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Renaissance Technologies Medallion fund is one of the most successful hedge funds - ever! Yet it is very secretive.

Do you have information on the strategy used that is not yet mentioned in the Wikipedia article above?

Is there really something fundamental going on (the Holy Grail of investing) - or will this be the next Madoff?

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    $\begingroup$ @vonjd: [From wiki] "Started in 1982 by James Simons, Renaissance currently has more than 15-billion in assets under management. Since 1989, the company's 5-billion Medallion Fund has averaged 35% annual returns" - what am I missing, why is the fund only 15-billion 30 years later if it pulling an average annual returns of 35%? $\endgroup$
    – blunders
    Commented Apr 18, 2011 at 12:15
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    $\begingroup$ @vonjd This seems like a really loaded question; the wording makes it appear you've already made your conclusion. As an aside, RenTec (mostly) doesn't have outside investors. $\endgroup$
    – chrisaycock
    Commented Apr 18, 2011 at 13:23
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    $\begingroup$ @chrisaycock: do you have references for these fascinating facts about HFT shops? $\endgroup$
    – vonjd
    Commented Apr 18, 2011 at 14:42
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    $\begingroup$ @vonjd Tradebot has been profitable every quarter since 1999 and has not had a losing day in four years. Tradeworx affiliate Thesys Technologies recruits traders with a Sharpe of 10-15+. $\endgroup$
    – chrisaycock
    Commented Apr 18, 2011 at 15:34
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    $\begingroup$ There's a very long, multi-year post on Nuclearphynance about Renaissance. It's all pure conjecture, of course, but there are some grains of interesting information in there. link $\endgroup$
    – I-CJW
    Commented Apr 19, 2011 at 9:35

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There are a some information about Renaissance Technologies available in The Quants from Patterson.

Basically, and it's also what I heard in general, they are using intensively algorithmic trading, and from what I understood there are using Information Theory (they worked with Shannon if I remember well).

I'd say it'd be harsh to say it's the next Madoff given the background they have, I can easily see them being simply better than the rest...

It's just my opinion of course...

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    $\begingroup$ +1: After doing some browsing in the book it seems as though they are using techniques from cryptography and speech recognition - impressive, thank you! $\endgroup$
    – vonjd
    Commented Apr 18, 2011 at 14:31
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    $\begingroup$ yeah, Information Theory is all about pattern recognition. quite cool indeed. $\endgroup$
    – SRKX
    Commented Apr 18, 2011 at 14:36
  • $\begingroup$ I created a follow-up question: quant.stackexchange.com/questions/1004/… $\endgroup$
    – vonjd
    Commented Apr 18, 2011 at 14:39
  • $\begingroup$ i'm sure thats not all they use even for there main funds... $\endgroup$
    – pyCthon
    Commented Jan 19, 2013 at 0:14
  • $\begingroup$ @pyCthon I never implied that.... $\endgroup$
    – SRKX
    Commented Jan 19, 2013 at 15:51
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The Medallion Fund doesn't take outside investors. They returned the original investor money years ago. So: if it's a Ponzi scheme, then they've figured out how to profit by ripping themselves off. That's nice work if you can get it.

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    $\begingroup$ @user764: Well, I guess it is a little more complicated than that. They have other funds which are not turning down outside investors. So maybe their Madallion fund is the wannabe wunderkind acting as a teaser. But again: If it really works they seem to have found the holy grail of investing - and I am interested in that too ;-) $\endgroup$
    – vonjd
    Commented Apr 18, 2011 at 19:34
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    $\begingroup$ Renaissance only opened the two other funds in 2005 or so. They made ~40% annualized returns (after fees) for at least 15 years before that. $\endgroup$
    – user1115
    Commented Apr 19, 2011 at 16:51
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    $\begingroup$ this made me laugh +1 "profit by ripping them selves off" $\endgroup$
    – pyCthon
    Commented Oct 16, 2012 at 13:48
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"There is no secret sauce!" - Inside the Black Box: The Simple Truth About Quantitative Trading, by Rishi K.Narang

In this book, which is well worth reading to get a good conceptual overview of the different components of a quant trading system, the author tells about "one of the most successful" quant funds hiring only the best academic researchers and outperforming competitors every year. However, he claims (by quoting a former employee of the fund if I am not mistaken) that what makes the fund so profitable is the constant and meticulous improvement of every aspect of the system. From technological aspects such as hardware and software platforms, to extremely well researched parts of the system which others may not traditionally focus greatly on. Of course, they have a rock solid alpha model, but order execution algorithms, data streams/cleaning processes, and transaction cost models are considered (at least) equally important.

The point being made by the author is in other words that the strategy itself, although naturally very advanced and "top-notch", is merely one part of a very well oiled machinery where extreme focus is put by every single component, to shape something that is bigger than the sums of the individual constituents.

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  • $\begingroup$ I actually started reading this book after reading your comment. The book actually references Rennaisance Technologies by name. Unfortunately for me, the book also says it will not go into formulas. Looking forward to reading it. $\endgroup$
    – spacedustpi
    Commented Jan 30, 2022 at 23:08
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There is an extensive discussion of what is publicly known in Paul Wilmott's new book (which is a very enlightening and enjoyable read, btw):

Wilmott, P., Orrell, D.: The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets, Wiley, 2017.

On pages 125 - 131 (chapter 6: What Quants do) they describe Simons' way from academia to the NSA and back and after that founding RenTech.

Then several approaches which were/are being used are described, like hidden Markov models (e.g. I didn't know that one of the earliest hires was Leonard Baum, the inventor of the Baum-Welch algorithm!), speech recognition, high frequency trading and more agnostic machine learning techniques for finding short-lived patterns in financial time series.

On top of that RenTech uses efficient tax-saving vehicles like basket options, in which all the heavy trading is done, while the investors only buy these instruments once as "long-term" investors. More technical details can be found in a report from the US senate: Misusing Basket Options to Avoid Taxes and Leverage Limits (2014)

Edit
There are now more resources available:
- Video: James Simons (full length interview) - Numberphile (> 1 hour)
- Book: The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution (2019)

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  • $\begingroup$ Thanks for the book reference. You mention they trade basket options - a particular case being an index option - do you mean index options or other exotics? $\endgroup$
    – Jared
    Commented May 23, 2017 at 1:14
  • $\begingroup$ @Jared: I added an exhaustive official source on this at the end of my answer. $\endgroup$
    – vonjd
    Commented May 23, 2017 at 9:31
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Maybe a better answer: http://quantivity.wordpress.com/2011/05/08/manifold-learning-differential-geometry-machine-learning/#more-5397

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I think the key to fund performance is the use of own money, not borrowed. In this case, it is possible to implement strategies that ordinary hedge funds can not use due to risk management.

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Given their choice in hiring mainly academics from the fields of NLP and cryptography(at least in their early days), my guess is that they have been using something derived from information theory and/or hidden markov models.

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I live very close to their office on Long Island and went to Stony Brook University, where they hire from at times - and the only few couple of people I know that got hired there were pure genius. I really doubt they are a ponzi scheme! I drive by their gates every now and then, definitely secretive but totally legit in my books.

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It is neither Holy Grail nor next Madoff, although it could be perceived as the former if it continues to do well or could be perceived as the latter if it crashes and burns ... but that's just because the general populace [including the financial news media] are so clueless about economic theory, quantitative finance and the practical details of how trading is done ... the methods of Renaissance pretty straightforward; they are not about some sort of magic talisman voodoo witchcraft OR aggressively seeking out idiots and tricking honest people to believe in some sort of magic talisman.

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  • $\begingroup$ What are their methods? If you can claim that they're straightforward then that implies that you know what they are. $\endgroup$
    – Jase
    Commented Jan 19, 2013 at 3:30
  • $\begingroup$ It's like watching the best painter or sculptor in world...or a martial artist...or a musician. Understanding the general nature of the methods is a lot different than really understanding the art. Genius is in the artful application of [relatively] simple methods ... of course, getting lucky doesn't hurt, except in what it means for overconfidence -- so it's more important to work on capital preservation and the margin of safety. $\endgroup$
    – markbruns
    Commented Feb 18, 2013 at 5:59
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The Wiki pages seemed to have been upgraded :)

http://en.wikipedia.org/wiki/Renaissance_Technologies

Investment strategy

Renaissance uses computer-based models to predict price changes in easily-traded financial instruments. These models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions.

[Teitelbaum, Richard (2008-10-27). "Simons at Renaissance Cracks Code, Doubling Assets". Bloomberg. Retrieved 2009-06-02.]

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