worth close to $300B.

 

And neither statistical arbitrage nor market making is technical analysis, you can trade with a lot of leverage if you have order flow info and control what is happening on your positions.