Jim Simons, the founding father of the Medallion Fund has accomplished what most individuals take into account to be inconceivable. His fund has persistently overwhelmed the market during the last 30 years. The fund has had a median return of 66% earlier than charges through the interval of 1988-2018!
To place these returns in perspective, $100 invested into the Medallion Fund in 1988 would have transformed into $398 Million by 2018. Even internet of charges , the fund has outperformed S&P 500 returns by ~1000 occasions and Warren Buffet’s returns by ~200 occasions!
If you’re nonetheless not satisfied in regards to the absurdity of the returns, check out the next chart which showcases the annual returns for the Medallion fund compared with S&P 500.
Discover something unusual? Since its creation, the fund has solely misplaced cash in a single yr  (1989). For the following 30 steady years, there was not even a single yr the place their returns dropped under 20%. Even on the peak of the 2008 monetary disaster, the fund had made an 82% achieve internet of charges!
Everyone knows that Hedge Funds will get loads of hate, more often than not justifiably so. However returns like this sustained for such a very long time interval name for additional scrutiny. So on this week’s evaluation, we’re deep-diving into how the Medallion Fund created such outsized returns for its buyers.
Jim Simons has a Ph.D. in Arithmetic, taught math at MIT, and has labored for NSA as their codebreaker earlier than turning his consideration to the inventory market. He was one of many first individuals who realized that sample recognition might be utilized to beat the inventory market.
He created a buying and selling system that makes use of quantitative fashions and fashioned Renaissance Applied sciences in 1982. The peculiar factor about this hedge fund is that it doesn’t rent anybody from monetary or enterprise backgrounds.
They solely concentrate on physicists, statisticians, mathematicians, and sign processing consultants and imagine that the herd-like mentality of enterprise faculty graduates results in poor returns! Renaissance’s headquarters is famously often known as the world’s greatest physics and arithmetic division.
This view is prolonged to their funding philosophy as highlighted by Robert Mercer (Co-CEO), Medallion Fund solely focuses on the quantitative mannequin suggestions and never the underlying enterprise efficiency/technique .
I do know we mentioned the extraordinary returns of the fund at first, however the next chart will put the sheer numbers into perspective.
By now we all know that the fund has outperformed the S&P 500 index by a large margin. However on this analysis paper by Bradford Cornell (Finance Prof at UCLA), he argued that even when the investor had the power to foretell the inventory market returns completely on a month-to-month foundation (shift the cash to treasury throughout downturns and again to shares through the upswings), the investor would solely have been in a position to flip the $100 into $331K (an insane 331,100% return) however even this might be nothing compared to the ~$400 MM return generated by The Medallion Fund.
It’s not usually you see Warren Buffet so low down an inventory for long-term funding returns. The Medallion Fund has overwhelmed all of the well-known funding managers by a large margin over its 30 yr interval.
Whereas the precise inside workings of the fund are solely identified to a couple key insiders who’re tightly sure by confidentiality clauses, what we all know comes primarily from the ebook ‘The Man Who Solved The Market’ by Gregory Zuckerman .
As per the ebook, Medallion technique entails holding 1000’s of short-term lengthy, and brief positions (aka like your avg r/wallstreetbets consumer) at any given time. Allegedly, they win 50.75% of the trades they make (not like your avg r/wallstreetbets consumer) which is sufficient to make them billions as they’re conducting hundreds of thousands of trades yearly.
Including to the wonderful quantitative fashions they’ve created, Medallion Fund additionally did two issues proper
Leverage: It’s estimated that Medallion trades with 12.5x leverage on common with it going as much as 20x when the system is assured. In case you take away the leverage from the image, the fund’s returns are just like S&P 500. It’s their efficient utilization of leverage and deep understanding of dangers concerned that makes their returns legendary
Fund measurement cap: The fund has made certain that their Asset Beneath Administration (AUM) by no means goes past $10Billion. They perceive that including extra money may not work with the identical methods and have paid out their returns to their buyers to maintain the AUM similar.
What does this imply for a median investor?
The Medallion Fund has been closed to outdoors buyers since 1993. As of now, solely the present and former staff of the corporate can spend money on the fund. The funds of Renaissance which are open to the general public have carried out so poorly that the 2 funds made it the HSBC’s high 20 losers checklist for 2020.
Whereas it actually is a bummer that the common investor can not spend money on the fund, this evaluation gave us some key insights into the market. The primary and most vital being that the inventory market will not be completely environment friendly and that there are inefficiencies that somebody can leverage for greater than 3 a long time. The second being that not all funds that cost an exorbitant payment construction  are taking cash away from the investor. In Medallion’s case, they’re justifying their eye-watering payment construction with phenomenal returns.
Lastly, this shouldn’t be thought of as a name to motion to seek out comparable funds as not each staff with stellar folks find yourself producing market-beating returns 
It’s like Jim Simon’s had created a license to print cash with the Medallion Fund. How lengthy the fund’s algorithms can stay a secret and proceed producing market-beating returns is anybody’s guess. My incredulity and skepticism throughout this evaluation was completely captured by Bradford Cornell in his analysis paper
Throughout your complete 31-year interval, Medallion by no means had a unfavourable return regardless of the dot.com crash and the monetary disaster. Regardless of this exceptional efficiency, the fund’s market beta and issue loadings had been all unfavourable, in order that Medallion’s efficiency can’t be interpreted as a premium for threat bearing.
Up to now, there is no such thing as a ample rational market clarification for this efficiency.
Till subsequent week…
 The fund fees an exorbitant quantity of charges. From 2002 onwards, it has a 5% administration payment and 44% efficiency payment. To indicate the influence of this payment, let’s take the next e.g. when you make investments $100K into the fund and on the finish of the yr, your fund grows to $130K (a 30% return), they might cost you $5K (5% administration payment) + $13.2K (44% of the revenue) for a complete of $18.2K in charges. So your internet returns would solely be 11.8%. Even when they lose cash, they may nonetheless cost you $5K for managing your cash. Vanguard SP500 ETF would cost you $30 for a similar!
 Even within the yr, their returns had been unfavourable, the fund returns earlier than the payment had been + 1%. The 5% administration payment pushed them to the -4% internet returns.
 His precise quote was “typically it [the model] tells us to purchase Chrysler, typically it tells us to promote”
 The person who solved the market — It’s a superb ebook and a extremely really useful learn.
 Lengthy Time period Capital Administration – A fund that was managed by a bunch of PhDs and Nobel laureates. It had posted nice returns since beginning in 1995 (within the 40% vary) solely to be bailed out in 1998, and was dissolved in 2000)