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4h16m
Sadly I've never been able to snag an interview with RenTech (and I've applied like a dozen times), but they're the ones that actually made me start taking finance a lot more seriously. Maybe if I ever finish my PhD they'll hire me.
I had previously thought of HFT and Quant as a bunch of "finance bros", and kind of dismissed it as "not real CS" [1]. Reading about RenTech and Jim Simons made realize that there's actually a lot of really cool and interesting math and CS that goes into this stuff.
Jim Simons being a respected mathematician who just decided to change trajectories has always fascinated me, and it's sad that he's gone.
[1] I don't believe this anymore and I feel dumb for thinking it in the first place.
His whole RenTech story was fascinating.
Effectively an outsider in finance who gathered a bunch of other outsiders (aka big mathematicians), and decided to start a hedge fund that takes zero interest in the actual companies and trades solely on math. Which makes sense, since none of the main people involved in its creation had any corporate or finance experience, but tons of math experience and knowledge.
This is oversimplifying it like crazy, but I recommend anyone to anyone with even a passing curiosity for this look up the details (or read “The Man Who Solved The Market”, which is documenting the beginnings and growth of RenTech, as well as that of Simons; very enjoyable read).
IIRC his fund averaged around 30% gains per year, every year, over 30 years. (I'm going from memory here, too lazy to look it up). That is just such an unbelievable performance number.
I'd still wish to have details on this (I too heard of similar numbers for his fund before), because in my newb eyes .. such returns would mean they could absorb a huge chunk of the planet liquidity.
No, because such returns aren't scalable.
According to industry rumors, RenTech is somewhere between $10-20bn AUM (assets under management, i.e. the capital used for trading), and the profit that they make, they can't reinvest, they have to take it out as profit.
How come? Why do they have to take the profits out and can’t compound it?
I know literally zero about this stuff!
The simplistic explanation is, if you're doing arbitrage - i.e. "fixing market mispricing", there's only so much arbitrage you can do before you fix the price...
This is of course a completely theoretical proposition, because in reality you don't know what the "fair price" is. You don't even have probabilities, because those are also unobservable, you only see one version of "history".
In practice, what happens is that if you trade "too much", "shit goes wrong". Both of these things require empirical estimation and are easy to get wrong.
The most obvious is the market liquidity, which you can observe at e.g. BitStamp TradeView [1] - there's only so many orders at a given price, so the more you trade, the worse price you get (the average/marginal trade).
No professional of course trades like that, especially not HFTs, but similar problems happen at every scale - you're competing with other traders, they might have better information, there's limited amount of stock in the market, the edge/alpha/expected profit you can earn decays over time as the price moves, if you trade too much you move the market and inform other participants who can then trade against you, ...
[1] https://www.bitstamp.net/market/tradeview/
When you scale up too much it creates market impact that affects returns. You basically become too much of the market.
All investment strategies are limited as to the amount of money they will take. They probably couldn't have ran much more without reducing perfomance.
You'd have to sacrifice the returns if you want bigger size. For every trade you do, there will be expected return (+ve) and then some costs to pay (-ve). Commissions and similar costs are only linear so not terrible. With increasing size, the market impact cost that's non-linear will soon overwhelm all other costs. So you keep adding alpha in your forecasts (via your research pipeline), that will be eaten away by the impact cost, as you scale up. If you keep it small (-ish - still gross pfolio will be billions) - then you will get to keep high returns.
it was 62% per year for 33 years.
That is insane. Like, completely insane, shouldn't-be-possible insane.
I guess the theoretical limit to how much money you could make in the market is "the sum of all volatility", but I wonder how realistically possible it would be to even dream of beating 62% yearly.
Mathematics can only take you so far. At the end of the day, people run the exchanges. Not math.
The returns of modern HFT market makers are even higher. With their unfair “business” advantages such as PFOF, privileged dark pool and block trade access, and military internet infrastructure.
Think 60%+, per year, at least. Over 10-20 years, of course.
Their returns worked out to something like an average of 39% per year after fees, which is the figure I've heard cited. This may be what they were thinking of. Renaissance was/is known for having higher fees than likely the entirety of their competition, which they can get away with since their returns still outstrip the rest after the higher fees.
Aren't there some shenanigans with those numbers around their larger funds not doing as well?
It's easy to make a few high margin dollars, hard to make a lot of high margin dollars.
They limited the fund size so employees frequently got distributions from the fund instead of just rolling over their investments. However, the distributions were still in the millions of dollars.
They also got into some tax trouble with uncle sam and had to pay 7b in back taxes (https://www.wsj.com/articles/james-simons-robert-mercer-othe...)
depends on your definition of "few". Rentech made a "few" for very large "few".
Important to keep in mind that these returns ceased to be compounding quickly: they restarted from scratch 10bn each year to score 30%.
Successful quant stratégies tend to hit capacity limits...
Their success is limited by what other party ready to lose, most of the time, these all are zero sum games.
Yep, not argument here at all, RenTech is a super fascinating outlier in finance.
It's kind of inspiring. I don't know a ton about finance or trading algorithms, but I know a fair bit (I think) about math and CS, and because of RenTech I've formulating my own trading strategies (just paper trades). Thus far all I've been able to do is lose all my pretend money by trying to play options, but it's still fun to try.
Will I be successful and make billions? Almost certainly not, but it's an excuse to play with different types of math that I don't play with very often, but RenTech proved that you can beat the market by taking advantage mathematics.
There are some interesting interviews around rentech. It starts to feel like they made a lot of money out of being extremely thorough, by doing a lot of reasonably simple (at least by the standards of math phds) things extremely well.
“The Man Who Solved The Market” is fascinating because it spans almost the entire history quantitative finance (through the lens of RenTech) dating back to the 1970s.
Simmons was one of the first to realize the advantage of collecting and analyzing vast sums of data to identify patterns in financial markets. They were digitizing magnetic tapes and collecting more data than they could even process given technical limitations of the time.
I can second this book recommendation. Remarkable candor in such a secretive field.
When I read "The Man Who Solved The Market”, I blown away with the story of Robert Mercer who arguably paved the way for Brexit and the election of Donald Trump. I wonder how different the world would be if Simmons didn't exist, the butterfly effect can sometimes have some massive unintended consequences.
RT must be one of the most selective companies in the world. Even to get an interview you'd better have a damn good CV (medals in math/cs/science Olympiads, degree from a top tier school etc.). And then after a few years of working there you're a (multi)millionaire. It's totally bonkers.
That is what they said about Google....
And RT has been around for about twice as long as Google. Has a headcount of around ~300.
It's truly inspiring that they've been able to keep their headcount low over a long period of spectacular success.
Most organizations would have choked themselves on tens of thousands of bad hires long ago.
That's one thing I find interesting about hedge funds and (some, not all) finance organizations: their ability to make huge amounts of money with small staffs. IIRC RenTech's revenue per employee is something entirely absurd, in the millions.
Yep, they don't have products they need to maintain. Just enough infra to figure out the next profitable trade. Once heir models stop being ahead the curve, they can be just scrapped.
It's just leverage. You can leverage people, capital, technology. Many companies were built leveraging large numbers of people. Many companies leverage technology. Many companies leverage capital. Gotta lever up.
Probably because it was run by mathematicians who I assume have no love for managing lots of people.
Combine that with how most the company spend all their time thinking about making money and that's probably why the company never succumbed to bloat
I think you're right.
I also think they have sufficient career progression (in terms of problems solved and $$$ earned) that nobody feels the need to build a big team. Pure speculation though, I know nothing about RenTech except that the pay is... generous.
We had leaks from even the NSA...But never from the RT fund.
There are leaks.
I don't really blame them for not picking me, clearly whatever they've been doing has been working. I'm not entitled to a job from them, obviously. I don't really know what a "top tier" university is, but I can say for sure that my undergrad (WGU) wouldn't count as that.
The PhD I'm in is from a more prestigious university [1], and I guess FAANG experience isn't enough to snag an interview with them.
[1] University of York, though I don't know if that counts as "top tier" either.
I've heard stories of professors getting letters in the mail from RenTech totally out of the blue. They pay so well that I'm surprised they even accept applications. Don't feel too bad about not passing their bar. What they've accomplished is essentially unheard of, and believed to be impossible by a lot of market theorists.
If it makes you feel better, my CV isn't even good enough to get a FAANG interview..
The phone screen was hard and I didn't pass. It's not usual tech interviews they hit you with a lot of stats and math GRE style questions. Maybe the prep in finance is different
They don't really hire finance people so I suspect most/all of the interview processes are heavy on the match/stat side.
Quantitative finance interviews are pretty much all probability and stats questions.
When have high frequency traders and quants ever been finance bros? Wut?
Again, I was wrong and I acknowledged that, but I guess I grouped HFT and Quants into the same camp as the characters from American Psycho.
They're different groups, I respect them now and feel dumb for not respecting them before.
The very early quants (people who did rough mental options math in the Chicago pits in the 1970s) were finance bros by osmosis. You had to be.
It changed at some point during the '80s, probably to no little degree thanks to Renaissance.
You should read these books:
https://www.goodreads.com/en/book/show/43889703
https://www.goodreads.com/en/book/show/25733505
And some of the myths you have may be dispelled :-)
Both are excellent, I'll add these two too:
https://www.goodreads.com/en/book/show/186124
https://www.goodreads.com/en/book/show/482347
Why would you think it was a bunch of "finance bros"? You can BS your way to the top in such things as Sales because raw intellect and mental ability is not required. The same can be said for many aspects of finance. But you can't just do HFT or Quant because you want to - you actually need skills. Same way I can't BS my way into designing a rocket - you either can or you can't.
Being able to BS yourself upward is a skill in itself. Management becomes "political" up the ladder
I have to confess that I still think that. Where would you recommend I start reading to find financial enlightenment?
I think Veritasium made a really good video talking about some of the differential equations governing option pricing [1] which I found really fascinating. Patrick Boyle's video about Jim Simons' history is really interesting too [2].
Also just reading about Jim Simons' being an already-very-successful mathematician dropping everything to start a hedge fund and ending up extremely successful at the end of it was a bit of a wakeup call. Clearly this was an extremely smart dude (he was the chair of the math department at Stony Brook!), and so if this is interesting enough for someone like him, then it's probably something worth looking into.
I read through a book on basic trading strategies and I thought it was pretty interesting [3], though I've gone in a pretty different direction from what they taught.
[1] https://youtu.be/A5w-dEgIU1M
[2] https://youtu.be/xkbdZb0UPac
[3] https://www.amazon.com/Machine-Learning-Algorithmic-Trading-...
I remember the time that I went to a conference put on by Sun Microsystems in the early 2000s and asked a question about certain hardware being good for main memory databases which got me jumped on by a RenTech recruiter. Had I known what was about to happen to my current job at that time (mentioned in another comment in this thread) I would have taken more interest.