{"id":2999,"date":"2017-02-01T09:55:57","date_gmt":"2017-02-01T14:55:57","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-digit\/submission\/renaissance-technologies-generating-alpha-without-wall-street-veterans-or-mbas\/"},"modified":"2017-02-02T09:48:50","modified_gmt":"2017-02-02T14:48:50","slug":"renaissance-technologies-generating-alpha-without-wall-street-veterans-or-mbas","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-digit\/submission\/renaissance-technologies-generating-alpha-without-wall-street-veterans-or-mbas\/","title":{"rendered":"Renaissance Technologies: Generating Alpha without Wall Street Veterans or MBAs"},"content":{"rendered":"
\"Funds<\/a>
Funds driven by systematic strategies raised $21B in 2016; all others lost $60B to withdrawals<\/figcaption><\/figure>\n

Since 2011, excess returns in the hedge fund industry have been lackluster<\/a>. 2016 was no exception; the average fund<\/a> returned 6.1% versus 12% for the S&P 500. Consequently, investors removed<\/a> $39 billion in aggregate from hedge funds during 2016. But if capital flows and excess returns are indicators of \u201cwinning\u201d in the investment universe, quantitative funds that rely heavily on mathematical models, data, computing power, and scientists are beating more traditional strategies.<\/p>\n

Perhaps the most successful\u2014and, somewhat unsurprisingly, the most mysterious\u2014\u201cquant\u201d fund is Renaissance Technologies. Since inception, its Medallion Fund has returned an astonishing 71.8% per annum (or around 38% net of fees) over its 29 years, versus about 10% for the S&P 500.<\/p>\n

All portfolio managers rely on data and technology in one form or another when making an investment decision. A traditional value-oriented hedge fund manager, for example, may employ proprietary software to sift through financial statements in an effort to identify mispriced securities, but ultimately, traditional hedge funds, though technology-enabled<\/em>, depend heavily on human judgement to generate alpha. Quant funds, however, rely substantially\u2014in some cases entirely\u2014on technology-driven<\/em> systematic strategies. At a foundational level, such strategies are built on deep statistical analyses that identify signals in noisy markets, and by shaping these mathematical models into actionable algorithms, quant managers can automate trades and reduce their fund\u2019s exposure to the \u201chuman element.\u201d<\/p>\n

Building successful quant strategies is extraordinarily complex. It requires extensive computational power, access to massive quantities of sufficiently organized data, and a team of mathematicians, computer scientists, and physicists to develop ideas and stich the pieces together. Despite the complexity, Renaissance has demonstrated that its methods are effective and repeatable.<\/p>\n

\"Medallion's<\/a>
Medallion’s returns are impressive, even against those of Berkshire Hathaway<\/figcaption><\/figure>\n

Founded by Berkley-trained mathematician Jim Simons in 1982, Renaissance has a remarkable track record of consistent, market-beating returns. The firm\u2019s early adoption of technology-driven strategies has paid off enormously: one dollar invested in its Medallion Fund in 1988 would be worth nearly $14 thousand today, net of fees (the same dollar invested in the S&P 500 would be worth about $17 today).\u00a0 Precisely how Simons, who retired in late 2009, and Medallion\u2019s managers achieved such high returns is largely a mystery. What is clear, however, is that Medallion\u2019s string of successes would not have been possible without access to cheap data storage and powerful, cost-effective computing. In the late 1990s, the firm\u2019s \u201ctotal CPU power grew by a factor of 50,\u201d while data bandwidth expanded \u201cby a factor of 45\u201d (Bloomberg<\/a>). Today, details of Renaissance\u2019s computing power are patchy, but Two Sigma Investments, a $40B quant fund of similar noteworthiness, reportedly<\/a> has access to \u201cmore than 100 teraflops of power\u2014more than 100 trillion calculations a second\u2014and more than 11 petabytes<\/a> of storage, the equivalent of five times the data stored in all U.S. academic libraries.\u201d If Renaissance\u2019s team of PhDs is the guidance system, the firm\u2019s computing power and databases are the rocket fuel that propels returns into orbit.<\/p>\n

Other attributes of the firm contribute to its ability to create value for investors. Renaissance limits Medallion\u2019s assets to between $9 billion and $10 billion in order to reduce the likelihood of moving markets with large trades, thereby dragging down returns, and since 1993, the fund has been open only to employees and their families, diminishing the threat of redemption and easing fund managers\u2019 client facing responsibilities. Lastly, the firm recruits almost exclusively scientists for its frontline work. In a 2008 interview<\/a> with Bloomberg, former employee and Berkley mathematician Elwyn Berlekamp said, \u201cI\u2019ve always said Renaissance\u2019s secret is that it didn\u2019t hire MBAs.\u201d In an interview<\/a> with the Wall Street Journal, Simons said scientists are less valuable for their \u201cmathematical or computational skills than for their ability to think scientifically\u2026They are less likely to accept an apparent winning strategy that might be a mere statistical fluke.\u201d When it comes to capturing value, Medallion charges a whopping 5% of assets under management and 44% of profits, well in excess of the industry standard 2 and 20.<\/p>\n

\"Comic\"<\/a><\/p>\n

Renaissance\u2019s future competition may not come from extant hedge funds looking to copy its tactics. Rather, artificial intelligence research teams at Facebook, Google, or any number of small startups could upend the investment management industry by unleashing constructs on financial markets. Nonetheless, investors are clearly hungry for technology-driven strategies like those employed by Renaissance, but they should be cautious of the impossibly high standard set by Medallion. The democratization of computing power, low cost of storage, and development of AI technologies could soon start dragging those numbers down.<\/p>\n","protected":false},"excerpt":{"rendered":"

How a team of mathematicians, computer scientists, and physicists is beating the market<\/p>\n","protected":false},"author":404,"featured_media":3000,"comment_status":"open","ping_status":"closed","template":"","categories":[29,1049,655,1048,161,1076,1075,897,1013,7,212,22],"class_list":["post-2999","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-big-data","category-computing-power","category-data","category-hedge-funds","category-investing","category-math","category-mathisawesome","category-topology","category-wall-street","category-winner","category-winners","category-winning"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-digit\/assignment\/digital-winners-losers\/","yoast_head":"\nRenaissance Technologies: Generating Alpha without Wall Street Veterans or MBAs - Digital Innovation and Transformation<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-digit\/submission\/renaissance-technologies-generating-alpha-without-wall-street-veterans-or-mbas\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Renaissance Technologies: Generating Alpha without Wall Street Veterans or MBAs - 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