Renaissance Technologies

Renaissance is unique, even among hedge funds, for the genius—and eccentricities—of its people. Peter Brown, who co-heads the firm, usually sleeps on a Murphy bed in his office. His counterpart, Robert Mercer, rarely speaks; you’re more likely to catch him whistling Yankee Doodle Dandy in meetings than to hear his voice. Screaming battles seem to help a pair of identical twins, both of them Ph.D. string theorists, produce some of their best work.

Excellent piece that raises many questions such as, Is finance really the best use for two string theorists? And if you think the answer to that question is obvious you may need to learn more string theory.


String theory is a pseudo-science that nonetheless is afforded great respect. Seems a natural fit for investment management.

The beauty of investment management is there is a "right" and "wrong." If you can put up 30% annual returns for 2 decades with virtually no drawdowns, you too can be a billionaire no matter what sort of science you practice. Good luck.

But Madoff was only offering 11%.

A small but finite chance exists that Renaissance Tech is doing what old-fashioned Wall Street hedge funds do: offering money for hot tips from credible sources, aka the victimless crime of inside trading... just a thought.

You would have to start off with 10 million. The first 10 million is always the hardest.

I lived with a theoretical physicist last year. He cheerily told me that he doesn't think any of the last 30 years of physics will become empirically testable in the next 100 years. Higg's paper was written in 1964, whilst the recent discovery of gravity waves confirmed a theoretical prediction by Einstein. Ed witten, the most important string theorist hasn't won a nobel because they haven't found a scrap of confirmation for the theory beyond the anomolies that inspired its creation.

Hanging out with him and his friends, I can assure you they would have a negative marginal product in most offices doing analytics work. Places like rentech are some of the only ones where these guys are actually useful.

I hate to be the internet pedant, but string theory is a tiny, speculative subfield which has nothing at all to do with the vast majority of contemporary physics. Somehow it gets amazing press despite that. But if you go to an American Physical Society meeting you will see thousands of physicists working on descriptions of this universe and doing real experiments with real apparatus on real, unsolved problems.

String theory isn't the future of physics. It's not even the present. It's a tiny field that has more in common with math than with theories describing real phenomena that occur in the universe we live in.

As one of the few commenters here who could name at least 10 string theorists (at least 8 or 9 of whom are certainly even better than I am at recreational mathematics, which is where the real understanding of nature finds its most pure expression in these exciting but slow and incremental days - but that is off topic) I have to slightly disagree with Zach - if you are smart enough to be called a string theorist - almost without exception - you are smart enough to describe a dreamscape that has ***very much*** in common with our universe. The real argument is not between the "is string theory something to be embarrassed about" camps and the "of course string theory is evolving, today's criticisms are weak because they are attacking the string theory of five years ago" camps, the real argument is between those, like me, who think that the most mathematically intense among us are on to something, but the ratio between their intelligence and the complexity of the real world is more vanishingly small than every single one of them (with an exception or two or more) wants to admit in their secular-einstein/feynman/adorolatous worldview, and those who think of guys like Feyman and Einstein as great leaders who mostly defeated ignorance once and for all. Short take - some people think the ignorance/non-ignorance ratio is high, others think it is not. There are probably people - as smart as chess champs, but in a different field of competition, where lots more talented people entered the tournament - who know what we know and what we don't know in a very clear way. Several of them are called string theorists. As for me, I am only guessing.

sometimes you have these dreams where things go way better than you ever could have imagined - and you wake up and think, that could never happen!!!! at their best string theorists are the dreamers we would be if we loved loved loved numbers and equations - and if a love for numbers and equations was (for foreigners, that is the plain subjunctive was - hard to explain, like the difference between got and gotten) all it takes to confidently comprehend the world (like in dreams all it takes to fly is to want to fly). Oh well, even Bernanos, the crabbiest of pure geniuses, was willing to admit that the wish for a prayer is itself a prayer (he may not have been right on that - but he tried, God bless his soul).

être capable de trouver sa joie dans la joie de l'autre voila le secret du bonheur.. nothing crabby about that. pure genius, of course, but without crabbiness, so I was partially wrong... (trouver means to find, the other words are fairly close to English - 'to be' capable of to find one's joy in the joy of the other voila the secret of happiness))

Quant investing reminds me of that Star Trek episode in which a planet fought a virtual war, with simulated battles fought on computers but with real deaths (because the battle "fatalities" went into the death chamber willingly), all to avoid the real destruction of an actual war. I suppose a humanitarian might quibble with the advantages of the virtual war, while an economist might quibble with the advantages of quant investing. On the other hand, those who worship at the alter of markets would argue that quant investing produces the most efficient allocation of a scarce resource, capital. $55 billion in profits over 28 years must mean something. If one can't believe in markets, what can one believe in.

A big chunk of it relates to market making strategies, displacing profit from traditional IB market making desks. Look at the trend in spreads and profits of these desks....

Is finance really the best use for two string theorists?

Yes it is.

And if you think the answer to that question is obvious you may need to learn more string theory.

No, I don't. Finance is the best use for virtually any smart person.

It seems like you are being serious. May I ask why you consider finance to be the best place to deploy marginal talent?

Allocating investment capital properly is much more socially useful than designing physics theories that can't be tested given our current knowledge.


Ah, but that's the rub, isn't it?

Hillary Clinton will tell you that if donors to the Clinton Foundation want investment capital, it is proper to give it to them. Paul Krugman will tell you that literally any government expenditure (ahem, "investment") is proper.

I'm sure these two meet the common definition of smart.

So your theory does not hold water.

Look, it's a closed system.

Renaissance or Mercer invests in 1) Breitbart, 2) Cambridge Analytica 3) Clinton Foundation book (also funded by Mercer's)

GOP donors pay for campaign services or support media outlets or materials from Renaissance investments.

Renaissance or Mercer has power over Trump.

Close the loop. Or, connect the dots.

Also, don't forget the pending tax lawsuit against Renaissance when you look at the potential benefits for its political assistance.

Sounds Trumpy, sorta.

If it was that simple, what do they need the string theorists for?

Oh, it gets better.

Ask yourself: who owns the data collected from the political campaign (mailing lists, revealed preferences from solicitations) and ask yourself: can you sell (or withhold from selling, or technically, license) the data to those whom you like or those whom you do not like. A data analytics firm with large data from campaigns gets progressively more valuable as the snowball grows.

And the hedge fund in question translates mailing lists into profits how?

Obviously: Ownership of the enterprises.

Oh right. Yeah...gotta be it!

Well, Jeff, maybe it is charity or maybe its just good citizenship to make sure a member of a wealthy elite can guide us all.

Evidently, it must be easy to fool some people.

Oh, and don't think it is just the Mercer's that have grabbed onto the power of owning the data.

Here is a piece on the Koch brothers political data operation:

Robert Mercer may not speak much but he sure spends his money freely on Trump and Bannon ...

"Since entering the world of big-money politics in 2010, he's championed anti-establishment Republicans, invested in a political data company, and bought a stake in the populist media outlet Breitbart News, where Bannon was executive chairman..."

And was it his scientific training in 'string theory' that led him fund so many fringe science conferences and conspiracy theorists...

But are they any good? Simply generating returns is not the same as a good performance. A lot of financial research suggests that hedge funds do not generate much "alpha" (returns in excess of the expected return due to the risk they take, and adjusting for luck). There is a survivorship bias problem (bad hedge funds dissapear and reappear under a new name). Many apparently high-performing hedge funds are either lucky, or take a lot of "bad" risk, or both.

Yes, they're very good. There are a lot arguments for being skeptical about hedge fund performance, but Renaissance is so far superior to the rest of the industry that it's a bit scary.

Yes. This is definitely alpha and they definitely earn their fee.

That's the same thing that people said of Bridgewater: If you ask people back in mid 2009, Ray Dalio was a genius.

Lucky streaks stop, techniques are copied, and perceived advantages disappear.

And no one knows when that will happen.

Medallion and Bridgewater (pre-2009) are not even in the same vicinity. Yes Ray Dalio had well above average performance for the industry. But Medallion was so far above them, even in 2009, that it's like comparing Michael Jordan to the median NBA player.

Let's put it this way, Bridgewater's Sharpe ratio (average annual returns divided by annual volatility), if you measure at the very best time, was around 1.8. Today, it's probably around 1.0. Still good, since the S&P500 is about 0.5 Sharpe. Medallion's Sharpe ratio is well north of 6. And remember Kelly-optimized growth scales quadratically with Sharpe. A leveraged, risk-neutral investor, could compound his money *10 times* faster investing in Medallion than Bridgewater.

This is true for a lot of hedge funds that make maybe ten, twenty investments per year, but not as true for a quant firm like RenTech, which is making thousands of trades per day. If you flip a coin fifty times and it lands heads 35 of them, maybe it's a weighted coin, but maybe it's just a fair coin and you got lucky. But if you flip that coin ten thousand times and it comes up heads seven thousand, then it's essentially impossible to believe it's a fair coin. RenTech's (and for that matter most other quant firms like DE Shaw or Two Sigma) investment style is a lot more like flipping a coin ten thousand times than flipping it fifty times.

What's with these eccentric rich guys and their attraction to Trump. I suspect what they share with Trump is the belief they are great men of history. No, they are lunatics, lunatics with lots of money who want to reshape the country and world in their image. Apocalypse now.

Lunatics? How did they get so much leverage over goddess Diana?

Trump won among those earning more than $250,000.

He also won among those earning more than $50,000.

Much is made of uneducated whites electing Trump but not so much about his winning the middle and upper middle class. Methinks college degrees aren't the proxy for intelligence they used to be.

Not that it is at all easy, but it is far easier to get a Ph.D. in string theory than it is to contribute significantly to it on an on-going basis.

That is true for most demanding technical subjects.

It's especially bad in shrinking fields. The situation in physics is much worse than the situation in, say, electrical engineering. A PhD in electrical engineering is easily able to gain employment doing electrical engineering.

One of my high school physics teachers had an Oxford Physics DPhil. The other had a Cambridge Physics PhD.

Is being a school-teacher better or worse than trying to convert yourself into an amateur electrical engineer, or aeronautical engineer, or whatever?

I don't know if there's a general answer. One of them had found his calling. I think the other was pretty disappointed. They were both pretty good people.

>Eventually the scientists went so far as to develop an in-house programming language for their models rather than settle for a numbercentric option such as ASCII, which was popular at the time.


Pretty sure the interviewer was being trolled.

Yeah, I was wondering about that myself.

They certainly made an ASCII of the reporter.

Just speaking generally, developing a workable programming language has never been a huge exercise. Developing a decent, general one is not even that rare. What is hard is getting lots of people to use any particular one.

The scientists coming from IBM will be using EBCDIC :)

I'd guess some kind of visual programming or possibly something that uses unicode characters for math operations. Maybe a computer algebra system?

How does Renaissance compare to Two Sigma and Jane Street? "Renaissance is unique, even among hedge funds, for the genius—and eccentricities—of its people." I've heard of Two Sigma and Jane Street being described this way but not Renaissance.

I've heard Long Term Capital Management described that way once.

For every quant there is an anti-quant playing the opposing game, anticipating the reaction to the reaction to the reaction, etc.

The difference between RenTech and Jane Street, Hudson River, Jump Trading, et al. isn't the performance. It's the capacity. Most top-tier HFT shops run core strategies that never have losing trading days. 200%+ annualized returns easily. The problem is these strategies quickly reach their capacity limits. The very best HFT firms may clear around a billion in trading revenue per year. And move a step down the quality ladder, and it's far less than that.

On the other side you have the stat arb funds, which hold positions longer, have longer capacity and hold positions longer. They may have capacity of ten billion or more. But their annualized returns are closer to 20-30%. Here you have firms like PDT, the Global Alpha spinoffs, Citadel and Two Sigma. (The latter two also have HFT strategies in (mostly insider-only) separate funds). Here's where Medallion totally blows anything else out of the water. It's generating near-HFT like returns (100%+ before fees) on stat-arb like capacity (~4 billion under management). Nobody in the industry as doing anything like that. It's almost assuredly beyond the performance-capacity frontier of any other firm.

'question .. is finance the best use of two string theorists?'
Well the explicit (posted salaries) market-implied answer seems to be 'yes ten-times over'. A more complete (hardness to get, non-salary benefits and work conditions etc) answer seems to be 'yes' with a larger multiplier on average (though 'course highly idiosyncratic preferences might alter this conclusion).
Even the faintest hint this question might be decided not by the mostly roughly fair markets but by the tyranny of expert opinion (or, worse, democracy) makes me annoyed.
Though of course those prices are just the shadows of our collective will, both subject to change. So far my impression is that quant finance people (and Simons in particular) are actually MORE willing to devote their money to science support (hence altering the expression of that will) than most of the rest of the society, esply most of the rest of the people with money. So maybe we have to go through more quant finance before we could get more science (and possibly less quant finance)? Do quant fin wizardry to squeeze the money from lawyers and MBAs wasting it on luxury to fund science of the future - sounds like a calling to me..

My chum the particle physicist urges me to waste no time studying particle physics. :)

Never did anything as practical as particle physics
Was in algebraic geometry;)

If highway robbery were legal, it would probably also pay quite well (for skilled practitioners). That fact is not sufficient to demonstrate that it is net valuable to society when its most talented people become robbers.

Please don't post again. It hurts.

Don't be an asshole.

Fair enough, each society gets to decide what is legal and what is not.
There are I believe places in the world where there is pretty much no finance, foreign investment forbidden, state controls all the capital flows etc etc One doesn't usually want to live there.
We can think of a developed country to sacrifice for another cleaner no finance experiment
As long as we agree U.S. is off the table

I'm not trying to argue that finance should be illegal. I'm trying to argue that some profitable activities are not net beneficial to society.

"Le chien est battu par jean" does not not translate as "John does beat the dog."
1) proper noum are not translated
2) the passive form was translated into the active. The proper translationis "The dog is beaten by Jean".
How many billions for a faulty translation algorythm? Hoow many billions are manged by people who can,t get that simple phrase straight?

It is revealing that you leap to the conclusion that the short coming is with the extremely successful company, rather than with the writing of the article.

You have to forgive francophones...they get overly emotional when they hear or see "la belle langue" mutilated.

Was there really anything new in that article?

Also, string theory and many other scientific fields already seem overcrowded--how easy is it to get funding or a tenure-track position? What does "better use" mean here? There are already a lot of people trying to cure cancer.

As a former (non-string) theoretical particle physicist, I would say that finance is an excellent use of string theorists. String theory has provided some useful insights, but as a model for the physical world most of it falls into the "not even wrong" category. Finance can make use of advanced mathematical skills and provides the discipline of testable results.

But is string theory the best way to train quants? Certainly better than comp lit.

"Is finance really the best use for two string theorists?"

They have the branes for it.

Good one.

Also what is more appropriate in the context of Finance rather than M-theory ?

String theory usually implies math skills that far exceed most humans. It also implies excellent ability to look at problems in N dimensions.

Most people can only consider a few dimensions (variables) at a time as we see with the simple minded talking heads on financial news programs, who think that if this happens, that will happen without considering hidden variables which they don't even know about.

"And if you think the answer to that question is obvious you may need to learn more string theory".
I'd love to, especially under your tutelage. Let's start with an easy question: could you please remind me how you compute the Hilbert polynomial of a complete intersection X of codimension r given by r hypersurfaces of degrees d_1,...,d_r in projective space P^n ? And what are the betti numbers of X? Surely this should be trivial for a specialist like you, given the condescending tone of your exhortation "to learn more".

> Is finance really the best use for two string theorists?

Versus what else? "Tech" where use deep-learning to optimize the placement of ads for male enhancement pills?

If society wants to complain about scientists not doing science, start with the corrupt decaying university system. The problem isn't evil hedge funds, it's the fact that having any sort of stable, decently paying, predictable career in the academy has become near impossible for anyone born after 1975. If we turned back the clock, and physicists got tenure at 30, instead of 50, you'd magically see much fewer physicists going to Wall Street or Silicon Valley.

Want people to cure cancer or do string theory? Simple solution: Start actually paying people to cure cancer or do string theory.

I thought that 'we' thought that paying for drugs was immoral. Isn't that the dogma de jour? I wonder if this has any effect on the wages in the industry? Probably not.

",,,having any sort of stable, decently paying, predictable career in the academy has become near impossible for anyone born after 1975."

Let's turn back the clock, shall we, and see how many PhD's have been minted in the U.S. over the past 60 years or so. Might this have something to do with it? If you were born after 1975, you are a bit late to the party (maybe the problem is also due to lifetime tenure?)

"Start paying people to cure cancer..."

The world pays people over $100 billion per year to "cure cancer" (that's the research spend, not the total spend), of which about $42 billion is spent in the US. That sounds like a pretty good start.

@Doug - thanks for your great insights here and in other HFT explanations you've given.

Finance probably IS the best use -- unless they want to become professional poker players to beat the polymath economists trying to be poker superstars.

More folk should be trying to copy what Medallion is doing. I recall 40+ years ago, Value Line Investment was giving fundamental info about a huge number of stocks, and, if one traded on their recommendations on the day given, one would get a great return. They also had (have) various funds which, due to NOT front-running their investment advice, actually do less well than their theory.

So how do they guys get such high returns? Effective insider knowledge of the other fund's strategies? Effective insider knowledge?
If it is NOT illegal insider trading, then other rocket scientists (string theorists or otherwise) should be finding out what the various relations, like clouds over Paris, are "causing" (influencing) share prices to move one way or the other. Like card-counting in blackjack, really knowing the odds and knowing that they don't always favor the house can help anybody win.

Then again, maybe they are successfully manipulating the market such as when their models predict it to be a good time to buy some stock, they instead try to sell it so as to drive others to sell it too, and then buy more of it (the Rothschild's Waterloo strategy). Or maybe they have successfully figured out most of the strategies of the other funds so that they are able to accurately predict who of the others will buy or sell what, when, and these accurate predictions allow the Medallion folk to manipulate all the others, a little bit, but often. In share price trading, it is mostly a zero sum game.

What is IN that black box?

Because it's real, and testable, putting more brain-power into finding out / duplicating the black box seems an excellent use of high powered math in the real world.

A better future for society is based on having capital and investing it in areas with positive returns. Rewarding those who get the most positive returns is mostly a good thing.

Is finance really the best use for two string theorists?

Monkey knife fights is the *best* use.

He is on to something ... determining the political leaning of population through their urine samples. Stalin did something similar ...

"""Russian Secret Service reveal evidence of a secret laboratory that put Soviet scientists to work studying the excrement of world leaders. The idea was that traces of various compounds in feces could give insights into each person's psychology."""

DNA testing can be done from urine sample and can have more direct determination of some diseases, valuable to health insurers and pharma companies.

23andme with investment of $241M is valued at $1B has about 1 million samples, i.e. valuation multiple 1000/241=4.15 and about $1000 per sample.

Robinson has 14,000 samples with Mercer's $1.46M investment, i.e. valuation multiple of 14/1.46=9.59

A pretty good deal.

Is finance really the best use for two string theorists?

Isn't everything ultimately just a branch of applied physics? ;)

No, the answer really is pretty obvious. There's a fairly limited pool of funding for physics, and every person employed doing string theory is someone consuming money that could be spent on real physics that makes falsifiable predictions, rather than something that gives you 10500 universes to fit to any experimental result.

As long as you aren't diverting string theorists into anti-productive fields (murder, theft, vandalism, religion, or politics), the worst-case scenario is that they are wasting money being useless. Which isn't any different than if they were employed doing string theory. While the best-case scenario is that their working in finance helps the capital markets hum along and finance entrepreneurship, and somebody other than string theorists get employed to do real physics.

Hmm, looks like my HTML superscript tag got voided. That's supposed to be 10⁵⁰⁰.

It would be nice if we could identify all the dead ends ahead of time. If that many physicists are inclined to think there's something worth looking into, I don't see why they shouldn't give a crack at it.

I mean, what else are they going to do, fight over zero sum games in already-fluid financial markets?

We don't need to identify the dead ends ahead of time. We just need to identify them after two or three decades of failure (depending on whether you'd rather date the failure from the first or second superstring revolution) to get pared down into something that is even in principle testable. String "theory" could be true, but it's no more a scientific hypothesis than "God did it that way because he wanted to" is; it explains everything, and therefore nothing.

It took 2000 years to get from the idea of the atom to really understand what it was.

Should they have given up after 20 years?

Given the success of the string theorists at investing and the lack of success of the vast majority of finance guys at investing, I would've thought the more obvious question would be "is investments really the best use of all those finance guys?".

From the article: "Today the equities group accounts for the majority of Medallion’s profits, primarily using derivatives and leverage of four to five times its capital, according to documents filed with the U.S. Department of Labor."

So how much different is that from LTCM?

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