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Impossible Returns? Hardly . . .

Posted By Barry Ritholtz On November 19, 2005 @ 8:12 am In Hedge Funds,Investing,Technical Analysis | Comments Disabled

"Certain price patterns are nonrandom and will lead to a predictive effect."

That statement, according to the Random Walk Theorists, is incorrect. I must assume, therefore, that the following returns are therefore "impossible." 

Mr. Simons, 67, who rarely talks to journalists, is hardly a household name like Warren E. Buffett. But Mr. Simons, who got into the hedge fund business after abandoning a stellar career in mathematics, has a track record that is jaw-dropping. This summer, word leaked out that he was starting a new fund – people took to calling it the "$100 billion fund" because its marketing materials say that it could conceivably grow to that enormous size. Not surprisingly, that has caused Wall Street types to be even more curious about him.

Here are Mr. Simons’s numbers: from 1990 to 2004, Renaissance’s primary hedge fund, called Medallion, has delivered annualized returns of 33.21 percent. (The Standard & Poor’s 500-stock index has returned, on average, 10.98 percent during those same years.) Since the end of 2002, the fund, which has $5 billion under management, has disbursed $4.9 billion to its investors – with another $1.5 billion to be delivered at the end of this year. (emphasis added)

Better than 33% returns — audited returns! — for 14 years.  I think it would be a whole lot of fun trying to come up with the title of Mr. Simon’s book:

Theoretically Impossible
Not Very Efficient   
Random Walk THIS!

(Submit your own title suggestions in comments [1])

How does Mr. Simons achieve his impossible returns? Through very complex algorithms that scan thousands of stocks (and other highly liquid securities that trade in public markets around the world) and executes rapid-fire trades. These algorithms are derived by the firm’s scientists, who search for "repeatable patterns and other signals."

The NYT quoted Mr. Simons saying this:  "Certain price patterns are nonrandom and will lead to a predictive effect . . . we’re very statistically oriented." He stays away from exotic derivatives.

Quite fascinating.

NOTE:  With this post, we add the category "

Hedge Funds."

$100 Billion in the Hands of a Computer [2]
NYT, November 19, 2005

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[1] comments: http://bigpicture.typepad.com/comments/2005/11/impossible_retu.html#comments

[2] $100 Billion in the Hands of a Computer: http://select.nytimes.com/2005/11/19/business/19nocera.html

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