Most investors know little or nothing of the interiors of what is considered the best investment fund in the world, for its stratospheric results for more than 30 years, the Medallion Fund. For this reason we have decided to write this article revealing the information we have collected and the insights we had when we visited its manager, Renaissance Technologies. Despite the length of the article, we believe that it will be very interesting for readers to know the details of the trajectory, internal functioning, curiosities and eccentricities of this great group of scientists, who have been recognized as the best managers in the world for their ability to beat the Market for decades.
The first bad news is that since 1993, Medallion only manages money from its little more than 300 employees and of course the owners of the manager. The good news is that the Medallion manager, Renaissance, has 3 funds open to some institutional clients. But the second bad news is that to invest in these institutional funds must be done with a minimum of 5 million dollars, and also overcome the due diligence that the manager performs to those who claim to be new investors. Yes, you have read well, to access the Renaissance institutional funds it is not enough to have the minimum 5 million investment, but also the managers reserve their right of admission. But do not get discouraged, keep reading because at the end of the article we will explain the way in which an investor with a minimum of 125,000 euros / dollars can access said funds.
According to Bloomberg, the size of the Medallion, which we remember is the fund reserved for “friends & family” of the owners, is approximately 11,000 million dollars at present, which together with the other funds that Renaissance manages for an elite of institutional clients , they make up the 62,000 million they manage in total (figures as of January 2019).
We will now explain the origins and evolution of the manager of the best fund in the world, and at the end of the article we will tell you how was our personal visit to the facilities of Renaissance Technologies, after reciprocally overcoming their due diligence and ours and thus become institutional clients of your funds.
The origin and evolution of Medallion and Renaissance performances:
On the north coast of the luxurious Long Island, just a couple of hours by car from Manhattan, is the area popularly known as the Renaissance Riviera. No wonder the biggest billionaires in the area are scientists working for Renaissance Technologies, in the neighboring town of East Setauket. This elitist group created in 1988 what has been the largest money-making machine in the financial world, the Medallion Fund. A quantitative fund that has far exceeded the benefits of other mythical managers such as Ray Dalio or George Soros. And what is even more spectacular is that he has done it in less time and starting from a smaller size.
This fund almost never loses money. Its worst result in periods of 5 years has been -0.5%. According to Andrew Lo, MIT finance professor and chairman of AlphaSimplex, another quantitative manager, “Renaissance is the financial and commercial version of the Manhattan Project.” Andrew praises Jim Simons, the mathematician who founded Renaissance in 1982, for bringing together so many scientists and intelligence in one company. “They are the pinnacle of quantitative investment. Nobody is even close to their level. ” Very few companies generate so much fascination, rumors and speculation. Everyone has heard of Renaissance and the mythical Medallion but almost nobody knows what happens inside. Apart from Simons, who is a somewhat more public figure who retired in 2009 with a personal fortune calculated at more than 16,000 million dollars, very little is known of the rest of his small group of founding scientists whose wealth exceeds the GDP of various countries.
For those who are wondering if these astronomical performances (see graphic below) are really possible and are so sustained over time, we should comment here on the words of Simons, in his speech last week at the Massachusetts Institute of Technology (MIT) , when they asked him for the umpteenth time in his car.
If you had ever compared him to the swindler Madoff: “Of course, with our results and after what happened with Madoff, shortly after the SEC (US regulator) studied and investigated exhaustively. Of course they did not find anything. ” But to this team of scientists that have spent more than 30 years trying to beat the markets, with a closed fund exclusively for them, and another 3 with barriers of entry of 5 million USD, the truth is that they worry very little about the skeptics.
Renaissance is unique among hedge funds, institutional funds and funds closed to the public. Your partners and managers are as cool as they are eccentric. Of the more than 300 employees, 90 are doctors (Ph.D.) in disciplines such as mathematics or physics. Peter Brown, who co-directs the firm, used to sleep in a pouch in his office. His counterpart, Robert Mercer, rarely speaks. And the identical twins, Stephen and Vincent Della Pietra, doctors specialized in string theory, often argue loudly among themselves. The rest of the staff can not be said to be typical office workers either. There is too much talent for vulgarity.
For outsiders, the mystery is how Medallion has been able to earn almost 80% per annum before commissions, which by the way take practically half of the performance, although in reality almost everything is at home since it is an exclusive fund for members and employees . And the most surprising thing is that despite three decades of experience, they have not been able to copy them enough to approach their results. We must look for the reasons in the power of their computational capacity, since the computers they have in the basements of their bunker are among the most advanced on the planet. Your talented employees have more and better data in which to find profitable models and models. And they also fine-tune the costs of their transactions, which are many, while taking into account the consequences that their own operations generate in the markets.
But do not forget that the origins of most of its founders come from IBM back in the eighties. There they used statistical analysis for the first linguistic challenges faced by mathematicians and computer scientists. Jim Simons, mathematical genius, professor at MIT and Harvard, recognized with the Oswald Veblen Geometry Award and co-creator of the Chern-Simons Theory, was also code-breaker for the Defense Analysis Institute (IDA) of the US .US. (Possibly the current location of Renaissance headquarters is not casual, given that East Setauket was the area known as Culper Spy Ring, cradle of espionage that allowed Goerge Washington to confront British troops knowing their secret plans in the late s. XVIII). The objective of the quantitative analysis is similar: Build models that find hidden signals between the “noise” of the Markets. Often they are just whispers, but some are able to predict how the price of an action, a bond or a barrel of oil will make a profitable movement, however imperceptible it may be. The problem is complex. Prices depend on fundamentals and flows and the often irrational behavior of the actors who are buying and selling. Despite (or thanks to) that Simons lost his job at IDA after publicly denouncing the Vietnam War in a New York Times article, the cryptographic connections he researched helped him create Renaissance, and a few years later Medallion. On his departure he searched and surrounded himself with cryptographers and mathematicians such as Elwyn Berlekamp and Leonard Baum, former colleagues of IDA, Stony Brook and professors Henry Laufer and James Ax, for their initial project: Predicting prices statistically.
The beginnings were bittersweet, and tracking trends and converting to the middle caused them problems. Gradually they were building models and more models. The results at the start were confusing: + 8.8% in 1988 and -4.1% in 1989. But in 1990, after focusing exclusively on operations or short term, Medallion achieved a profit of + 56% net of commissions. The scientists came to develop an internal programming language for their models. Today, Medallion uses dozens of “strategies” that run together as one. The computer code they use includes several million lines, which is said soon. Several teams are responsible for specific areas of research, but in practice everyone can work on everything. Each week there is a meeting where new ideas are put to the test, which are discussed to the extreme limits by almost a hundred doctors and other gifted minds.
In the early 1990s, spectacular returns became the norm at Renaissance: 39.4%; 3. 4%; 39.1%. And customers started crowding to enter Medallion.
In 1993 Renaissance stopped accepting new clients. The commissions were multiplied from 5% of management + 20% of success commission, up to 5% + 44%. Brutal, but even so their net returns continued to stand out above the rest. And not only that, but also in 2005 they had already expelled from the fund all the former investors who were not partners or employees, leaving Medallion exclusively for them, and creating for the outsiders the first of the 3 institutional funds from which we will give details later: RIEF, RIDA and RIDGE.
Scientific background applied to the Markets:
The success encouraged Simons to hire more and more brilliant scientists. The next batch of gifted people who entered the Renaissance family was a team of mathematicians from the IBM research center in Yorktown Heights, NY, who were struggling at that time for the machines to recognize, broadcast and translate the human voice. Let’s say the parents of Siri, Alexa and Google Translate. At first mathematicians tried to rely on linguists to codify grammar, but they soon realized that the problems they faced were solved much better with mathematical probabilities than with language experts. Mercer for example disappeared for months to type conjugations of French verbs on a computer. The processing of his data allowed him to write an algorithm that found the translation more plausible for each sentence: “Le chien est battu par Jean” translated it as “John does beat the dog”, which was a spectacular advance over the literal translation against which systems crashed without these algorithms. With every linguist they fired and a mathematician who signed up, the system took a step forward. Something similar happened with voice recognition: “Given an audio signal x, the speaker probably said and”. “Recognition and translation are the intersection between mathematics and programming,” said Ernie Chan, who worked in the 90s in the IBM research department and who now manages QTS Capital Management.
Mercer and Brown then made a very bold proposal to IBM: “Let us build a computer model to manage a part of your pension fund.” At that time IBM managed a fund of 28,000 million dollars for its employees. IBM rejected the proposal thinking what will linguistic programmers know about the world of investment? But Mercer and Brown were already determined to apply their knowledge in extracting juice from the financial markets. IBM was also in low hours, and it was easy for Simon, Mercer and Brown to recruit talent at that time. Renaissance was created by mathematicians who learned how to program, and not the other way round. They learned to build large systems in which many people worked at the same time. That was another competitive advantage of Renaissance.
The incorporations of talent were happening, the twins Della Pietra (Theory of Strings), Lalit Bahlt (responsible for human voice recognizing algorithms), Mukund Padmanabhan (specialist in digital signal processing). Almost all of them had worked together at IBM. They soon understood that facing the market was much more demanding than the advances required at IBM. Either your algorithm was better than the rest – they were already flooding the Markets – and you made money, or it was worse and you screwed up. The high pressure was tremendously productive. Renaissance used many resources to collect, classify and clean up data, as well as making it accessible to its researchers. “If you have an idea, you want to test it quickly. And if before you have to adapt the data you want to use, the process slows down a lot, “said Patterson, another code-writer who worked for British intelligence and was part of Renaissance until 2001. But intellectual challenges are not the only incentives for that group of data-hungry brains. They also enjoy something more intangible: The feeling of Family of scientists of the highest level and the complicity and satisfaction that this entails. Simons was like the figure of the benevolent father who added emotional intelligence to a group as diverse as geek.
When scientists from IBM joined Renaissance, Medallion was already earning figures in excess of 30% net of commissions. And almost one third of that figure came from futures trading. In those early times, market inefficiencies were more visible and profitable than today. For example, one of their scientists realized that there were 15 minutes difference between the closing of options and futures, which allowed them to create a specific system to exploit that for a while.
The market was full of aberrations, and scientists investigated each of them to death. The sum of all of them generated very important amounts of money. At first they were millions, but after a few years they were already billions. But as the financial system became more sophisticated with the pluriferation of other quantitative funds, inefficiencies began to become scarce.
When Mercer and Brown arrived at Renaissance, they began to work separately, but soon they realized that they were more powerful working together. They fed back to each other: Brown was the optimist and Mercer the skeptic. “Peter is very creative with a lot of ideas, and Bob says, I think we need to go deeper into this,” said Petterson. They took over the group that worked with listed shares, which were losing money. It took no less than 4 years to make the system work. But Jim Simons was very patient. The investment paid off, and even today those responsible for listed shares, through their derivatives and leverage (do not forget that inefficiencies today are much more subtle) continue to generate most of the benefit of Medallion.
Simons explained in an interview at Institutional Investor, back in 2000, that a winning [quantitative] system must be very stratified. “With each new idea you have to determine: Is it really new or is it implicit in something we’ve already done? Once determined, the team must find out how much it should weigh on the set. ” He explained that signals can cool down at a given moment, but that surveillance must be maintained because they can emerge again at any time, or that even withdrawing that monitoring can affect the overall performance. The operative can be in any type of asset and last fractions of a second or many months. At a conference Brown gave in 2013 he explained an example they shared with outside investors at the time, and therefore it was public: Studying the weather in financial centers across the globe found that local markets have a subtle tendency to go higher in the sunny days that in the cloudy ones. “It turned out that if Paris is cloudy, it is less likely that the French stock market will rise that day than if the sun shines during the opening hours of its Market,” he said. It was not a great generator of money, since that only happened slightly above 50% of the time. But with the tools and the system conveniently prepared, they are usable signals, along with many others. Brown continued: “The point is that there can no longer be obvious and powerful signals, because they would have taken advantage of others as soon as they were incipient. What we do is look for huge amounts of signals, and for that we have 90 doctors in mathematics and physics, who only have to sit there every day to distinguish them from the noise of the Markets. We have more than 10,000 processors (year 2013) down there who constantly gut very diverse data in search of those signals “. At present the methods to take advantage of the Market are as secret as difficult to imagine. A couple of years ago it leaked information that they were planning to use GPS (atomic) clocks to synchronize purchase and sale orders in different markets, through nearby servers that manage to take massive positions without their purchases altering the market price and before that not even HFT (High Frequency Trading) funds have time to react. We can not even imagine what they will do (or do) with quantum computers.
In addition to language specialists, astrophysicists have been especially successful in deciphering systems throughout history. This type of scientists shine above the rest when it comes to finding patterns among a sea of noisy data. The specialists in String Theory have also had a special success in filtering data. And the Della Pietra brothers, who along with others from their team at IBM dedicated themselves to the area of shares quoted at Renaissance, were among the first to shine in their field. These identical twins, who are now 58 years old, have never separated from each other. They both completed an honorific advanced program at Columbia at age 16, graduated in Physics at Princeton and earned a doctorate at Harvard in 1986. They always sat next to each other, recalls his former professor of abstract algebra at Princeton. “Their conversations were full of arguments. They were passionate mathematical discussions, and they were always correcting their professors. ” The fact of being identical twins seems to take them to another dimension.
“They are almost telepathic,” says Ernie Chan. In Renaissance the Della Pietras have always had adjoining offices with a large window to communicate constantly. “They are very creative and competitive between them, “adds Patterson, whom they reported directly for a few years.
The team from IBM focused on constantly improving the efficiency of the system and its performance. As the Renaissance models were essentially short-term, they focused on fine-tuning the transaction costs and how their own movements affected the markets, both problems very difficult to solve, according to other quants fund managers. They also made sure that the operations and the benefits were adjusted to what the system marked, since a bad price or any other crack could spoil the entire result of that specific operation.
Medallion reserved exclusively for partners and employees:
The amount of money invested by an employee in Medallion depends on their overall contribution to the company. And collaboration with the environment is considered key to having a larger portion of the cake. Employees are allowed to buy a limited number of fund shares. In addition, a quarter of their salary is invested directly in the fund for at least 4 years. All pay, of course, the tremendous fees of 5% mgmt fee + 44% performance fee. Simons made it clear from the start that the size of the fund matters, and that too much money hurts performance. Renaissance currently limits the size of Medallion to 10-12 billion, which is twice the size of the previous decade. Therefore, it is not uncommon for members and employees to divest large sums of money to maintain a manageable fund size. The benefits are also distributed semiannually.
Thanks to Medallion, Simons, which still owns 50% of the company, amasses a fortune of 16 billion, according to the Bloomberg Billionaires Index. The other Renaissance heavyweights such as Laufer, Mercer or Brown have fortunes not publicly quantified, but they have probably amassed many hundreds of millions each. But in a way, money, like the family environment among the partners, holds them together, except for some scientists who, already rich, have preferred to devote their intellect entirely to research or philanthropy.
In general, few employees and partners leave Renaissance over the years. Why would they do it? The intellectual challenges are as attractive as they are constant, the colleagues of the highest order and the astronomical salaries. As all the employees have become rich, their lifestyles have changed. Trains to Manhattan have given way to private helicopters. Scientists have changed their Hondas for Porsches, and expensive hobbies have become the norm. Simons’ cousin, Robert Lourie, who leads the futures research team, built some stables and a horse trail for his daughter. The yachts with the latest technologies are also the order of the day, and the expenses of business trips for team building activities are unmentionable. Simons, an inveterate smoker, came to sign a fire insurance policy in favor of his favorite restaurant to allow him to continue smoking his beloved Merit in the aftermath. You will understand better now because the coast where the manager is located is known as the Renaissance Riviera.
However, money has also caused some displeasure, logically. In 2001 they hired a Russian scientist, Alexander Belopolsky. Patterson was not in favor of signing him because Belopolsky had previously worked on Wall Street, where he had jumped from one position to another. His fears were well founded. In 2003 Alexander and another Russian, Pavel Volfbeyn, announced that they were leaving to work in another hedge fund, Millennium Partners, where they had negotiated multi-millionaire bonuses in exchange for trying to copy the Renaissance know-how. Of course, both Russian and Millennium scientists were sued by the Renaissance, and the matter was later settled by the parties reaching an economic agreement of which no details are known.
However, not all Russians gave displeasure to the manager. At that time, another scientist named Alexey Kononenko, out of the defunct USSR and a Ph.D. from Penn State in 1997, was promoted and promoted in the Renaissance organizational chart in a brilliant way, raising some blisters among the most veteran. Kononenko was seen having dinner at Simons’s house, and that was an unmistakable sign that the Russian had some gift that made him more special than the rest of the company’s gifted brains. Time proved him right, and Medallion achieved net returns of more than 40% a year after that dinner.
Taking advantage of the crash of 2007 and 2008. What is the secret of Renaissance?:
Still, they have not been exempt from scares. As explained by sources close to the manager, in August 2007 the mortgage market went bankrupt to many hedge funds on the road, which literally disappeared from the map, including the giant of 30,000 million managed by Goldman Sachs. The disasters of so many trapped investors and quantitative and non-quantitative leveraged hedge funds flooded the sales order markets, making the situation much worse. Medallion suffered a loss of almost one billion in a matter of days, almost 20% of its size at that time. This, which had never happened in its almost 30 years of history, made the team of scientists think. They came to ask if they should reduce risk to ensure the survival of the fund by selling some positions. Fortunately, the scientists put aside their hearts and focused on their brains, leaving the systems to do their job. In the last four months of the year, not only did the losses recover but they closed the year with a brutal profit of + 85.9% net. But it does not end there, in 2008, the year of the stock market crash, the benefits were even higher, touching 100% net. The Renaissance partners reaffirmed their principles: “Do not touch the models” (do not mess with the models). And they also learned a lesson: We must also calculate the damage that the bankruptcies of large third parties can cause to the Market.
Quantitative managers usually say that there is no system that is effective forever. The variables are endless and the markets are as changing and diverse as the human being himself and his globalization. That is why we can ask ourselves how much longer Renaissance can obtain these higher yields. The reality is that almost a decade after Simons has officially withdrawn, the money-making machine is still running, and the components of the old ex-IBM team are still between 50 and 65 years old.
The Cluster Family Office visit to the Renaissance facilities:
We will tell you now our impressions about the face-to-face visit we made a couple of years ago to the Renaissance bunker in Long Island (lower images of google maps). We will start by saying that, once their due diligence was passed to be accepted as institutional investors, we had to insist a lot to be allowed to visit their headquarters, since most of the selected ones are only shown their Manhattan offices, which are more ” commercials “although also spectacular. Manhattan usually employs about 40 people, but the offices are large enough to accommodate the more than 300 employees working in renaissance. And why? Well, because in Manhattan they have a backup and servers equivalent to the equipment they use in the bunker, and from time to time they practice a simulation as if it had been left inoperative, transferring all the staff for a day or two to Manhattan, in order to Make sure you keep working perfectly in case of an emergency in the bunker. That’s how freaky and rigorous they are.
Why do we call bunker at Renaissance headquarters on Long Island, if it is apparently a building (or several), great yes, but like any other? Because in addition to access control on the road and being surrounded by a lush forest hidden facilities naturally, inside there are many access controls, depending on the degree of restriction that is desired for each part of the building. Some doors we crossed when our companions passed a simple magnetic stripe for the reader, but others, closer to the heart of the company, required additional codes and even their fingerprints. In addition to the two stories high and its capricious shape that slightly reminiscent of the Pentagon building (saving the distances), the main block also has two underground floors where they house, among other secrets, the computer room. They agreed to show it to us for a few minutes. It was a huge space with white walls, perfectly cooled and double height ceiling. In the center of the room, half a dozen columns of 2 meters high were lined with processors on either side, forming long corridors between column and column. The length of each column was impressive, with the eye of a good cubero we calculated that they should measure between 50 and 60 meters, since they allowed us to go through these corridors from one end to the other. Obviously, the figure of more than 10,000 processors Brown talked about in 2013 was no exaggeration. Within that room there was another minor, to which we had no access, inside which there must be other main computers.
During the visit to the rest of its facilities we were able to verify that indeed all the individual offices are identical in size and decoration, following the guidelines of the partners. We did not see a single closed office door, everyone works with their door open to facilitate the interrelation and contrast of ideas, as Simons affirms in some interview. They explained to us some of their internal processes, such as the challenges that the speakers of new proposals to incorporate into the system must overcome. Any new idea must overcome that a huge number of Ph.Ds (doctors in physics, mathematics, etc.) try to destroy it without mercy. And the proposal of the speaker (s) will only progress if it overcomes the criticism and convinces that list of eminences. The next step is to test the proposal with models for a while. If it continues to work, it is tested with operations and real money in small quantities for another period of time. And if finally all the results are positive and there is no affectation or interference with the rest of the systems, it is implemented. The process can last for months or even years, since it is not fully implemented until it is empirically demonstrated and rolled. It was impressive to see the challenges room, where these new proposals are debated to death. In it there was a large screen presiding over a huge oval table with about forty seats, and around it a second ring of chairs forming a total audience of more than a hundred. Imagine that room full of Ph.Ds arguing vehemently and trying to find the cracks of any new proposal. Truly, nothing that does not improve with certainty the existing system will surpass that first theoretical filter and the subsequent practical implementations.
The comments and behavior of the managers who attended us during that day, confirmed that indeed the motivation of scientists to continue in Renaissance is not primarily money, since once they have become rich enough, what keeps them there is the Attraction of an intellectually challenging environment and surrounded by the best. And what better place than this, they said. They also told us that the intellectual challenge of working surrounded by 90 Ph.Ds of the scientific elite, not only serves to retain the talent that already works at Renaissance, but also to attract eminences that get bored in their posts of university research. These profiles, already tired of any professor or university colleague dares to contradict them in anything, fit perfectly into the fun offered by an environment such as Renaissance, where the challenges they constantly submit to each other are at a level that could never be found in any university in the world. The concentration of talent, not forgetting the impressive biannual checks, acts as a true intellectual magnet to maintain and attract the most prodigious minds.
Funds opened to institutional investors: Renaissance Institutional Funds
In addition to the mythical Medallion, reserved exclusively for partners and employees as we have said, the manager has 3 funds open to institutional investors who have a minimum of 5 million to invest and also overcome the internal due diligence of the manager: Renaissance Intitutional Equity Fund (RIEF), Renaissance Institutional Diversified Alpha Fund (RIDA) and Renaissance Institutional Diversified Global Equities Fund (RIDGE). They explained how they discriminate Medallion’s management with respect to the RIEF fund, the oldest of the 3 funds that are still open to institutional investors (you can see their trackrecord since 2005 in the table below). They recognize without any pretense that their “best ideas” apply them to the Medallion, and that their “second best ideas” use them in RIEF. The other two institutional funds of the manager, RIDA and RIDGE are different animals. Seen on their part these last two as tests or platforms where they apply other ideas (apparently more conservative), are perfect laboratories for their research, but for many other managers would be their flagships or flagship funds, without a doubt.
That feeling of seeing how the best in the world work in their field. Having said that, we must confess that quantitative funds are not a saint of our devotion, since we mostly feel much more comfortable investing in good value managers that focus on finding good stock at attractive prices. The quantitative ones do not stop being black boxes that, when they stop making money (as it happens with the immense majority), there is no where to hold on. However, we must surrender to the evidence of Number One, who have not stopped making money to date and far above the others. That is why the combination of RIEF in portfolios over 10 million along with the rest of the first swords of the International Value management is, in our view, the best option. We are convinced that this is the perfect mix for the coming years in equities: A percentage of the best Value managers and a percentage of the best quantitative fund on the planet. The proportions to the taste of the consumer, or rather adjusted to the needs and circumstances of each.
The good news for the smaller investors, as we anticipated in the beginning of this article, is that they can access funds of funds that cut these combinations from 125,000 euros / dollars, although logically paying an additional commission, as we explained in “Funds that make inaccessible funds accessible. ” To be sure, Medallion will remain reserved exclusively for Renaissance members and workers forever. But investing in the substitute RIEF of the same manager is not easy either, since the minimum amount of 5 million and the due diligence performed by the Renaissance itself to give or not access to the aspiring institutional investor, represent an insurmountable barrier for the vast majority. Hence, being able to enter through the back door via a fund of funds is an extraordinary opportunity. The only one.