Wall Street’s Biggest Secret (The Medallion Fund)
Summary
TLDRThe Medallion Fund, created by Jim Simons' Renaissance Technologies in 1988, has achieved unprecedented investment returns, outperforming the S&P 500 and even Warren Buffett. Utilizing quant trading, leverage, and cost-effective strategies, it has maintained a consistent positive return, even during market crashes. Despite its success, the fund remains exclusive to its creators and employees due to the risk of market disruption from its strategies.
Takeaways
- 💼 The Medallion Fund, created by Jim Simons and Renaissance Technologies, is considered one of the best investments ever made with an unprecedented track record.
- 📈 If you invested $1 in the S&P 500 in 1988, you would have roughly $40 today, which is a 3,900% return or an 11.8% annual compound growth rate.
- 🤑 If you invested the same $1 with Warren Buffett in 1988, it would have grown to $152 by 2021, a 16.4% compound annual growth rate.
- 🚀 Investing $1 in The Medallion Fund in 1988 would have turned it into $40,000 by 2021, a staggering 37.8% compound annual growth rate after fees.
- 🔒 The Medallion Fund outperformed the US Stock Market by a thousand times and Warren Buffett by 263 times.
- 💡 The fund's success is attributed to its use of Quant trading, leveraging, and cost-effective strategies.
- 📊 Quant trading involves using vast amounts of data to identify subtle patterns and anomalies in the stock market that can predict future movements.
- 💲 The Medallion Fund is rumored to use leverage between 12 to 20 times, which increases risk but also the potential for higher profits.
- 💸 The fund's cost-effectiveness is crucial as it places millions of trades a year, which would be prohibitively expensive for individuals.
- 🚫 The Medallion Fund is closed to new investors and only available to a select few and employees of Renaissance Technologies, with a cap of $10 billion in assets under management.
- 🌐 The Medallion Fund's strategies would be less effective if scaled too large, as it could influence the market and reveal its secrets.
Q & A
What is The Medallion Fund?
-The Medallion Fund is a hedge fund managed by Renaissance Technologies, which has been known for its exceptional performance and high returns since its creation in 1988.
Who created The Medallion Fund?
-The Medallion Fund was created by Jim Simons, a former mathematician and codebreaker who later founded Renaissance Technologies.
What is the significance of The Medallion Fund's performance?
-The Medallion Fund's performance is significant because it has consistently outperformed the market and other investment strategies, including the S&P 500 and Warren Buffett's Berkshire Hathaway, by a substantial margin.
What is the efficient market hypothesis?
-The efficient market hypothesis is an economic theory that suggests it is impossible to 'beat the market' because stock market efficiency causes existing stock prices to always incorporate and reflect all relevant information.
How does The Medallion Fund defy the efficient market hypothesis?
-The Medallion Fund defies the efficient market hypothesis by consistently outperforming the market over decades, suggesting that it has discovered patterns or anomalies that the market itself does not account for.
What is Quant trading and how is it used by The Medallion Fund?
-Quant trading is a method of trading that uses complex mathematical models and algorithms to analyze market data and predict future price movements. The Medallion Fund uses Quant trading to identify subtle patterns in the market that can be exploited for profit.
What role does leverage play in The Medallion Fund's strategy?
-Leverage is used by The Medallion Fund to increase the potential return on its investments by borrowing money to increase the size of its trades. This strategy can amplify both gains and losses, but the fund's models are reportedly accurate enough to ensure profitability.
Why is The Medallion Fund closed to new investors?
-The Medallion Fund is closed to new investors to maintain the effectiveness of its trading strategies. Allowing more investors could dilute the fund's performance by influencing market prices and reducing the availability of the inefficiencies it exploits.
How does The Medallion Fund manage risk?
-The Medallion Fund manages risk through a combination of sophisticated quantitative models, the use of leverage to balance risk and reward, and by limiting the amount of assets under management to avoid impacting market prices.
What is the connection between The Medallion Fund and the broader financial market?
-The Medallion Fund's success is predicated on the existence of inefficiencies in the broader financial market. If the fund's strategies were widely adopted, these inefficiencies could disappear, reducing the fund's ability to generate high returns.
What does Jim Simons say about the success of The Medallion Fund?
-Jim Simons, the creator of The Medallion Fund, attributes its success to advanced mathematics and a focus on not over-investing to maintain the fund's edge. He also emphasizes the importance of philanthropy, having donated a significant portion of his earnings.
Outlines
💹 The Medallion Fund: Wall Street's Best-Kept Secret
The paragraph introduces the Medallion Fund, created by Jim Simons and Renaissance Technologies in 1988, as an investment that outperformed the stock market and even Warren Buffett's investment returns. It details how a $1 investment would have grown to $40,000 by 2021, reflecting a 37.8% compound annual growth rate after fees. The paragraph also contrasts this with the S&P 500's 11.8% and Buffett's 16.4% returns, emphasizing the fund's unprecedented success. It ends with a teaser about揭开Medallion Fund神秘面纱, promising an explanation of how it works and why it's so secretive.
📊 The Efficient Market Hypothesis and Medallion's Defiance
This section discusses the efficient market hypothesis, proposed by economist Eugene Fama, which suggests that stock prices reflect all available information and thus it's impossible to consistently outperform the market. However, the Medallion Fund is presented as a counterexample, consistently outperforming the market for decades without a single negative year. The paragraph also humorously introduces the concept of 'perfect foresight' to illustrate how even with预知未来的能力, one would still not outperform Medallion Fund, highlighting its exceptional performance.
🧮 The Secret Sauce Behind Medallion Fund's Success
The paragraph delves into the three key components behind Medallion Fund's success: Quant trading, which uses massive data sets to identify subtle market patterns; the use of leverage, which increases profitability while managing risk; and cost-effectiveness, which allows for millions of trades annually without incurring prohibitive costs. It also mentions that despite the fund's sophisticated technology and strategies, only about 50.7% of its trades are profitable, underscoring the fine margins on which the fund operates.
🚀 The Medallion Fund's Limitations and Jim Simons' Legacy
The final paragraph explains the limitations of the Medallion Fund, noting that it is closed to new investors and that there is a cap on assets under management to maintain the fund's effectiveness. It discusses the fund's careful management to avoid market disruption and the importance of not being too greedy. The paragraph concludes with a nod to Jim Simons' philanthropy and his ability to simplify complex concepts, suggesting further reading and viewing for those interested in learning more about the Medallion Fund and Quant trading.
Mindmap
Keywords
💡Medallion Fund
💡Jim Simons
💡Quantitative Trading
💡Efficient Market Hypothesis
💡Leverage
💡Compound Annual Growth Rate (CAGR)
💡Anomalies
💡Margin
💡Capacity
💡Cost-Effectiveness
💡Closed Fund
Highlights
The Medallion fund, created by Jim Simons and Renaissance Technologies, is considered one of the best investments ever made.
Investing $1 in the S&P 500 in 1988 would yield $40 today, a 3,900% return.
Warren Buffett's investment strategy would turn $1 into $152 by 2021, a 16.4% compound annual growth rate.
The Medallion fund would turn $1 into $40,000 by 2021, a 37.8% compound annual growth rate after fees.
The Medallion fund outperformed the US Stock Market by a thousand times and Warren Buffett by 263 times.
The Medallion fund has never had a negative year, even during market crashes.
The fund's success defies the efficient market hypothesis, which suggests that no one can consistently outperform the market.
The Medallion fund's strategy is a closely guarded secret, with no public explanation of how it works.
Quantitative trading, using massive data sets and algorithms, is a key component of the Medallion fund's strategy.
The fund uses leverage, or borrowed money, to increase potential profits while limiting risk.
The Medallion fund's cost-effectiveness allows it to make millions of trades a year without excessive costs.
The fund is closed to new investors and only available to a select few and employees of Renaissance Technologies.
The Medallion fund's strategy is limited by the amount of money it can manage to avoid influencing the market too much.
Jim Simons, the creator of the Medallion fund, has given away a significant portion of his earnings to philanthropy.
The Medallion fund's success is attributed to sophisticated mathematics and a careful balance of risk and reward.
The Medallion fund's strategies, if scaled too large, could potentially break the stock market.
Transcripts
so I think I found wall Street's biggest
secret it's called The Medallion fund
and it did something that shouldn't even
be considered possible it cracked the
secret code of the stock market but they
were very very smart yes they got very
rich very very smart and very smart and
very rich yeah and and very high grade
by the way yeah in 1988 a man by the
name of Jim Simons and his company
Renaissance Technologies created what is
considered today to be the best
investment anyone could have ever made
with the best track record of all time
and let me just give you an idea of how
insane this is by giving you a
comparison of all the different ways you
could have invested your money back in
1988 like for example if you took $1 and
you invested it into the S&P 500 the
stock market today you would have
roughly $40 now that doesn't sound like
a lot of money but that's a
3,900 return which when converted into
its annual compound growth rate that's
11.8% which is amazing but there was
something that was even better he was
called the Oracle of Omaha and it was
almost like he could see into the future
and he could predict what was going to
happen next Warren Buffett and if you
invested $1 with him instead in 1988
that $1 would have left you with
$152 in 2021 that's almost four times as
much it's a
16.4% compound annual growth rate but
there was something else that did even
better it was light years ahead of
Warren Buffett and that was The
Medallion fund if you invested $1 into
The Medallion Fund in 1988 by 2021 that
$1 would be worth
$40,000 that's almost A4 million per
return which is a compound annual growth
rate of
37.8% after fees and over
66% before the fees and what this means
is that this one fund outperformed the
US Stock Market Market by a thousand
times it outperformed arguably the
greatest investor of all time by 263
times and the craziest part about all of
it is that The Medallion fund is still
around today it's still doing its thing
but how it works and why it's so good
and who can invest in it is still
shrouded in mystery and in today's video
I want to explain everything the public
knows about it which isn't much but it's
going to blow your mind so let's get
into it hi name is Andre J hope you're
doing well come for the finance and stay
for one of the coolest things I've ever
learned about and it's all thanks to a
comment that asked me to explain The
Medallion fund that led me down a rabbit
hole of research and here we are so
thank you for that comment and I just
want to say that this video is about to
get insanely Technical and nerdy but I
promise it's worth it so in the 1960s an
economist by the name of Eugene F came
up with something called the efficient
market hypothesis by studying the
performance of thousands of stocks over
50 years years he came to the
realization that there was no
relationship between volatility and
long-term returns so in simple words it
just means whenever we open up our
investing apps and we're scrolling
through to look at which stock we want
to buy the prices that we see today
reflect everything the stock market
knows about itself meaning there is
nothing that you or I could figure out
about the stock market that it hasn't
already taken into account when it shows
us stock prices with that ultimately
means though is that over the long term
if this is true no one should be able to
consistently outperform the market
because the stock prices already include
all the relevant information both known
and unknown now Mr Eugene Fama
eventually went on to win the Nobel
prize in economics but in 2019 Bradford
Cornell from UCLA published a research
paper called Medallion fund the ultimate
counter example the counter example that
should not exist because this fund
outperformed the market consistently for
decades which means this fund figured
something out about the market that the
market didn't know about itself it knew
so much more that $100 invested into it
in 1988 would have left you in 2018 with
almost $400 million those are the kind
of gains that even bitcoiners would be
jealous of and what's even crazier is
that in that same time frame the fund
never had a negative year the fund
always made money even when the stock
market would crash like for example when
the tech bubble of the 2000s lost people
22% that same year The Medallion fund
made over 51% and during the 2008
financial crisis when the stock market
lost over 36% it made
152% its best year ever so if I haven't
convinced you yet that this Medallion
fund defies all logic and it's doing the
impossible it shouldn't even technically
exist let me give you another example of
how crazy it is because in that same
2019 research paper they referenced
something called perfect foresight let's
say someone had the superpower of being
able to know ahead of time at any given
year when the stock market was up and
when it was down and the bond market was
up instead and let's say you were able
to use this superpower consistently from
1988 to 2018 for 30 years you had a
perfect track record anytime the stock
market was up you were buying it anytime
it was down you were buying treasury
bonds instead if you did that you still
wouldn't beat The Medallion fund because
that $100 investment would have only
left you with
$398,000 which is still less than 10% of
what The Medallion fund made in that
same time frame and that is just insane
so the question is how is this even
possible what are they doing and how
could I get in on this and unfortunately
I don't have the answer in fact no one
really does even the employees at
Renaissance Technologies couldn't really
tell us because they are legally not
allowed to say there was no person that
I could reach and no research paper that
I was able to find on the internet that
could explain how any of it
works yeah at this point in the video I
was like fine keep your secrets then but
after watching every single Jim Simons
video I could find and all the research
papers I found a couple interesting
theories that I think come extremely
close to explaining it it uses a couple
different components Russian components
and American components no there's a
couple key ingredients that are sort of
The Secret Sauce the first secret
ingredient is the use of Quant trading
it uses Quant trading to predict the
patterns and the future of the stock
market the second secret ingredient is
the use of margin it decreases risk and
increases profitability through the use
of Leverage and number three it also is
extremely cost effective so if all of
that sounded like a different language
Let me just explain the first secret
ingredient is that the fund uses Quant
trading and Quant trading is the
opposite of what you and I think of when
it comes to investing like someone might
say I really like Tesla stock because
elon's going to build several
gigafactories all over Europe which by
2030 could triple their production rate
and for the long term that's great for
the stock and that's a mix of some sort
of qualitative or quantitative analysis
and that's how most people think about
when it comes to investing but Quant
trading is the opposite it's mostly
shortterm and it's all based on
mathematics and data and when I say data
I mean a lot of data like terabytes of
data per day which then crunches through
a computer that tries to predict the
stock market by spotting what are called
anomalies which are sort of patterns of
things that sometimes happen for some
reason Commodities especially used to
trend
uh not dramatically Trend but Trend so
if you could get the trend right you'd
bet on the trend and you'd make money
more often then you wouldn't whether it
was going down or going up that was an
anomaly Jim Simons is the architect from
The Matrix and that is why moo you must
smash the like button for Andre's video
because of the anomaly that is day
trading now some of these anomalies are
obvious sorry so let me give you an
example with a commodity like corn or
wheat which might be harvested a lot
more of throughout some parts of the
year and less so during other parts so
maybe the strategy is that you can short
it in the months that you know it's
going to go down and the opposite when
it goes up thanks to seasonality so
that's one example of an anomaly or
pattern another one that investors love
to talk about is the dividend capture
strategy this is when investors buy into
a stock on the X dividend date get paid
their dividend and then sell the stock
the next day the idea is is just to
collect the dividend without holding on
to the stock for long the problem with
doing these though is that you don't
need a complex algorithm in a computer
to figure this out everyone knows about
these strategies so on the long term
they're not extremely profitable real
Quant trading uses terabytes of data to
find extremely subtle patterns that no
human would ever be able to figure out
and that's one of its secret ingredients
so they have to be subtle things and you
put together
uh a collection of these subtle
anomalies and you begin to get something
that will predict pretty well the second
secret part that makes up the Medallion
fund is their use of margin rumor has it
that the fund uses anywhere between 122
to 20 times leverage on its trades Now
using leverage I can use some of my
money and I can borrow the rest so for a
$1 trade I can leverage 20x like they're
supposedly using and I can turn this $1
bet into a $20 bet now it is a lot more
risky because there's less room for a
margin of error but if I can get it
right I can make a lot more money with
my dollar now you might be wondering why
would they need to borrow money if they
probably have billions of their own and
why they borrow money is because they
want to limit their downside while
increasing upside they don't want to
risk their own nest egg because if their
model ends up being wrong they're going
to lose a lot of money in a single trade
but when the model ends up being right
they can risk a very small percentage of
assets under management and they could
still make as though they bet a lot more
money while risking a lot less of their
own and it's also rumored that the
patterns their computers notice are so
subtle that only
50.7% of their trades end up being
profitable think about that for just a
second with all of this technology in
all the brilliant mathematicians they
employ to put all of this together that
still only gives them a tiny Edge uh but
we keep we keep improving it we have
about 100 phds working for the firm now
in theory this should discourage anyone
from trying to day trade and get ahead
of the market when you realize who
you're actually competing against but
for some reason it never does but this
tiny Edge is what makes a casino win
rather than placing 5 to 10 big bets per
year their models will leverage their
money over millions of smaller trades
and it's their tiny7 5% advantage that
makes their investors billions now the
third part of their secret strategy is
cost Effectiveness because placing
millions of trades in a single year is
extremely expensive and no single person
would ever have access to the same kinds
of price structures that they have so
whatever they're doing it allows them to
use their strategy in a cost-effective
way but to me one of the most
fascinating things about all of this is
that According to Jim Simons he says
that the most mathematically complic
licated part about all of this is
figuring out how much money not to
invest for one thing there's a there is
a capacity to the major
model it can manage a certain amount of
money which is rather large but it can
it can't manage an enormous amount of
money because you're pushing you're
going to end up pushing the market
around too much so it was kind of a
sweet spot as to how much it's
reasonable to manage that last part uh
takes some fairly sophisticated applied
mathematics and that's why if you're
wondering how you can invest into this
fund the answer is you can't in fact no
one can because the fund was closed just
5 years after it was created in the year
1993 the only people that can invest are
just the select few outside the company
and the employees of Renaissance
Technologies but even for them there's a
total limit of $10 billion in assets
under management and that's because past
a certain point the strategy breaks the
market like if we had had access to an
ETF that recreated The Medallion fund
the market inefficiencies would
disappear and that fund wouldn't last
for very long that's also why they have
to be extremely careful about not being
too greedy because if you take that
$100 invested at 66% per year on average
which is what they've done in 45 years
time that $100 would be worth a trillion
dollar but remember they're not managing
$100 they're managing 10 billion dollars
and if you allow that kind of money to
grow at 66% per year it would grow into
a trillion dollars in just 9 short years
and if you allowed that money to grow
for 35 years which is how long they've
been around that $10 billion would turn
into half a quadrillion dollars which is
basically more money than all of the
physical money in the world that exists
today at that point influencing the
market and giving away their secrets is
the least of their concerns because at
that point it would break the entire
stock market and that's why for now they
keep it under wraps it's the not so
secret secret but here's the thing I
kind of left out the most amazing part
of this entire story even though this
insanely complicated technology exists
somewhere out there and it's making its
investors billions right now as you're
watching this video the most amazing
part is what its creator Jim Simons had
to say about it well
the short talk is
this I did a lot of
math I made a lot of money and I gave
almost all of it away that's the story
of my life
no it's a good story but it's short so
that's pretty cool if you want to learn
more about this subject check out a book
called The Man Who solved the market how
Jim Simons launched the Quant Revolution
also so check out all of his interviews
on YouTube he's got this amazing gift of
explaining the most complicated things
in the simplest ways and he's really
humble and he's amazing otherwise have a
wonderful rest of your day smash the
like button subscribe if you haven't
already don't forget to grab your free
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patreon love you thank you so much for
watching this video I'd love to see you
back here on Monday and Friday sometimes
a Wednesday see you soon bye-bye
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