Quant Macro Investing

Risk Taking Disciplined

God and RenTech’s Black Box

(Reuters, Jun 24th 2010) Does Renaissance Technologies — arguably the most successful hedge fund in the history of the world — know why it makes as much money as it does? A couple of weeks ago, I thought that it did, after reading a piece about RenTech’s Robert Frey in the FT. One of the fund’s four principles, he said, was rationality – “it can’t just be statistically valid”. You have to employ reason to identify a statistically significant but spurious pattern — which meant, I thought, that RenTech had a common-sense test: it wouldn’t enter into a strategy without having some kind of grip on why that strategy should work.

Ryan Avent, at the Economist, was unconvinced:

According to Sebastian Mallaby’s new hedge fund history, “More Money Than God”, the willingness to explore unexplained correlations is what sets Renaissance apart from other quant funds… The firm’s advantage is in its willingness to trade what doesn’t necessarily make sense…

Mr Frey is obviously in a better position than I am to know whether Renaissance does or does not require some theoretical model to be in place before trading on a signal can begin. But having the guts to trade relationships no one else can understand or explain would be one way to consistently beat the market over a period of two decades.

Scott Locklin, for one, thinks that’s ridiculous. Trading a relationship no one can understand or explain, he says, is “how you lose all your money in two weeks”. True scientists, says Locklin, of the type hired by RenTech, are trained to look for actual rather than spurious correlations, and to be able to tell the difference.

So, who’s right? Sebastian Mallaby would seem to be the best person to ask, here, since he spent a lot of time with RenTech types researching his doorstop of a book. So I asked him, and got this back:

The answer is that it is willing to trade stuff in the absence of intuitive explanations, and that this sets it apart from DE Shaw. But RenTech feels more comfortable when there is an intuitive explanation because that reduces the danger of data fitting errors.

Mallaby even quotes RenTech’s Bob Mercer to that effect in the book (page 302, for those of you following along at home):

“If somebody came with a theory about how the phases of Venus influence markets, we would want a lot of evidence….(But) some signals that make no intuitive sense do indeed work…the signals that we have been trading without interruption for fifteen years make no sense. Otherwise someone else would have found them.”

It’s weird, but if you believe Mallaby and Mercer, it’s true: somehow RenTech discovered a secret formula for making money. Follow the rules it spits out, and you’ll be rich, even though the formula makes no visible sense at all.

Does such a formula really exist? Is it as simple as finding it, keeping it secret, and doing whatever it tells you to do? Does that explain why the Medallion fund continues to do so well, even as RenTech’s other funds seem much more likely to come unstuck? And if such a formula does exist, would there have to be some deep reason why it works, which is just too recondite for mere mortals to work out? We’re entering the realm of the metaphysical here, which might be condign for a book entitled “More Money than God”. Maybe God — and only God — knows why James Simons is so rich, and maybe his formula is the modern-day equivalent of the Holy Grail.

Editing Assistant: Frances Wu

June 28, 2010 Posted by | Hedge Funds | Leave a comment

Hedge Funds Fail When ‘Rock Stars’ Are in Charge

From Bloomberg and the blog  Abnormal Returns,

(Bloomberg) … The ideal hedge fund should be like a good local restaurant: reliable, high-quality, a loyal group of customers, and unknown to the rest of the world.

Editing Assisstant: Katherine Xu

March 17, 2010 Posted by | Hedge Funds | Leave a comment

NYT: An Office? She’ll Pass on That

Great interview with Meridee A. Moore, founder of Watershed Asset Management, a $2 billion hedge fund based in San Francisco.

(New York Times) …  So, if you can include someone who comes with a different perspective — as long as they embody the same values — it’s a great way to get to the right answer. It helped me to understand that hard work, intelligence and willingness to go the extra mile can come in all shapes, sizes and colors.

… There’s nothing better for sharpening your ability to predict outcomes than living through some period when things went wrong. You learn that events aren’t in your control and no matter how smart you are and how hard you work, you have to anticipate things that can go against you.

… If the person avoids answering the basic questions and instead changes the subject to talk about the work they did, that tells me the person is a bit rigid. Instead of trying to respond to what’s being asked, they’re trying to get an A on the test.

…  they have to be able to challenge others and have me challenge them without taking it too personally.

… Investing is all about learning from what you did right and what you did wrong. If you are too afraid to admit what you did wrong, you are setting yourself up to make an even bigger mistake in the future.

Editing Assistant: Lingli Li

March 15, 2010 Posted by | Hedge Funds | Leave a comment

About Tudor’s Quant Funds

Some info on Tudor’s quant funds – hat tip Market Folly:

(Blog.CTNews.com) … Evans, [star trader of Tudor’s quant fund], has been a bit of a mystery, with very little written about his background or how many people he has helping him figure out the proprietary statistical formula that earned him positive 35.5 percent returns in 2008, and allowed him to grow his asset under management to $1.1 billion this year.

… Paul Tudor Jones shows his love for Evans’ trading skills by giving 10 percent of his $7 billion BVI Global Portfolio L.P. to the quant funds (Tudor calls it the “system trading group” – there 18 of them) that Evans helped build for Tudor Investment Corp. Of that $700 million, half of it goes right into the Tensor fund.  Talk about commitment — and maybe a little bit of pressure to perform — because that means a third of Evans total AUM comes directly from Tudor Jones flagship fund that he has a ton of his own coin in.

Editing Assistant: Lingli Li

March 15, 2010 Posted by | Hedge Funds | Leave a comment

We hedge fund managers are on your side

Click for more details

March 12, 2010 Posted by | Hedge Funds | Leave a comment

A meeting of minds between investors and hedge funds?

click here for more details

March 12, 2010 Posted by | Hedge Funds | Leave a comment

FT: DE Shaw and other hedgies look to Asia

Posted by Gwen Robinson on Mar 09 12:06.

While hedge funds have been virtually stampeding out of Japan for the last few years, DE Shaw, the $24bn hedge fund founded by Shaw, is set to open offices in Tokyo as well as Shanghai, as part of a concerted push to expand its Asian operations.

The group’s Shanghai office, according to the FT, will mark its first expansion into mainland China, with a team of private equity analysts focusing on acquisition opportunities in the country. The Tokyo office, meanwhile, will deal with such functions as marketing and account management.

The two new Asian offices come several years after DE Shaw opened a Hong Kong office in 2007 to focus on Chinese private equity opportunities, and set up in India. If the group’s earlier Asian moves are anything to go by – DE Shaw’s Indian operations are now its largest base outside the US, employing about 700 people in the country – the China and Japan offices have a rosy future.

Indeed, several other large hedge funds are now looking to beef up their regional presence, including GLG, Moore Capital and Soros Fund Management which are all planning to open Asian offices, adds the FT.

China, Singapore, and Hong Kong maybe. But Japan stands as a counter-intuitive proposition. Having spent the last few years pulling back from Japan, few big funds are bothering to set up shop in Tokyo, where regulations are onerous, taxes are high and margins on equities bets are often depressingly slim.

Just to reinforce that view, here, courtesy of EurekaHedge, is a rather striking snapshot of hedge fund presence – both in terms of assets under management and numbers of hedge funds – in the main Asian centres.

(Note that apart from assets under management, the actual number of hedge funds operating in Japan is omitted as many hedge fund groups offering Japan-focused funds are based outside the country – largely due to regulations and taxes that deter funds from putting people on the ground in Tokyo)


In the eyes of some Japan watchers, DE Shaw’s Tokyo move reflects a view that, amid investor pessimism about the country’s uncertain economic outlook , Japan has been oversold.

As Richard Armstrong of hedge fund consultancy Eureka Capital Partners told us on Tuesday:

There has been increasing interest in Japan lately because it has been so out of favour for the last four to five years

Of course, he notes, there is also a seasonal factor, with a general uptick of investor interest in Japan inthe first quarter of the year, which tends to dissipate over the second quarter.

Right now, says Armstrong, there is a “huge surge of start-up interest” driving a crop of new hedge funds in Asia – but most of these are setting up in Singapore and Hong Kong.

Meanwhile, EurekaHedge in a preliminary report issued on Tuesday found that hedge funds overall returned to positive territory in February, up 0.52 per cent after being marginally down in January.

Geographically speaking, hedge fund returns across most regions were marginally positive for February, although early reports showed that North American managers, who make up 65 per cent of all hedge funds globally, posted gains of 1.41 per cent, adds EurekaHedge, explaining:

Regional managers capitalised on the marked improvements in market sentiment on the back of some strong earnings reports, positive movements in the US dollar and commodities as well as improved manufacturing data and the Fed’s decision to maintain low interest rates.

As for emerging markets and even Japan: Latin American funds were also positive with a 0.48 per cent returns in February while Asia ex-Japan and Japan funds returned nominally positive performances. Not surprisingly, problems in the eurozone led to negative results by the region’s managers, who were down 0.66 per cent in February as the euro weakened amid speculation of Greece’s sovereign debt default.

Asia, in that context, is looking like a safe – and potentially lucrative – haven. A quality that is clearly not lost on David Shaw and his peers.

March 10, 2010 Posted by | Hedge Funds | Leave a comment

Not Quite So Exotic

Hedge funds are hitting middle age.

Read full text here (By Barton Biggs | NEWSWEEK, Feb 26, 2010).

March 2, 2010 Posted by | Hedge Funds | Leave a comment

Economist: Scarcity in Asian Sovereign Debt

Read full text here (Feb 25th 2010 | HONG KONG | From The Economist print edition).

March 2, 2010 Posted by | Hedge Funds | Leave a comment

Cohen Trades Secrecy for Golf With Investors Lured by 30% Gains

Read full text here (Bloomberg 26th Feb, 2010).

March 2, 2010 Posted by | Hedge Funds | Leave a comment