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probability of a loss secret sauce tricks of Renaissance Technologies HFT masters

 

Sweet Mama. This is the closest I have gotten to this secret sauce eof Ren Tech black swan risk and probability of a loss tricks

From someone who knew all the founders of Ren Tech:

I have known Jim Simons, Bob Mercer and Peter Brown since 1965, 1974, and 1979, respectively.  Renaissance has also hired senior researchers who had formerly worked for me for years.  None of these people has ever told me anything about Renaissance’s investment strategies.  My observations below have been obtained entirely from publicly available records.

In particular, the core strategy is publicly known.  It’s the details that are proprietary.  There are millions of details, and they are essential to the performance.  However, the question was about strategy, so that is what I will try to answer.

The core strategy is portfolio-level statistical arbitrage carried to the limit and executed extremely well.  Basically, portfolios of long and short positions are created that hedge out market risk, sector risk and any other kind of risk that Renaissance can statistically predict.  The extreme degree of hedging reduces that net rate of return but the volatility of the portfolio is reduced by an even greater factor.  The standard deviation of the value of the portfolio at a future date is much lower than its expected value.  Therefore, with a large number of trades the law of large numbers assures that the probability of a loss is very small.  In such a situation, leverage multiplies both the expected return and the volatility by the same multiple, so even with a high leverage the probability of a loss remains very small.

The general properties of the strategy can be deduced from the statement of Renaissance for the Hearing of the Senate Permanent Subcommittee on Investigations, dated July 22, 2014.  [https://www.google.com/url?sa=t&…

Renaissance collects “all publicly available data [they] can that [they] believe might bear on the movement of prices of tradable instruments–news stories, analysts’ reports, energy reports, crop reports, weather reports, regulatory findings, accounting data, and, of course, quotes and trades from markets around the world.”

Their models “use this data to make predictions about future price changes.”

The hearing was specifically about the Medallion fund, about which the statement says “The model developed by Renaissance for Medallion makes predictions that are profitable only slightly more often than not.”

With these properties, there were two reasons that Renaissance would like to have a call option on the portfolio that it has designed: leverage and protection against Black Swan events.

Leverage is needed because, unleveraged, the rate of return of the portfolio is low.  However, because the volatility is much less than the expected return there is no limit to how high the leverage could be without increasing the probability of a loss, at least according to the models.  Through years of use and refinement, Renaissance knows that its models are very reliable.  However, they also know that there is always the risk of something happening that is not covered by the models, in particular something that is outside prior experience, which is called a “Black Swan” event.

Thus, a call option is ideal: it can provide high leverage and can provide protection both against the very low probability of a loss greater than the option premium and also against the unknown probability of a possibly catastrophic loss due to a Black Swan event.

We know all this because these are the business reasons for Renaissance accepting Deutsche Bank’s proposal of barrier options.  Basically, Deutsche Bank, and later Barclays,  sold the equivalent of a call option to Renaissance on the reference portfolio that Renaissance designed.

Of course, writing an uncovered call on the Renaissance portfolio would be equivalent to betting against Renaissance at high leverage, which would seem to be a foolish thing to do.  The banks covered these options by buying all of the securities in the portfolio.  Thus the bank’s position was equivalent to a covered call.  In other words, the banks’ profits and risks were essentially equivalent to writing a put option, which is a bullish position.  Because the volatility was very low the probability of a loss for the bank was low and the probability of a loss greater than the option premium was even lower.

Except for the Black Swan risk.  The probability of a Black Swan risk is unknown.  Part of the premium paid by Renaissance and earned by the banks was equivalent to insurance against Black Swan risk.  I don’t know if the amounts of the premiums were publicly disclosed.

There were many more details in the statements and the testimony at the hearings.  However, discussion of further details would detract from the important points that I have made above.  In particular, the hearings themselves were about tax issues not about investment strategies.  Renaissance explicitly asserted, under oath, that its “models do not factor in tax rates when making trading decisions.”  Therefore, tax issues, although they might be very important, are not part of the “investment strategy” at least as reflected in the models, so they are outside the scope of this particular discussion.

[Edit (added in answer to a comment):  The reference portfolio was highly dynamic.  There were thousands of  trades per day.  To accomplish this, the banks gave RenTech’s computers  direct access to execute trades through the banks’ trading desks.

This  arrangement was part of what created controversy about what should  be the proper tax treatment for this particular case. However, I am not a  tax lawyer and will not try to analyze those issues.  However, if you  want to hear more details on the automatic execution of the trades, and  questions about how much human interaction was present, that is all  discussed in the live testimony before the subcommittee: [Hearings| Homeland Security & Governmental Affairs]

I have copied this in case the Quora link disappears which is from

https://www.quora.com/What-are-the-investment-strategies-of-James-Simons-Renaissance-Technologies-I-understand-he-employs-complex-mathematical-models-along-with-statistical-analyses-to-predict-non-equilibrium-changes

Notes from Senate hearings include:

https://www.hsgac.senate.gov/subcommittees/investigations/hearings/abuse-of-structured-financial-products_misusing-basket-options-to-avoid-taxes-and-leverage-limits

https://www.hsgac.senate.gov/imo/media/doc/STMT%20-%20Renaissance%20(July%2022%202014)2.pdf

Copy attached just in case that disappears

STMT – Renaissance (July 22 2014)2

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Screw your Masters or PHD? We are cheaper!

Screw your Masters or PHD? We are cheaper!

From Facebook contact

You have dine excellent work….

And think that we did masters degree without this material you sell wich is cheaper than the masters degree and essential

Join my FREE newsletter to learn how to automated your trading without wasting thousands on a Masters to nowhere 

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Hello from a Quant wannabe with advise for Masters PHD and quant/hedge fund career

Hello from a Quant wannabe with advise for Masters PHD and quant/hedge fund career

From someone local to me through LinkedIn:

Hello Bryan Downing:
I am a Physicist/Teacher by profession. However, I am doing online entrepreneurship now. I am also one of the organizers for the DenEntrepreneurs meetup group in Toronto.
I came across your website and your linkedin group because my very good friend wants to know about the field of Quant. I must say that I am very impressed from your website and all the generous information that you are sharing with everyone!
Actually my friend will be getting her Ph.D in Physics in about 2 years time from now. She wants to know about the Quant field. She does not have alot of interest in heavy programming or coding, but she wants to know as to what the opportunities are in the Quants field in Canada. I saw your youtube video, where you stated that there are not many quant jobs in Canada.
Now I have some questions, in which I need your guidance in 🙂

1) Now I have heard that under the current economic climate, some Quants are being let go because Quants deal with high risk management, and in today’s global economic crisis- there is very little room for risk. What is your general view on this?

 

à  this is true. The Volker rule is making it difficult for banks to become a like a prop shop where this kind of work is. It seems there will be lots of boutiques in the usual global financial centers but Canada is quite conservative here.
2) Interms of the Job market and future job trends for Quants: Does it look sort of bleak and/or not very strong in general?  -> I would say there are amazing opportunities in emerging markets like Latin America, Australia, and Singapore/China/India as this market matures. There shall be many smaller shops but I see trends where individuals/independents will be able to pull this off. They will just need to be highly driven, entrepreneurial, and advanced to learn more math and technology techniques like programming. I am doing it and know many who are as well.
3) To be a Quant- it is best to master: Matlab, C++, C#, Java, VBA and Excel, correct?  à Yes but I would also add R and Linux scripting like PERL as well as other open source technologies like Python. This is the problem with the ever changing tech landscape.  It comes down to choosing the Microsoft .NET vs open source Linux/Unix paths.
4) University of Toronto has a One year Masters program for Financial Mathematics. I had contacted them and they said that at the end of that program- you qualify to become a quant. However, I have noticed that Mcmaster University, U of T and Simon Fraser in BC and a lot of these US based Universities don’t prepare students for heavy programming courses in their Financial Math curriculum. I have come across so many people in different Quant forums where they state that people with strong mathematical and computer science backgrounds can have a alright chance for any entry level quant jobs. What is your general outlook on this? -> This is correct but the competition is getting highly fierce for these positions. There  also seems to be a highly strong trend to be from a name global brand ivey league school like Stanford, Columbia, NYU, etc. I am not sure if any of the Canadian schools will get you recognized globally but Rotman definitely could be a top choice.
5) My friend also wants to look into the field of Actuary. From what I have seen- it does not require a lot of programming and there is a huge job demand for it as compared to Quants. The field of Actuary is much broader in scope interms of job opportunities. Have you come across similar trends as well?
à This is more insurance and less banking/capital markets
I am looking forward to hearing from you/Thank you so much:

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interested in Modeling and Data Mining.I’m face with the challenge,I need to come up with the research topic for my Masters,

I’m interested in Modeling and Data Mining.I’m face with the challenge,I need to come up with the research topic for my Masters, i’m working for a survey agency(data is not a problem),please advice.

 

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Are you loooking for data mining in which industry? If related to pharmaceuticals then we c

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n discuss.

 

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I’m not working for pharmaceuticals industry,my background is surveys or I won’t mind financials.

 

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Quant opinion on a few masters in quantitative finance: LSE (MSc in Financial Mathematics), Rutgers, Baruch, NYU?

Quant opinion on a few masters in quantitative finance: LSE (MSc in Financial Mathematics), Rutgers, Baruch, NYU?

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about Rutgers ask Marysienke!

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I havent gone to those programs but they are pretty prestigious and hard to get into. If you can get into the NYU program for example and be able to pass all the courses (this stuff is some of the hardest material you can learn), you will definitely be able to push yourself through into a good paying job in finance with over 100k salary to start with. Its a question of whether you can get in there and understand what the professor is talking about.

 

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Quant development: Good universities to do Masters/PHD in HPC? Fee is a important , looking universities outside US

Quant development: Good universities to do Masters/PHD in HPC? Fee is a important , looking universities outside US

In France you can take a look at Paris 6, Lyon 1 or the Ecole Normale Supérieure (specially in Lyon).

 

lsu.edu
indiana.edu
uiuc.edu
gatech.edu
utexas.edu
berkeley.edu
cmu.edu
pitt.edu

 

 

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