Markman Capital Insight

Renaissance men plunder data for profit

What do Big Data, cutting edge supercomputers and sunny days have in common? If you answered Renaissance Technologies’ Medallion hedge fund, give yourself a gold star.

Gold stars are more than a namesake at Medallion. The Bloomberg article “Inside a Money Making Machine Like No Other” tells the story of the secretive New York hedge fund. Since 1988 it has racked up annual returns close to 80% before fees. Founded by award winning mathematician James Simons, the fund blazed a trail in Big Data before it was a buzzword in Silicon Valley or corporate boardrooms. It hired eccentric geniuses, built powerful supercomputers and wrote innovative algorithms. Then it began looking for patterns in what looked like chaos.

Today the quantitative hedge fund is run by ex-IBMers Peter Brown and Robert Mercer. The entire 300-person payroll is comprised of scientists. Fully 90% have PhDs. And every last one of them has a stake in the fund. In fact, employees are now the only investors.

MIT Sloan School of Management finance professor Andrew Lo believes the strength of the fund is its collection of employees. “Renaissance is the commercial version of the Manhattan Project,” he told Bloomberg. “They are the pinnacle of quant investing. No one else is even close.”

Returns bear this out. Medallion earned $55 billion in profits over its 28-year lifespan. More amazing still, the fund regularly rolls back capital by distributing profits every six months. Because Medallion makes short term investments in equities, Brown and Mercer like to keep no more than $10 billion on hand.

In 1993 they stopped accepting new money. Many of the best hedge funds charge fees amounting to 5% of capital and 20% of profits. Medallion charges 5% and 44%.

It refuses to hire anyone with previous Wall Street experience. Instead, Medallion hires scientists doing exciting work in pattern recognition. Simons himself once worked as a master code breaker at the Institute of Defense Analysis. Many of the first employees worked on early linguistics programming at IBM. Brown, one such veteran, explained the importance of finding patterns where none seem to exist:

“It turns out that when it’s cloudy in Paris, the French market is less likely to go up than when it’s sunny in Paris,” he said. Ultimately that trade did not make a lot of money because data showed it to be sunny a little more than half of the time. “The point is that,” Brown concludes “if there were signals that made a lot of sense that were very strong, they would have long ago been traded out.” 

This is not materially different than the work happening now with deep neural networks at Alphabet (GOOGL) and Nvidia (NVDA). They have assembled some of the brightest minds in computational and data science. They built innovative computing frameworks and began looking for patterns in massive data streams.

Big Data will change what is possible. There are patterns in what looks like chaos. Mining them leads to untold riches.

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About Jon Markman:  A pioneer in the development of stock-rating systems and screening software, Jon Markman is co-inventor on two Microsoft patents and author of the bestselling books The New Day Trader Advantage, Swing Trading and Online Investing, as well as the annotated edition of Reminiscences of a Stock Operator.  He was portfolio manager and senior investment strategist at a multi-strategy hedge fund from 2002 to 2005; managing editor and columnist at CNBC on MSN Money from 1997 to 2002; and an editor, investments columnist and investigative reporter at the Los Angeles Times from 1984 to 1997.

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