You've confused two separate and very different funds at Renaissance. Their flagship fund, Medallion, is the subject of the book and has continued to perform superbly. You're referencing their funds available for public consumption, which have completely different mandates. Despite your mistake, your point is well-taken. In fact, the continued success of Medallion is probably because Simons recognized early the diminishing returns to scale problem and returned all outside capital from the fund many years ago. If Medallion were close to the size of their funds that are open to outside capital it's highly unlikely that it would have continued its exceptional performance as it has.
Hi David, My reading of the book is that it's not just about Medallion (although its most popular chapter is no doubt Appendix 1, which tabulates Medallion's returns). And I agree - it is possible that those returns underline the point. In fact, the research I link to in Note [1] addresses this very issue.
Marc, definitely not trying to detract from your excellent post. The funds that are down this year have been down before. Their historic returns have been good, but not gravity defying like Medallion, which is the size-limited fund that actually puts into practice Simon’s’”market solving.”
"Zuckerman's Curse" is an example of a well-documented phenomenon known as "performance chasing". When investors buy into a product or sector which has risen strongly in the preceding few years, they are at risk of jumping on the wave at its crest, just before it crashes. Performance chasing is very common among retail investors who, because they don't understand the fundamentals of their investment, think that something that has done well will continue to do well. Performance chasing is a form of momentum-based investing, and one of the major challenges in momentum-based investing is to get out before the eventual reversal. There is an old market saying: "the trend is your friend - until the bend at the end."
I think about this a lot because all my of investments are in fields that are competitive but evergreen. How would you show a distinction between a market that is at its peak and a market that always fluctuates?
Cyclical industries (such as housing, metals) are easy to identify from long-term price and volume charts. The cyclicality usually arises from supply lags - e.g. the need to wait for next season's crops, or the 5 years needed to build a new mine. This is taught in ECON101 as the "cobweb model". Investors in cyclical industries should avoid cycle peaks in favour of troughs, but the complication is that in some industries troughs can last a decade.
Quasi-cyclical industries can be analyzed in terms of their cycles of capital scarcity and abundance. Marathon Asset Mgmt are best known practitioners of this approach. For example, the time to buy general insurers is soon after a string of catastrophic events, because the destruction of underwriting capacity means that premiums will rise.
Other industries - such as railways, oil - have clear paths of rise, peak, and decline. Although the peak is rarely obvious at the time, this is not important from an investor's viewpoint, because the inflection points often occur over several years. As an example, the halving of Big Oil's share prices in 2020 was preceded by a decade of decline.
There is a very, very large academic literature on momentum-based investing. Academics are also beginning to take bubbles seriously, in the sense of defining, identifying and measuring them. A month ago the hedgie David Einhorn correctly identified 02 September as the day the long-running tech bubble popped - see
I feel so foolish after reading such a confusing piece 🤦🏼♂️
You've confused two separate and very different funds at Renaissance. Their flagship fund, Medallion, is the subject of the book and has continued to perform superbly. You're referencing their funds available for public consumption, which have completely different mandates. Despite your mistake, your point is well-taken. In fact, the continued success of Medallion is probably because Simons recognized early the diminishing returns to scale problem and returned all outside capital from the fund many years ago. If Medallion were close to the size of their funds that are open to outside capital it's highly unlikely that it would have continued its exceptional performance as it has.
Hi David, My reading of the book is that it's not just about Medallion (although its most popular chapter is no doubt Appendix 1, which tabulates Medallion's returns). And I agree - it is possible that those returns underline the point. In fact, the research I link to in Note [1] addresses this very issue.
Marc, definitely not trying to detract from your excellent post. The funds that are down this year have been down before. Their historic returns have been good, but not gravity defying like Medallion, which is the size-limited fund that actually puts into practice Simon’s’”market solving.”
"Zuckerman's Curse" is an example of a well-documented phenomenon known as "performance chasing". When investors buy into a product or sector which has risen strongly in the preceding few years, they are at risk of jumping on the wave at its crest, just before it crashes. Performance chasing is very common among retail investors who, because they don't understand the fundamentals of their investment, think that something that has done well will continue to do well. Performance chasing is a form of momentum-based investing, and one of the major challenges in momentum-based investing is to get out before the eventual reversal. There is an old market saying: "the trend is your friend - until the bend at the end."
Only problem with what you're saying is that Renaissance's flagship fund has never been available to retail investors.
I think about this a lot because all my of investments are in fields that are competitive but evergreen. How would you show a distinction between a market that is at its peak and a market that always fluctuates?
Cyclical industries (such as housing, metals) are easy to identify from long-term price and volume charts. The cyclicality usually arises from supply lags - e.g. the need to wait for next season's crops, or the 5 years needed to build a new mine. This is taught in ECON101 as the "cobweb model". Investors in cyclical industries should avoid cycle peaks in favour of troughs, but the complication is that in some industries troughs can last a decade.
Quasi-cyclical industries can be analyzed in terms of their cycles of capital scarcity and abundance. Marathon Asset Mgmt are best known practitioners of this approach. For example, the time to buy general insurers is soon after a string of catastrophic events, because the destruction of underwriting capacity means that premiums will rise.
Other industries - such as railways, oil - have clear paths of rise, peak, and decline. Although the peak is rarely obvious at the time, this is not important from an investor's viewpoint, because the inflection points often occur over several years. As an example, the halving of Big Oil's share prices in 2020 was preceded by a decade of decline.
There is a very, very large academic literature on momentum-based investing. Academics are also beginning to take bubbles seriously, in the sense of defining, identifying and measuring them. A month ago the hedgie David Einhorn correctly identified 02 September as the day the long-running tech bubble popped - see
https://www.zerohedge.com/markets/david-einhorn-enormous-tech-bubble-and-it-popped-september-2-2020 .