What Public Accounts Suggest About Renaissance Technologies’ Quant Methods

# Strategy of Renaissance Technologies Medallion fund: Holy Grail or next Madoff?


# Strategy of Renaissance Technologies Medallion fund: Holy Grail or next Madoff?












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?

## Answer by SRKX (score 22, accepted)

https://quant.stackexchange.com/a/1002

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...

## Answer by user1115 (score 39)

https://quant.stackexchange.com/a/1005

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.

## Answer by Klase (score 11)

https://quant.stackexchange.com/a/7023

> "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.

## Answer by vonjd (score 10)

https://quant.stackexchange.com/a/34341

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)

## Answer by RockScience (score 8)

https://quant.stackexchange.com/a/1158

Maybe a better answer: http://quantivity.wordpress.com/2011/05/08/manifold-learning-differential-geometry-machine-learning/#more-5397

## Answer by columbus (score 6)

https://quant.stackexchange.com/a/1498

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.

## Answer by gamerx (score 6)

https://quant.stackexchange.com/a/4050

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.

## Answer by Code Monkey (score 3)

https://quant.stackexchange.com/a/9567

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.

## Answer by markbruns (score 1)

https://quant.stackexchange.com/a/1169

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.

## Answer by user7056 (score 1)

https://quant.stackexchange.com/a/8264

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.]

## Answer by Con Fluentsy (score 0)

https://quant.stackexchange.com/a/85308

They combine Hidden Markov models,and other statistical machine learning methods to predict prices, they are effectively an online dark pool market maker but in a market makers dark pool, they are scalping the scalpers while avoiding the costs of settling trades.