Wall Street’s Biggest Secret (The Medallion Fund)

Summary

The 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

00:00

💹 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.

05:01

📊 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.

10:02

🧮 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.

15:03

🚀 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.

Keywords

💡Medallion Fund

The Medallion Fund is a hedge fund managed by Renaissance Technologies. It is renowned for its exceptional performance, outperforming the stock market by a significant margin. The video discusses how, if you had invested $1 in 1988, by 2021 it would be worth $40,000, showcasing a compound annual growth rate of 37.8% after fees. This fund is central to the video's theme of揭秘华尔街的秘密和投资奇迹.

💡Jim Simons

Jim Simons is the founder of Renaissance Technologies and is often referred to as 'The Oracle of Rensselaer.' He is a key figure in the video, credited with creating the Medallion Fund. The script mentions his role in developing quantitative trading strategies that have led to the fund's extraordinary success.

💡Quantitative Trading

Quantitative trading, or 'Quant trading,' is a method of trading that uses complex mathematical models to predict market movements. The video explains how the Medallion Fund uses Quant trading to identify subtle patterns in the market, which are then leveraged to make profitable trades. This concept is central to understanding the fund's strategy.

💡Efficient Market Hypothesis

The Efficient Market Hypothesis (EMH) is an economic theory that states it is impossible to 'beat the market' because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. The video discusses how the Medallion Fund's success seemingly defies this hypothesis.

💡Leverage

Leverage in trading refers to using borrowed capital to increase the potential return of an investment. The video mentions that the Medallion Fund uses leverage, reportedly between 12 to 20 times, to amplify their trades, which increases both risk and potential profit.

💡Compound Annual Growth Rate (CAGR)

Compound Annual Growth Rate (CAGR) is a measure of an investment's growth over time. It is used in the video to compare the returns of different investment options, such as the S&P 500, Warren Buffett's Berkshire Hathaway, and the Medallion Fund, with the latter showing an astonishing CAGR of 37.8% after fees.

💡Anomalies

In the context of the video, anomalies refer to subtle patterns or irregularities in market data that can be exploited for profit. The Medallion Fund's algorithms are designed to identify these anomalies, which are then used to make trades that consistently outperform the market.

💡Margin

Margin in trading allows investors to borrow money to make trades, which can increase both potential profits and losses. The video explains that the Medallion Fund's use of margin is a key component of its strategy, allowing it to make larger trades with a smaller amount of capital at risk.

💡Capacity

In the video, capacity refers to the maximum amount of money that the Medallion Fund's trading model can effectively manage without disrupting the market. It is mentioned that managing too much money could push the market too much and render the fund's strategies ineffective.

💡Cost-Effectiveness

Cost-effectiveness in the context of the video pertains to the Medallion Fund's ability to execute millions of trades per year at a low cost. This is crucial for maintaining profitability, as the high volume of trades would otherwise be prohibitively expensive.

💡Closed Fund

A closed fund is one that is no longer open to new investors. The video explains that the Medallion Fund closed to new investments in 1993, and now only a select few, including employees of Renaissance Technologies, can invest in it. This exclusivity adds to the fund's mystique.

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

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watching this video I'd love to see you

back here on Monday and Friday sometimes

a Wednesday see you soon bye-bye