Warren Buffett made a bet in 2008 that index investing would beat hedge funds over a ten year time period. This includes all fees, costs and expenses that the hedge funds have. After the ten year time period, Protégé Partners LLC admitted defeat as Buffett’s index investing had won. The real question is, could index investing beat the famed Medallion Fund?
What is the Medallion Fund?
Jim Simons changed the world back in 1982. In sleepy Long Island, New York he launched Renaissance Technologies LLC. Jim Simons was looking to use his mathematics background to solve the longest running math problem, the stock market. In 1988 Renaissance started a fund that would change the course of history for investing. The Medallion Fund was born using an expanded model that Leonard Baum first made. They were looking to explore correlations in the market and leverage these into profits.
The Medallion Fund is famed as the beginning of the quantitative revolution in the market. Quantitative investing involves system based trading on variables that are data mined and analyzed. Renaissance Technology employs petabyte-scale data warehouses to asses statistical probabilities. They even go further than analyzing market data, they also look at peripheral events and their correlation. Then based off of the data analysis they feed these models into computer programs and most of the trading is automated.
Renaissance Technology also took a different approach than many other funds at the time. They exclusively employ specialists with non-financial backgrounds. Isadore Singer referred to their Long Island campus as the best physics and mathematics department in the world.
What Makes the Medallion Fund So Special?
The Medallion Fund is famed for the best track record on Wall Street, returning more than 66% annualized before fees and 39% after fees from 1988 to 2018. To give you an idea of just how good this is, the S&P 500 has an annualized return of 10.19% in the same time period. $1 invested in both funds in 1988 would give you over $20,000 and just over $20 respectively. Compounding interest will give you crazy returns.
Unfortunately, the Medallion Fund has been closed to investors since 1993 and is only available to current and past employees and their families. In 2012 Renaissance was granted exemption to allow employees to invest their retirement money in Medallion since it consistently outperformed their old 401(k) plan. After the exemption, in 2013 the retirement plan balances grew from $86.6 million to $153 without fees or annual taxes.
Now there are two open Renaissance funds that investors can utilize. They are the Renaissance Institutional Equities Fund and the Renaissance Institutional Diversified Alpha funds. Neither of these funds have been able to come close to the performance that the Medallion Fund has had.
What Can We Learn From the Medallion Fund?
The Medallion Fund employs a short-term quantitative trading strategy. It trades across multiple asset classes with high turnover and significant leverage. Now at face value this is the exact opposite of what we want in our personal portfolio. However, we can learn a couple things from this.
First off, Renaissance Technology does not employ finance background employs. Sometimes it is best to not follow the herd into the latest and greatest stock picks. It is also important to think about the market from different perspectives. For example, a paper published by Berkeley points to a direct correlation between temperature, relative humidity, sea level pressure, precipitation and the return of SPY.
The second thing we can learn is the place of leverage and short term plays. I believe both of these have a place in every budget and portfolio. However, it is not in the sense that you think. For example, you can leverage time to set goals for yourself that also build a skill at the same time you make the decision. This allows you to leverage your time to accomplish two things at once.
Short term plays are also important. It is important to use your short term goals to build into a more prosperous future. For example, if you want to have $20,000 in dividend a year, this may seem like an insurmountable task. However, building your first wheel is something that can be accomplished this week.
The Most Successful Hedge Fund
The Medallion Fund is a unicorn in the investing world. It is almost impossible to find another fund that has replicated the same returns over a similar time frame. They seem to have found the secret sauce in their computer algorithms and are definitely reaping the rewards because of it. I wouldn’t use this fund’s performance as a benchmark for success. However, it does show what is possible with some creative thinking and a whole lot of intelligent teamwork.
Have you ever looked into quantitative trading or heard about the Medallion Fund? Let me know in the comments below what your opinion about them is!