Sunday 24 November 2019

The Man Who Solved the Market

By now many of you will be familiar with the investment record of Renaissance Technologies. A book on the subject came out earlier this month.
For the uninitiated their Medallion Fund has compounded at 66% p.a. for multiple decades, 39% p.a. after the most delicious fees in the industry. $1 invested in 1988 would be worth $19,500 in 2018. That is if you were fortunate enough to remain invested, as many early LP's were not. The fund size has apparently been capped at around $10 billion, in order to preserve high percentage returns.

We can never completely rule out that this is a blind-folded monkey throwing darts. But if that is the case then it is one hell of a monkey. Or it's an 800 pound gorilla.

This performance is even more striking because the fund apparently employs few, if any, finance domain experts. Mathematician Isadore Singer described Renaissance as having "the best physics and mathematics department in the world". This capability is combined with a data-driven, quantitative approach across multiple asset classes, and a reported 2 day average holding period.

It's a powerful story of just what is possible with data, and I love it because of that. But unless you also have a team of world class scientists, their approach may not be one that you want to try to emulate exactly. There may or may not be room for a few more players deploying similar strategies to the Medallion fund, and at similar scale. But their very existence suggests that for many others with a quantitative focus, their efforts may best be expended by doing what the Medallion Fund does not.

- Vincent