Are Renaissance Technologies just trend followers?

[cameronfen]

There are many different ways to make money in the market. But it’s really hard to scale with size. Ren is doing very high frequency trading, resulted in very high sharpe but size can’t be scaled up to more than a certain percentage of a stock ADV

Yes but the idea is you trade every single stock, every commodity, every currency pair and derivative contracts.  After all a neural network that can follow one trend has an easier time of generalizing to other assets.  With that you can manage a lot of assets.

[johnhuber]

The other thing to consider about Renaissance is the massive tax bill that LP's paid each year. I know much of their investor base became institutions that in some cases don't pay tax, but if you are a tax paying investor, your results were still incredible, but much, much closer to owning BRK. In fact, if you were a high net worth individual living in NYC, I would bet that your after tax returns would have been higher just owning BRK during its prime three decades than owning Renaissance during their run.

[sleepydragon]

There are many different ways to make money in the market. But it’s really hard to scale with size. Ren is doing very high frequency trading, resulted in very high sharpe but size can’t be scaled up to more than a certain percentage of a stock ADV

Yes but the idea is you trade every single stock, every commodity, every currency pair and derivative contracts.  After all a neural network that can follow one trend has an easier time of generalizing to other assets.  With that you can manage a lot of assets.

Making money through stats arb doesn’t mean they use neural network or even any sophisticated AI. The neural network is actually a pretty new thing. Any alpha/ideas employed by hedge fund human traders can be automated by Stats arb. But it’s not easy to apply most ideas in equity to other assets.

[sleepydragon]

The other thing to consider about Renaissance is the massive tax bill that LP's paid each year. I know much of their investor base became institutions that in some cases don't pay tax, but if you are a tax paying investor, your results were still incredible, but much, much closer to owning BRK. In fact, if you were a high net worth individual living in NYC, I would bet that your after tax returns would have been higher just owning BRK during its prime three decades than owning Renaissance during their run.

If all the BRK investors invest in the Ren’s internal fund, it will start posting loses immediately. Like WEB said he could do 50% return in a year if he manages small money.

[RuleNumberOne]

Buffett's principles will always remain valid. No doubt he would win a stock-picking contest with any Renaissance employee even today.

But Renaissance is like the Google of the investing world. Someone who has read all the newspapers and encyclopedias of the last 100 years can beat any Google employee in a trivia contest. But they can't beat the search engine.

The typical hedge-fund portfolio consists of FAAMG, V, MA, PYPL, BKNG. Whereas the Renaissance 13-F looks completely inhuman, hundreds of positions entered and exited without any regard to market cap. If they were made to file a 13-F every week, we could get a better idea of what the Renaissance machine does.

[cameronfen]

There are many different ways to make money in the market. But it’s really hard to scale with size. Ren is doing very high frequency trading, resulted in very high sharpe but size can’t be scaled up to more than a certain percentage of a stock ADV

Yes but the idea is you trade every single stock, every commodity, every currency pair and derivative contracts.  After all a neural network that can follow one trend has an easier time of generalizing to other assets.  With that you can manage a lot of assets.

Making money through stats arb doesn’t mean they use neural network or even any sophisticated AI. The neural network is actually a pretty new thing. Any alpha/ideas employed by hedge fund human traders can be automated by Stats arb. But it’s not easy to apply most ideas in equity to other assets.

AFAIK rentech is not stat arb typically (although at this point they probably do a bit of everything).  I think stat arb is not just programming hedge fund ideas.  It is but is grounded in mathematical or at least statistically valid arbitrage opportunities ie actual situations where the same asset has different prices.  Rentech is mainly a trend following quant shop, which means they use techniques to identify then follow trends.  While you don’t have to use cutting edge machine learning to identify those trends, most of the big quant shops have teams that apply machine learning and deep learning to these problems.  I know for sure that Rentech hires machine learning phds.  I’m not saying generalizing a statistical model is easy, but it’s much easier if you have one model the follows trends to extend that to other assets and even asset classes.  While they might pick up fundamentals, to some extent when you are trading based on trend a lot of that is probably picking up subtle behavioral reactions to price movement and that generalized across any asset class. 

[RuleNumberOne]

Good points cameronfen. Another item to add is conviction - machines have a lot more compared to humans. Six of Renaissance's top 10 positions right now are drug stocks.

A "fundamentals-based" hedge-fund builds its portfolio around the hedge-fund favorites - FAAMG, V, MA. The only stock in that list that appears in the Renaissance top 10 is FB at #10.

The Renaissance people are betting their own money on models that they themselves built. Who would think of betting their money on drug stocks in an election year with Liz and Bernie tweeting threats all the time.

Even when "fundamentals-based" investors jump into drug stocks, they come out with a Valeant as 10-30% of their portfolio. Hard to say "fundamentals-based" can in any way be superior to Renaissance's machines.

There are many different ways to make money in the market. But it’s really hard to scale with size. Ren is doing very high frequency trading, resulted in very high sharpe but size can’t be scaled up to more than a certain percentage of a stock ADV

Yes but the idea is you trade every single stock, every commodity, every currency pair and derivative contracts.  After all a neural network that can follow one trend has an easier time of generalizing to other assets.  With that you can manage a lot of assets.

Making money through stats arb doesn’t mean they use neural network or even any sophisticated AI. The neural network is actually a pretty new thing. Any alpha/ideas employed by hedge fund human traders can be automated by Stats arb. But it’s not easy to apply most ideas in equity to other assets.

AFAIK rentech is not stat arb typically (although at this point they probably do a bit of everything).  I think stat arb is not just programming hedge fund ideas.  It is but is grounded in mathematical or at least statistically valid arbitrage opportunities ie actual situations where the same asset has different prices.  Rentech is mainly a trend following quant shop, which means they use techniques to identify then follow trends.  While you don’t have to use cutting edge machine learning to identify those trends, most of the big quant shops have teams that apply machine learning and deep learning to these problems.  I know for sure that Rentech hires machine learning phds.  I’m not saying generalizing a statistical model is easy, but it’s much easier if you have one model the follows trends to extend that to other assets and even asset classes.  While they might pick up fundamentals, to some extent when you are trading based on trend a lot of that is probably picking up subtle behavioral reactions to price movement and that generalized across any asset class.

[LC]

Most fundamental investors (myself included) have zero industry specific knowledge in healthcare r&d. The ones that do hire specialists (baupost), and their portfolio looks much different than bill ackman and valeant.

[RuleNumberOne]

Owning drug stocks with Liz and Bernie hovering is very painful. Bernie caused a lot of pain to drug stock investors in 2016.

Humans don't want that pain. Machines don't feel the pain and Renaissance is content to let the machine do its thing.

When it came to Valeant, it was not just Bill Ackman. The list of Valeant luminaries included Lou Simpson (12% of portfolio), Sequoia Fund (> 30% of portfolio), Glenn Greenberg (36% of portfolio), Wally Weitz. They probably derived conviction from each other.

Most fundamental investors (myself included) have zero industry specific knowledge in healthcare r&d. The ones that do hire specialists (baupost), and their portfolio looks much different than bill ackman and valeant.

[Spekulatius]

Owning drug stocks with Liz and Bernie hovering is very painful. Bernie caused a lot of pain to drug stock investors in 2016.

Humans don't want that pain. Machines don't feel the pain and Renaissance is content to let the machine do its thing.

When it came to Valeant, it was not just Bill Ackman. The list of Valeant luminaries included Lou Simpson (12% of portfolio), Sequoia Fund (> 30% of portfolio), Glenn Greenberg (36% of portfolio), Wally Weitz. They probably derived conviction from each other.

Valeant was easy to avoid - lots of red flags: high debt levels, rollup with exponential growth, unconventional business model, promotional “ Outsider” management, heavy promotion of non-GAAP accounting.

People got greedy and were neglecting the downside because so much money was made with this stock. If you just focus on downside, you never would have gotten into Valeant to begin with.

Most fundamental investors (myself included) have zero industry specific knowledge in healthcare r&d. The ones that do hire specialists (baupost), and their portfolio looks much different than bill ackman and valeant.