The Medallion Fund, managed by Renaissance Technologies, is a super successful and kind of mysterious hedge fund. Started in 1988 by math whiz Jim Simons, it's made a ton of money for investors by using fancy math and computer programs to trade in financial markets.
Even though it's a big winner, not much is known about how the Medallion Fund actually works. Today, we're going to uncover the story behind the Medallion Fund, check out its awesome profits, and peek into the special strategies that make it the ultimate money-making machine in the finance world.
The History of the Medallion Fund
Jim Simons, a math expert with a Ph.D., taught math at MIT and even cracked codes for the NSA before shifting gears to focus on the stock market. He was a pioneer in realizing that spotting patterns could help beat the stock market.
In 1982, he founded Renaissance Technologies and came up with a unique trading system using math models. What makes this hedge fund stand out is that it doesn't hire people with financial or business backgrounds. It's a bit peculiar, but that's part of what makes it interesting.
But, Medallion faced challenges in the beginning. In its first year, the fund only made a 9% return , while the S&P 500 went up by more than 16%. In the second year, the fund had a 4% loss, while the S&P 500 gained over 30%.
In the following years, Jim Simons brought in top-notch math experts who propelled the Medallion Fund to incredible success. The rest, as they say, is history. In 1994, Medallion made an impressive return of over 70%, and in 2000, it hit its all-time high with a staggering 98.5% return!
Now that we have covered the history of the Medallion Fund, let’s look at just how exceptional the Medallion Fund’s returns have been over time.
What Were the Medallion Fund’s Returns?
Renaissance's main Medallion Fund made a whopping 62% every year (before fees) and 37% (after fees) from 1988 to 2021. To grasp how awesome that is, imagine putting $1 in the Medallion Fund back in 1988 – by 2021, it would have grown to almost $42,000 after fees. Now, compare that to $1 in the S&P 500, which would have only grown to $40. Even Warren Buffett's Berkshire Hathaway wouldn't beat the Medallion Fund – a $1 investment there would only grow to $152. So, Medallion outshone one of the best investments and one of the top investors by 1,000x and 250x, respectively!
Since inception, the Medallion Fund has only lost money in a single year 1989. More importantly though, the fund’s returns have been partially negatively correlated with the market (correlation = -0.41).
For example, in 2008, when the S&P 500 lost 37%, the Medallion Fund posted a gain of 82%!
Bradford Cornell (Finance Prof at UCLA), published a research paper on the fund. He said that even if someone could perfectly predict stock market ups and downs each month (like moving money to safer options during downturns and back to stocks during the good times), they would only turn $100 into $331,000 – a crazy 331,100% return. But guess what? That's still nothing compared to the mind-blowing ~$400 million return that the Medallion Fund raked in.
What Fees Did the Medallion Fund Charge?
While hedge funds are famously known for charging 2 and 20 (2% annual management fee and a 20% performance fee), Simons and his team generated arguably the greatest track record in investment history while charging 5 and 44.
This fee structure may not sound much higher than 2 and 20, but it is worlds away and still worth it.
How Did the Medallion Fund Make Money?
Though the nitty-gritty details of the Medallion Fund are a well-guarded secret among a select few insiders bound by confidentiality rules, what we've learned mostly comes from Gregory Zuckerman's book, 'The Man Who Solved The Market'
According to the book, Medallion's strategy is like a financial acrobat, juggling thousands of short-term long and short positions simultaneously with a high success rate of 50.75%. That might not sound like much, but considering they make millions of trades each year, it's enough to rake in billions.
Two key things set them apart:
Leverage: they borrow money to invest, using about 12.5 times the average amount, and sometimes even going up to 20 times when the system is feeling confident. Without this financial acrobatics, their returns would be similar to the regular stock market.
Fund size cap: The other smart move is capping the size of the fund at $10 billion. They get that adding more money might mess with their strategies, so they share the wealth with their investors to keep things steady.
There are rumours that this fund uses Baum–Welch algorithm & Baum–Sweet sequence to recognise patterns.
The Baum–Welch algorithm is like a detective figuring out hidden rules in a game by observing clues. It helps model systems with changing "hidden states" (like market trends) to predict future patterns.
The Baum–Sweet sequence is a pattern of 0s and 1s based on a number's binary representation. It could potentially be used to identify patterns in stock charts that signal buy or sell opportunities.
But this are just rumours and no one in the public really knows that are these the exact algos used or is it something else thats generating such returns.
How Can You Invest in the Medallion Fund?
Here's the scoop: you might be curious about jumping into the Medallion Fund, but sorry to say, that ship has sailed. It's been off-limits to outside investors since 1993. Right now, all the winnings and the money behind it belong to Jim Simons and the crew at Renaissance Technologies. Until another Medallion Fund pops up, the rest of us can only dream about joining the party!
