Nowadays, privately owned funds swear only by physicians, mathematicians, econometricians and computer scientists. They seek them as precious commodities. Their abilities to deal and come up with new complex models are much appreciated by financial institutions. Nevertheless, it is not unusual that those people gather and set up their own funds with the aim to beat the market.
On the one hand, some of those funds were prodigiously successful before they collapsed, e.g. the Long Term Capital Management (LTCM) founded in 1994 included two Nobel Prize in Economic Sciences laureates (Scholes and Merton) in its board.
On the other hand, some of those funds were and still are profitable today. Among them, Medallion Fund, one of Renaissances Technologies’ funds, has been recording two-digit annualised returns since 1989 or, in other words, for 27 years in a row. Few funds, if any, can boast about this kind of incredible consistency.
Renaissance Technologies’ Cash Cow
Bloomberg reported that Medallion Fund’s competitors agree on its performable technology. As a matter of fact, it turns out that the best computers in the industry are in Renaissance’s office: their speed guarantees to notice abnormalities in the markets and analyse them faster than anyone else. However, restricting Medallion’s performance to their equipment would be overly simple.
Indeed, the employees at Medallion are provided with collected, clean and accessible data – Renaissance does not skimp on resources to conduct their researches. This mentality and this care for the small details are not recent and are the result of a long process. Many key figures ranging from James Simons (founder of Renaissance) to the IBM team that moved over to Renaissance contributed to Medallion’s success and the sustainability of the models. Those people were the best at what they were doing, and this feature is mirrored in Medallion’s models.
There are some $10m assets under Medallion’s management. Since Medallion, as well as Renaissance, does not get external funding anymore, the employees are the only investors permitted.
The amount of money one employee has in Medallion is correlated to his contribution to the firm: the better the performance, the more money one can invest in the fund. Additionally, a part of their salary is locked in for four years and the pay structure applied is a “five forty-four”. Five refers to the percentages that go to the hedge managers from assets under management and forty-four is the fraction of profits allocated to the managers expressed in percentages.
These payment fees are twice as expensive as the industry standard is “two twenty”. Despite higher costs compared to traditional hedge funds, people tend to stay with Renaissance: the option to invest in Medallion is certainly an incentive and it is understandable if one has a look at Medallion’s returns since 1988.
The chart above displays them in histogram, and an essential fact is obvious: Medallion Fund’s returns have been positive since 1989. They even recorded a two-digit return during the financial crisis, which is remarkable considering that unstable environment.