"Does Renaissance Technologies — arguably the most successful hedge fund in the history of the world — know why it makes as much money as it does? A couple of weeks ago, I thought that it did, after reading a piece about RenTech’s Robert Frey in the FT. One of the fund’s four principles, he said, was rationality – “it can’t just be statistically valid”. You have to employ reason to identify a statistically significant but spurious pattern — which meant, I thought, that RenTech had a common-sense test: it wouldn’t enter into a strategy without having some kind of grip on why that strategy should work"
There's a lot of talk about Ren Tech these days, and it seems that experts want to crack the "genetic code" for its fabulous run so far.
"It’s weird, but if you believe Mallaby and Mercer, it’s true: somehow RenTech discovered a secret formula for making money. Follow the rules it spits out, and you’ll be rich, even though the formula makes no visible sense at all."
Correlation, Strategy, Luck, data mining, algorithm(google type), or maybe simply a mixture of all these things! The best part of blogging, and not being a expert is, to make some extraordinary guesses, wild guesses or maybe true sometimes.So what is the reason for Ren Tech's accurate calls(and puts) ? My guess is they use extensive correlation algorithms which are refreshed as in google periodically and they are more dependent on speciality indices, where the patterns are easy to analyse. But the essential crux is between aligning the correlations, patterns with the risk return strategy. By this I mean, only the returns for Ren Tech are consistently mentioned and analysed by the news experts. What about the risk? The level of risks involved, the internal thresholds of risk taking and management are the key factors which differentiate Ren Tech from the pack.That's just a naive guess !
A few good reasons to work in Financial Services Industry this month(and many more..)
- Came across a news in FT (date 26 July), the city added 1700 new jobs in June. and nearly all in the Financial services. The three biggest job creators were US, China and India.
- The continuing movement of banks from non banking activities (Barclays- Blackrock merger) will provide a rising degree of stability to the industry, may be this activity will be accelerated after the results of "stress tests" across Europe. Just saw the stress test graph and could not stop wondering about the number of German Banks hovering around the baseline capitalisation rate of 6.2%, All this is a precursor, to the exciting times for the financial services in the near future. An overhaul is round the corner..
Finally some good links I have come across that explains the success of Renaissance funds, maybe people already know the secret behind renaissance funds, its quite obvious, to be true. One good paper to know more(recommended by a friend) is
'When There is No Place to Hide' - Correlation Risk and the Cross-Section of Hedge Fund Returns by Buraschi, Kosowski et al.
Can be found at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1639984
Bye for now !
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