Sounds like you've assumed that rentech are running the same volatility as the S&P 500. That's very unlikely to be true - most systematic hedge funds ran crazy high risk in the '80s and '90s. But even if you assume it's a coin toss as to whether they perform well in any given year, twenty good years in a row is impressive.
My best guess is that it's a combination of luck, skill, and hindsight bias. Rentech probably had (has?) an edge. They were also partly lucky: in investment, you can do everything right and still lose money. There were also many other players: had LTCM not blown themselves up, we might be marvelling at their investment prowess now.
In the book (“The Man Who Solved the Markets”), the author actually provides the Sharpe ratios for their flagship fund (“Medallion”). Medallion’s Sharpe Ratio has almost never been below 2.0, and has been as high as 7.0 (!!!) in some years.
I’ll link to the Wikipedia page below for the math, but these figures would highly suggest that their returns are much less likely the result of luck, and more likely the result of some edge/alpha generation.
Well I'm saying it's both skill and luck, combined with hindsight bias.
They're famous because Medallion is the best performing quant fund. Even if quant funds were just chumps tossing coins, if you pick the best of a number of them, you'll get something that looks good.
Now that maths still doesn't stack up that they were just lucky - they probably had skill too. But I think it's more likely that they had a modest edge and were lucky than it is that they had a large edge and got an average result.
Given that they're selected for being the very best returns, it's probably a decent (but not completely exceptional) combination of every factor- skill, luck, laundering, connections, etc.
The point of Sharpe is that it’s invariant with respect to leverage. Anything with sharpe 3+ is extremely impressive - that’s 3 sigma, assuming normal returns that’s like 2% tail event.
Yes, but Sharpe calculated ex post is also subject to survivorship bias.
For example, you might make a (successful) bet that works only in a low-volatility environment; if it works, your ex post Sharpe ratio will look ingenious.
But, if a given fund (Medallion in this case) is able to thrive/survive during the 1998 Russian financial crisis (which felled LTCM), the 2000-2004 tech bubble bursting, the 2007 quant quake, the 2008 financial crisis, and 2010 flash crash, it would seem to suggest that their statistical arbitrage strategy performs well in all manner of environments.
After their very hefty 5/40 fees, their worst year between 2001 and 2013 was a 21% gain [1].
I understand that there are all manner of epistemic and mathematical problems that prevent us ever from completely disentangling luck and skill, but a conceptual framework like "The Superinvestors of Graham and Doddsville" would seem to apply here. I.e., after a long period of consistent overperformance, the case for skill starts to look much more likely.
Sharpe isn’t invariant with respect to leverage. Volatility drag implies that a leverage will always decrease your Sharpe, unless your volatility is 0.
You really don’t know what you are saying. The leverage is to boost absolute returns. Sharpe isn’t changed by leveraging. They are automated black box
strategies making 1000s of trades a day with massive undeniable statistically significant information content.
That’s true I’ve assumed they have the same volatility. But since RenTec probably is market neutral for equities so I would imagine their Sharpe ratio is much higher than the S&P 500. And their Sortino ratio is most likely insanely high.
I'd be curious what their risk-adjusted returns are, especially in a leverage free environment. Anybody know where to find such information for RenTec (or other hedge/mutual funds for that matter)?
According to the book, they were running a SR of 2 through the 90s and early 2000s. After overhauling their strategies, they started running a SR of around 7! I’m not sure where you can get information about other funds besides finding articles in BB or WSJ, but the HFRI Index publishes return information for different classes of funds. Regardless, I don’t think you’re going to be able to access SR unless you’re an investor or work at a portfolio analytics company.
idk about medallian but capacity-capped HFAT funds can be near zero risk. I remember one HFAT firm went public and their S1 filing revealed they had lost money on like 5 days out of 5 years. It's not really 'prediction' or 'investing' in the sense generally implied
My best guess is that it's a combination of luck, skill, and hindsight bias. Rentech probably had (has?) an edge. They were also partly lucky: in investment, you can do everything right and still lose money. There were also many other players: had LTCM not blown themselves up, we might be marvelling at their investment prowess now.