Renaissance Technologies 03:10:19

i always used to misspell run ascence as i was typing it out at R， e， n and then i would sort of like not really know it came from there but i learned to nemonic to make sure i get it right oh！

i thought yougonna say youve typeed it so many times now over the past month oh！

theres that too but ready for this you cant spell renaissance without ai uh huh toshee toshee alright lets do it who got the truth is you is you who got the truth now？

podcast about great companies and the stories and playbooks behind them im Bengilbert！

im David resindall！

and we are your hosts they say David that as an investor you cant beat the market or time the market that your better off indexing and dollar costaverging rather than trying to be an active stock picker they say theres no persistence of returns for hedgefunds that this years bigwinner can be next years big loser and that nobody gets huge outperformancewithout taking huge risk when i was in college。

i actually took an economics class with Burton malkill who of course。

you know was involved in starting van guard and is a big proponent of all that and that is what i learned to Ben all David turns out they were wrong today listeners we tell the story of the best performing investment firm in history， renaissance， technologies or rentec there thirtyyear track record managing billions of dollars has better returns than anyone you have ever heard of including berkture， Hathaway， Bridgewater， georgesoro， speederlynch， or anyone else so why havent you heard of them or if you have， why dont you know much about them？

well， there i popping performance is matched only by their extreme secrecy and they are unusual in almost every way theyfounder Jim Simones workedfortheus government in the cold war as a code breaker before starting renaissance， none of the founders or earlyemployees had any investing background and they built the entire thing by hiring PhD， physicists， astronres and speech recognition researchers theyre located in the middle of nowhere and a tiny town on long island they dont pay attention to revenues prophets or even who the ceos are of the companies that they invested in and any given time they probably couldnt even tell you what actual stocks they own now you may be thinking OK， great， i just learned about this insane fund with unbelievable performance and to be specificlisters thats sixsix percent annual returns before fees and you know well， i want to invest well， you cant to add to everything else that i just said rentex flagship medalian fund doesnt take any outsideinvestors the partners of the firm have become so wealthy from the billions that the fund has generated that the only investors they allow in are themselves oh， we are going to talk a lot about that towards the end of the episode cause i think its kind of the key to the whole thing ooh cliffhanger David im excited so what exactly does run a son to do why does it work and how did it evolve to be the way it is today and while the resources are out there are scarce because for one employees signing lifetime nondisclusureagreement David and i are going to take you through everything weve learned about the firm from our research dating all the way back before Jim Simon started as a math professor to understand it all this episode was selected by our acquiredlimited partners and to be honest i didnthink enough people knew what rentec was to pick it， but when we put it out for a vote， the people have spoken so if you want to become a limited partner and pick one episode each season enjoyed me quarderlyzoom calls with us you can join acquireddatafm slashlp if you want to know everytime， a new episode drops sign up idequiredatafm slash email these emails also contain hint setwhatthe next episode will be and follow up facts from previous episodes for example， we had a listener Nicholas Colin email us this time who found the actual document with the bylaws of airmesses controlling familyshareholder H51， which we linked to in this most recent email comtalk about this episode with us after listening at acquireddatafmat slash slack if you want more from Dave and i check out ack two our most recent episode was with latta beer newson who led the team that created the first glp ones at novoe nordesk so awesome follow up to the novoepisode if you liked that one before we dive in we want a briefly share our presenting sponsor this season is jp Morgan specifically there incredible paymentsbusiness yeah！

just like how we say every company has a story every company story is powered by payments and jp Morgan payments is a part of so many companies that we talk about on acquired its not just a fortune 520 theyre also helping companies grow from seed to IPO and beyond yep so with that the show is not investment device David and i may have investments in the companies we discuss or perhaps wish we did and this show is for informational and entertainment purposes only David where do we start our story today uh well， we start in nineteen thirty eight Innewton massitusits， which is a fairly wealthy suburb just outside of Boston where one James Simones is born and both of James Parentswere very very smart especially his mother Marshall his dad was a salesman for 29 sentry fox the moviecompany his job was he went around at the utters in the northeast and sold packages of movies to them super cool by the way we know all this because we have to thank Gregsockerman， author of the man who solveed the market， which is the only book out there that is solely dedicated to rentec and Jim Simonson we actually got to talk to Greg in our research he helped this out a bunch thank you Greg and help factcheck if you have our assumptions of what happened after the book came out。

so that was James parents。

but really a major influence on himgrowing upwas his grandfather marxisdad thereof echos of the basio story here with the grandfather， the mothers father and spending a bunch of time with him rubbing off on young Jeffer， young jib in this case and basios of course would get his start in his career at de shaw he quant fund coming up at the same time as rentec but back to Jim here in the nineteen 40 his grandfatherpeter owned a shoe factory that made womens dress shoes Jim spends a ton of time there growing up at the factory so jims grandfather Peter was quite the character he was a Russian immigrant and hes cut it like still more Russia than Boston at this point in time as Greg puts it in the book Peter Reveled Intelingjim and his cousins stories of the motherland involving wolves women caviare and Voga and he teaches young Jim when hes a child here in the factory to say Russian phrase is like givemea cigarette and kiss my as which i think he probably would say that thousands of times arrest is life i think so ifyouwatch interviewswithdiv， his hands are always twitching because he is changesmotehis entire life probably going back to like it tenin a factory threepacsamerit today unbelievable although i think hes quit later in life， but he definitely chain smoked the better part of the first call it seventy five years or something having the these famous stories of the conference rooms at rentec and the warrooms when the market is going through like a crazy generation and just filled with cigarette smokenits all gym different time different time so back to jims childhood though here in the Boston suberbs。

he grows up！

certainly not Uber wealthy or Uber rich， but very very solidly upper middle class and especially keys an only child he has all the resources of his parents， his family， his grandfathersthis sort of well to do entreprener and Jim？

you know？

he gets to rub shoulders in the bostonarea， with people who are really rich and he says later， i observed that its very nice to be rich i had no interest in business。

which is not to say i had no interest in money yes important to tease out the difference between those two things yes！

very very important， and what he means when he says he has no interest in business， itsbecausefrom a pretty youngage， he gets reallien to math， so the legend has it when Jim is four years old。

he stumbles into one of xenos famous paradoxes from anching greet times yep this is great the basic gist of xenosparadoxs if you are always taking a quantity and dividing it by two， you will never hit zero you will ask totically approach zero， but you will never actually touch zero you need to do edition or subtraction to do that division wont cut it and so Jim as a four year old， when he observes， they need to go to the gas station to fill up the tank， he throws out the idea wall， lets just use only half the gas in the tank because then well still be able to after that only use half the gas in the tank and you know the funny thing that doesnoccurred do a four year old this will then were just not going to get very far so jimstream is to go to mit downthe street in cambridgeandstudymatthegraduates high school in three years and during the secondsmaster of jimsfreshmen year there heenrollesinaggraduatematseminr on abstractouterbra so pretty no heady stuff yeah and Jim would go on to finishes undergrad at mit in three years and get amasters in one year yup pretty！

pretty smart but it turns out that that freshmanyear grad seminar he took actually has a big impact on him because he doesnt do well in the class he cant keep up and jims pretty selfaware here there are other people at mit who never run into problems they never hit a limit they never struggled， understanding any concept， and he realizes that oh， im smart， im very very smart， im smarter the most other people here but im not one of those people right？

which is you know what do you do with that information？

you realize you have to add a few of your skills together to become the best at something you have to be smart and something else yes！

so jims own words on this are i was a good mathemetition i wasnt the greatest in the world， but i was pretty good， but he recognizes like he said Ben that he has a different advantage that most of the supergenius is lacked， and thats that as he putted he had good taste， so these are his words hastainscience is very important to distinguish whatsagoodproblem and whatsaproblem that no onegoing to care about the answer to anyway。

thats taste and i think i have good taste by the way this is exactly the same thing as Jeff basios in college， realizing he wanted to be a theradicalphysicist he met some of the extreme brain power people that would go on to become the best radicalphysist in the world and he said im smart！

but im not that smart and so switch to compare science i think the analogy here is like sports there are all star players， there are holifamers and then theres libron and mj and Jim ends up being a holifamer mathemetition， but hes not tombready i mean hes got a pretty important theory named after him that goes on to become a foundation of string theory in physics， which isneven Jimsfield crazy so this realizationthe Jim has about himself though both that hes not the smardest person in the room at a place like mit but he can hang with them and that he has this taste concept i think becomes one of the most important keys to the secret source the dense of getting built to rentec， which is the he can relate to everybody he understands whats going on any person off the street probably couldneven really have a conversation with these folks but he can and yet he also has the perspectivemaybe some of this is from his grandfather of what is important out there in the realworld and as a result， all of his friends at mit in the super smart people they look up to him because you arent like the kid in the corner at the high school dance youcool hes the extroverted theoretical mathemetition yes， so he was selected class president in high school you know he smokecigarads hes popular with the ladies he kind of looks like humpfree boegart hes a popular dude especially at this point in time were now in the late fifties when jams at mit， you know this is cata jamesde and rebel without a causearrow yep so after graduation Jim leads his bodies on a road trip with motorscuters you get make the stuffup from Boston down to bogatawhere one of his classmates is from the ideas that theyre gonna do something so epic that the newspapers are gonna have to write about it so they all load up on scooters and drive down to vogatow they get into all sorts of adventures theres knives guns and they get run in jail its honestly crazy that this group of people took this type of risk totally crazy so after east and mit and after the road trip， Jimmy heads out to Berkeley in Californium， so that he could do his PhD with the professor she and mutleader in life Jim would collaborate with turn forthechurn simonstheary that we talked about earlier that becomes one of the foundational parts of string theory in physics but before Jim leaves for the west coast， he meets a girl in Boston and they decide to get engaged in four days， uh i mean this is this is in backthere these were the tips and when they get to California and they get married， Jim takes the five thousand dollar wedding gift did i believe they got from her parents and he decides i want a multiplythis so he starts driving from Berkeley in the San Francisco every morning to go hang out at the meril lint brokerage office and just be a rat hanging around the brokerage and findways to trade and turn this money into something more。

which is so interesting to think about because at that point in time， there was such an advantage to just being there this wasneven the trading florde， but information is also manual and also relationship driven in the markets that there was basically no way to be in on the action unless you were physically there in on the action exactly yeah！

you couldnt just log in the Yahoo finance or something are open the stocksap on your iPhone， which even the information they were getting was god knows how long delayed from the yorker from Chicago for the futures in commodities that are being traded the Tim gets into heis closeto the action as he can possibly be， but hes a longlongway from the action yeah， noneless when he starts out doing this Jim hits a hot streak and he goes up fifty percent in a few days trading is easy， trading is easy he says i was hooked it was kind of a rush i bet except he ends up losing all of his profits just as quickly yeah important to learn that lesson early yes and also right around this time Barbara his wife gets pregnant with their first child and is like you cant be driving into safety Cisco every morning at gambling our feature like this right effectively playing the police yeah， exactly so teams like OK， OK ill stop a focus on academia for now so he finishes his PhD in two years they come back to Boston and he joins mit as a jr professor at age 23 so they stay one year in Boston but Jim even though hes got a family even though he super successful as a young academic year he doys get kids hes restless so one of his buddies from the skuder trip to bogatar is from bogataun lives there is families there he has an idea to start a flooring tile manufacturing company hes like you know the flooring at MIT in Boston it so much nicer than a bogatai we should start a company id make the same kind of flooring here when i read this？

i couldnbelievethat this was Jim simonsfirst business venture like its so random！

but it really is emblematic of just how much he was thrilled seeking and just looking for anything that was unexpected different exciting hes gitboard fast totally uh not just is this the start of his ocr pinarial career the seeds of this financially are what go on to start rentec twld totally well， so Jim takes a year off goes down the bugget up this is a guy with an mit undergrad and masters and a Berkeley PhD in theradical math whos now a professor at mit whois taking a year off to go work on a flooring company in boketao yes accurate so he does that for a year they get its setup they get sport against run this company ive helpset it up ive an ownership stake in it now hebounces back to Boston this time to Harvard as a professor there for a year hes really racking him up but hespend a year there and hes like got the itch again and you know the junior professor salary isnt that much and like we said about him back from his childhood days he sees the appeal and being rich hes like this is not a path to be， so hes like im Gonna go put my skills out on the open market he gets a job in Princedin New Jersey， not at Princedin university， but at the institute for defense analysies， which is a nonprofit organization that consults exclusively for the us government， specifically the defense department and specifically the nsa， these are the civilian code breakers yes！

it was basically formed with this idea that one across various branches of our government we need better collaboration and cross funding of the same initiatives and two there are going to be a lot of people who dont work for the government that were gonna want a higher to do some pretty secret work yup so the idea there in Princeden kind of functioned like the institute for advanced study。

which is also in princedin， thats where einstine went when he came to America， kind of an independent think tank research group except its solely focused on code breaking and signal intelligence with the Russians during the cold war yeah！

its a pretty wild charder and especially how special of an organization it was like the way these people would spend their time is part code breaking but part kind of goofing around because the creativity of mathematicians working together on passion projects is important to discovering clever new algorithms yes！

this is so so key and this culture ends of getting translated wholecloth right into rentec so the way idea worked and i assume still workstothis day is they recruited top mathemetitions in academics to come be code breakers there they would double their saleries an importantly！

it couldnt been a government division if they were gonna be doing that， because there is very specific congressionallyapproved budgets for payroll exactly！

they figured out that they needed to attract the smardest people in the world who werent gonna come just go work for the department of defense this was the way to do it so lakey said Ben， the charder of the group was that employees had to spend fifty percent of their time doing code breaking， but the other fifty percent of the time they were free to do whatever they wanted like research pursue， whatever they were doing an academia publish papers kind of the appeal of going there was hey， its the same thing is being a professor at mit your princedinher harveder whatever， except youdoing code breaking， instead of teaching， and theres no beer okr c to worry about theres no politics its just like hey， youre co breaking work and then you publish that you can collaborate with your colleages there yep now this is pretty crazy very quickly after Jim arrives at idea remember hes in moneymaking mode at this point in time， he recruits a bunch of his very brilliant colleages to come work with him in there fifty percent free time on an idea to apply the same work in technologies that theyre using in code， breaking and signal intelligence to trading in the stock market so they come together and they publish a paper called probabilistic models for and prediction of stock marketbehavior and everything that they suggest in this paper really is rentec this twenty years before rentec its crazy for this was published yes， now at this point in time， fundamental analysis was that as in most of the world today still is the primary way of investing in things of hey， iknowthiscompany im gonna analyze there revenues their pricemultipleor im gonna think about whathappeningin the currencymarkets or in the commodity markets and why copper is moving here the British pound is moving there and im new investon those insights youre effectively looking at the intransig value of an asset trying to assign it a value and make investments based on that yes， fundamental investing there also existed in the sixties technical investing， which kind of his vodo this is like im looking at a stock chart and ive got a feeling that its gonna go up like im tracing this pattern and like its going upbaby or no， no， no， this pattern is going down yeah！

using the phrase technical might be a little generous， but what theyre looking for basically trying to mind trading behavior for signal about the way that it will trade in the future rather than mining the intrinsic information about an asset for what you think it will do in the future right and what Jim and his colleags here suggesting is that。

but just not really done by humans its that with a lot more data and a lot more sophisticated signal processing and importantly you might say why is it？

this group of people that came to that conclusion of applying computational signal analysis to investing well its effectively the same thing as code breaking you are looking for signal in the noise and trying to use computers in algorithms to mind signal from something that otherwise kind of looks random totally when Jim started working on code breaking。

i think he just looked right back to his experience trading in the marketson was like wow， this is the same thing！

which is not an insight other people had that was the amazing thing about his background priming him to realize that yes！

theres all this noise in this data and it is impossible for a human to sit here and look at this data and say oh， i know what the Soviets are saying no no， you have to use mathematical models and statistical analysis to extract the patterns so mathematical models。

statistical analysis we actually hear a lot of that in the world today because machine learning is a thing yes！

what they are really doing here at idea and then soon in rentec is earlymachine learning and Jim just had this incredibly Brilliant site that you can use these techniques in this technology for making investments， which makes this the perfect time to talk about our presenting sponsor for this season jp Morgan payments yes！

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David so this paper is published theyre Gonna trade and make a whole bunch of money in the stock market by applying this code breaking， signal processing， data analysis approach to investing yep。

so then the natural question is OK what is the model here？

how are they gonna do this？

and it turns out that one of the employees of idea at this time and one of the members of this sort of rebel group shall we say within the organization is a guy named learning bound and Lenny just happens to be the world expert in a mathematical concept called a Markov model specifically， a version of Markov model called a hidden mark of model now， a marke of model is a statistical concept thats used to model sudo random or chaotic situations basically， it says lets abandon any attempt to actually understand what is going on in all of this data that we have and instead just focus on what are the observable states that we can see of the situation can we identify different states that the situation is in and if we just do that can we predict future states based on what weve observeedabout the patterns of past states and the answer to that is usually yes， even if you donknow anything about fundamentally how the system operates so the great example that gregsocumen gives in the book is yes！

a baseball game theres threeballs in two strikes that state has a narrow set of states after it， itgonna be a strikeout theyre gonna get on base its gonna be a walk or maybe they falledoffin it keeps going theres only really a narrow set of things that could happen after that， whereas when its zero balls in zero strikes， theres a lot that could happen they could just keep pitching and if you dont know the rules youlike why do they just keep pitching and so its this sort of great way to explain this idea of the blackbox that if nobody tells you the rules to the game by observing， the outputs enough and observing OK in this state， these outputs are possible you actually can kind of get pretty good at at least if not predicting understanding the probability distribution of the outcoms for any given state in the game。

so we brought up machine learning ai a minute ago this is a foundational concept to modern day ai if you think about large language models and predictingwhat comes dex， its not like these large language models necessarily understand English theyre just really really good at predicting states and the next state ie characters and the next character or pixels， and the next set of pixels are frame。

etc and obviously theyre much fancier than that but that is kind of the underpending of it all i mean i remember in my software year of college computer science class， i had a mark of chain assignment， and it was basically right a javaprogram to injust this public domain book and then i would give it a seedword you know the first word of each sentence impress， return， return， return！

it would scan through the probability tree and give me the most probable wordbased on the corpus of the book that it just read to create some sentence and it feels like magic and of course， in these earlyredimentary mark of chain things like the one， i didnt college， it kind of spits out nonsense but that would evolve to be the lms that we know of today yes！

totally！

and that is what they were using Ada to do code breaking and thats what they propose in this paper that they could use in the stock market to exactly and the way that this applies to investing is just like you might not know the rules of baseball but if youve watched enough baseball， you can kind of guess at what the probabilities of the next thing to happen are based on the state investings kind of the same thing or at least the stock market movements are where you dont know the future you dont know whats gonna happen you dont know if stockx affects stocky in some way because you dont know in what way those companies do business together or who holds both stocks are they overlapping investors like you dont know the relationship between those companies so you cant forecast with a hundrepercent certainty what is going to happen however， if you suck in enough data about what has happened in the past and the probability distribution from every given state in the past， you probably could make some educated guesses or at least understand the probability of any individual outcome based on a state today of what could happen next yes！

exactly so Jim and Lenny and this whole little crew theyre pretty fired up theylike oh， great lets go raise a fund and invest in the markets using this strategy certainly were going to be successful erasing that fund and certainly were going to be very profitable because weve got this great idea totally what could go wrong in the MID 60， the idea that some monkey academics at some random secretive agency in Princedindo Jersey could go raise money was nonviable， mini was hard enough for warren buffet to raise moneyat this point in time for his fund and he was Benjamin grams anoiented， appointed， disciple and here these academics who are working at some random unknown nonprofit saying give us money we dont know anything about these companies that were going to investing we dont know anything about fundametals but weve got a really good algorithm people are probably like what is an algorithm so they just have no access to capital right this was decades before it became high pedigree to come from a technical。

computer science background in the world of investing yes！

so， a bunch， a kind of Keystone cops style fundraising happens here theyre going around in secret， theyre trying to keep the idea bosses from knowingwhatheydoing one of the group ends up living a copy of the investment prospectus on the copy machine handwork one night and the boss discovers it and calls the ball into his office and is like guys what are you doing here？

right？

its a little bit of a clown show on the operational side even if the idea is good yes！

so they end up abandoning the effort both because they cant raise moneyandbecauseidea is found out about this and theyre not too pleased shortly after all this though Jim ends up moving on anyway， because the vietnamemore starts and he as you can imagine from his background is not a supporter of the Vietnam or at this point in time， Jim writes an oped in the New York times denouncing the Vietnam war and say like yeah， hes you know sorta part of the defense department but like not everybody in the defense department is for the war！

which is so naive thinking you gonna write an open in the New York freaking times and thats not going to create issues for you in your job even more than that amazingly！

nobody really paid attention to it except a reporter at newsweek who then comes to interview Jim and ask of some more questions that he does doubles down on this and when the news week peace comes out thats when the department of defense is like are you got fire this guy yep so Jim getsfired in 1967， even though is a star code breaker he made supposedly huge contributions to the group which are still classified but it aids thirty with a wife and threekids hes out on the street and even though hes super smart his colleagues love him clearly hes now bounced out a mit hesbounced out a Harvard hes gone to this seemingly final home for him great place it idea hes bounced out of there to his job prospects are not great yeah， so he takes pretty much the only halfway decent paying job that he could get， which is to be the chair of a newly established or maybe reestablished math department at the state university of New York Stony Brook， which is the long island campus of the state university of New York this is not Harvard？

this is not Miz no！

it is not！

but it did have one very important thing going for it， which is why Jim ended up there and that is that Nelson Rockefeller who was then the governor of New York had launched a campaign a hundred million dollar campaign to try and turn this long island campus of the state university of New York into a mathematical powerhouse to become the Berkeley of the east i sort thought mit was the Berkeley of the east already， but rockefellar is waita good givehid that he wants stony brook to become a matthesciences powerhouse and Jim is the key he wouldnt be able to recruit somebodylike Jim otherwise， but because hes now kind of tarnised his career heres a like very talented mathematician that they can convince to come be chair the department yep， so they basically give him an unlimited budget and lee way to go try and post matt professors from departments all over the country in the world and bring them there the long island and part of how jimgoes recruits focus is moneylike the old haile double your salary line but the other part of it 2 is hes given such leeway and stony broke is so different from the politics of an mit or a Harvard or Princeton he says hey， come here ill pay you more but even more importantly you can just focus on your research youre not gonna have to deal with commities youre not gonna have to do all this stuff there is not a this stuff here you might have to teach a little bit but thats not even the point Rockefeller doesnt want this necessarily become agree teaching institution he just wants to assemble talent there yep amazingly it works Jim starts getting a bunch a great talent including James ax， whois a superstar in Algebra number theory from Cornell and he ends up at stony brook recruiting and building one of the best match departments in the world amazing tolyamazing but intruejimfashion after a couple years of this and also his marriage with Barbara falling apart he starts getting restless again he decides that he wants to go honest Abatical and go back to Berkeley and reunite with his old advisor there and go spend sometime out on the coast in California and this is where churn unsimones end up collaborating and developing the charm Simons theory that ends up winning the highest toward in geometry from the American mathematical society and really can is gems personal mark on mathematics yep now also right around the same time remember the columbian flooring company it gets acquired and Jim， and is buddies who are partners in it come into a good amount of money and Jim is newly divorced hes restless in academia， hehasthesideasbackfromwhenhewasidaaboutwhatyoucoulddointhemarketsifyouhadcapital hestarts trading again anygets more and more into it meanwhile like we said hebecoming dissolution again and restless at academia and in 178， he leaves to focus fulltime on trading， which is a huge shock to the academic community remember hes assembled the superstar team there its donebrook theres a quota gregsbook from another mathemationic Cornell we look down on him when he did this， like he had been corrupted and had sold his soul to the devil yeah！

i mean it was really viewed in the math community as anyonewhos going to do investingis throwing away their talent and it wasnt even that it was commintheway that it sort of is today right？

Jim was the first one， but the idea that you would leave to do anything commercialyou doing a disservice to humanity yes！

exactly and leaving to do anything sure but living to do investing was almost just seen as dirty like its this rich persons game that provides no value to society right？

yeah！

i dont think it was that the rest of the math world was skeptical that it could work they probably were like oh yeah！

this could work but they were like you academics tend to be much more motivated by prestige than money so i could totally see this other people being like oh i could do that if i wanted， but i have this higher calling and everyone respects me for this higher calling and my currency is the papers i publish in the awords that i win and thats what i want yep now stony brook we should say too like its a very nice place yes！

but its in the middle of long island on the north shore this is not the hampdance its like the long island suburbs yep the woodid long island suburbs yes， the woodid long island suburbs herese Jim in a strip mall next to a pizza joint setting up his trading operation that he decides very cleverly to call monometrics， a combination of money and metrics or econometrics。

and he recruits his old idea， buddy。

original partnering crime on the trading idea lennybound come and join him and this time though they have some capital from the sale the flooring company and how much should he make on that flooring sale i think together with Jim his partners and whatever money Lenny put in they had a little less than 4 million dollars in this initial capital in nineteen 78 yep now， Jim also has another advantage at this point in time， which is hes right down the street from stony brook， and hes just recruited all of these superstar mathmetitions the table has been set yes， and as folks are more loyal to Jim than they are to stonebrook。

but theyre more loyal right now to academia than they are to finance this is not a pavedpathway until Jim pavesispathway yes！

in general， but some of them are in particular the superstar James ax Jim convinces to come join him in disturating operations。

so having balm and ax and simones its like suddenly this extremely credible team in the math world yes， beyond credible right all the theorums that a lot of mathemetitions are using everyday are all named after these three guys who are now at the same from trading？

yes and its lead by Jim whosomebody that they respect as an academic， but even more important is somebody they want to work for and they look up to and they think is cool and hes out there being like hey！

i think we can make money right now at this point theyprimarily treating currencies not stocks and currencies are obviously large markets but they arent impacted by as many signals in as many factors has stocks are are really even slightly more complex commodities like i dont know soybeans or whatever and it seemed to me like a lot of the trading of currencies they were doing was basically based on filings that they had around how a central bank was acting like if they had of state of a certain country was gonna do something or not its basically like bedding on how one single actor who was in control of currencies at governments would act so tier point about very few signals impacting price its knowing what one person is going to do yes and this is super important at the end of the day they build some models there theyre getting the earlyversions。

an infrastructure and scaffolding of this quantitative approach setup， but in terms of the actual trades， theyre putting on theystodoing all of it by hand and theyre still all really going on a fundamental type analysis theyll take some signals from the model theysee its interesting what they spit out but theyre not gonna act on anything unless they can be like oh yeah i see what is going on here i have a high pothosis right the computer are by no means running at this point， by no means at all yeah theyre just suggesting patterns and ideas and James and Lenin James they have to then decide here we gonna do this or not or we gonna do something just totally different that we think is whats gonna happen yep and this actually does make sense really for two reasons， one computers in computing power just wasnt sofesticated enough yet to really build ai in a way thats powerful enough that it could work well enough you could really trust it thats one part theotherpart is these foxer， mathematicians theyre not computer scientists right， and theyre really really good at building models， decoding signals obviously， but theyll much more from this realm of theory and actually spoke with Howard Morgan whois Gonna come up here in a second and he made this point to me hes like in math theres this concept of tracability thats a really really important cultural tenant its like proving approve for proving a theoram or something like that you really need to understand why to get ahead in the field its not like you can just say oh hey， the data suggest this its like no no you need approve and thats the world that these guys are coming from theyre like oh we can use data the sort of help us here but ultimately， we want to have a rock solid theory of what is fundamentally happening here fascinating！

which is very different that will cram a huge amount of data and then whatever， the data suggest we know its true because the data suggested， which is sort of where they would end up many years later once they had both the hardware you referring to sophisticate computers the clean data that would be required to make all of those incredibly numerous and fast calculations and also， the real computer engineering architecture to build these scale systems to actually act on large amounts of signals and understand them all to come up with results they just didnhave any of that at the time so it was hunches in shockwords yes and so much so that even Jim is ringleader here hes far from convinced that he should put all of his wealth into this thing hes like yeah！

this is interesting， were building， were experimenting， like great， but i also want to put my moneysomewhere else to for some diversification so this is where Howard marking comes in you know we used to talk about this on all required episodes that did the early days of silk and valley there are only ten people out here and they all knew each other and theyre all doing the same thing this was also the casein east coast finance in technology in earlyvc in these days， Howard Morgan would go on to be one of the cofounders of firstaround capital。

which was essentially spun out of renaissance like it was kind of the venture capital work that they were doing at renaissance the didnt fit with the rest of runaconts yes！

so herehow it all went down and this is so poorly underset out there yes， Howard was a computer science and business cool professor at the university of Pennsylvania so we taught CSAT pan and business at worden he had been involved in bringing arpenet to pen and was kind of like earlyearlyinternet pioneer and so， as a result， he was superplugged into Tech and earlystartups， and really earlyearlyproto internet stuff and Jim gets excited about investing together with Howard， so they say like hey maybe we should partner together and in nineteen eighty two Jim actually， winds down monometrics and he and Howard cofound a new firm together thats gonna reflect both of their background be a great diversification。

Jim and his group are gonna bring in the quantitative trading thing and again trading on currencies and commodities at this point and howards gonna bring in private company technology investing and they pick a name for a firm that is going to reflect this renaissance technologies its crazy and that is why rentec is called rentec i could not only figure this out the research i could not believe that this is not a morelyunderstood story that this is the origins of what is today a fantastic venture capital from first round capital but you could not name two more different strategies in investing i mean a longterm Illiquid thing like venture capital highly speculative versus you know were gonna trade whether we think the French Frank is gonna go up or down tomorrow based on the whim of some government leader its unbelievable these were under the same roof totally。

but when you know the whole background in history， it kind of make sense because this is their personal money， this is Jim in his bodies， ED Lenny and Jamesan Howard theres not institutional capital here theyre not outpitching lpsoflike oh， you should investing my diversified strategy of currency trading and private technology startups yeah！

when they say multistrategy？

this is really multistrategy wegettinto whatmultistrategy today means later， but in these earlydaysafrientech， 50 percent of the portfolio was venturecapital and fifty percent was currency trading and fact a couple years after they get started the currency trading side of the firm almost blows up when leni goes super long on government bonds and the market goes against him in the whole portfolio drops 40 percent， which is wild that ends up triggering a claws in lenies agreement with Jim and they sell off lennies entire portfolio and he leaves the firm this is crazy of it blowup risk is always an issue in the markets。

but this happened to rentec and because we quickly got to this point in the story it would be easy to say well thats a class that has a lot of teeth there were many sort of rumbles of something like this potentially happening sims going to any insaying hey， maybe we should cut some of our losses and its OK to trade out of these positions and learning？

which is very dog in on im a true believer and that i can get into a situation where you triggera covenant like this totally and again also shows they werendoing modelbased quantitative trading really at this point in time now so much good so as a result of that forawhile rentec is truly almost， entirely aventure capital firm at one point on the ventureside just one investment franklindictionaries do remember Ben the yes， franklinelectronic dictionaries yeah that was one of their biggest investments that one investment is half of James Networth what at this low point for the trading side？

yes！

i had no idea thats crazy yeah so in the book Greg talks about oh， Jim was focused on venture capital on thats kind of the story out there its like what he was focused on venturecapital because i was the only thing workeding making money oh， i might see only thing where they actually had an edge from howardsaccess to dealflow because they certainly didnhave an edge in the global currencymarkets so i think perhaps compartbecauseofthetraininglosses James ax starts to get a little dissolution to and he tells Jim that he wants to move out to California with sandorstrouse who started working with them at this point Sandora was another stony， brook， alum the join them and the two of them wanna move out to California and do trading out there Jim says sir， fine im here with Howard im doing venture capital stuff why dont you go move out to California？

you can start your own firm？

which they do its called xcom axcom and will contract with axcom to run whats left to the trading operations here for rentec so its this interesting arms length where Jim strikes a deal where hes gonna own a part of acscom inexchange for this very favorable contractual relationship where theyre going to hire them to be the manager for this pod of money that render sance has raised but you know its technically not renaissance its xcom right its another company that is now doing the quantitative trading yep and i think Jim owned a quarter of it is that right yes！

thats right and importantly。

i donthink anyone had any idea what xcom would become or how unbelievably profitable it would be no nobody would have done what they did had they noticed what was coming yes， wouldnt have spending out no！

so once ax and strouse get out to California strouse hes kind on the computing data infrastructure side thats what he was doing its donebrook and thats what he came into renaissance to build he starts getting really into data and he starts collecting into day pricing movements on securities at this point in time i think really the best data you could get from providers out there was maybe open enclosedata on security pricing stroussfinds away to get tikdata like every twenty minutedata on these securities throughout the day not only that hes getting historical data that predates what your traditional data providers will give you and then ingesting it into computers in cleaning the data to get it into the same format as the tikdata so hesgetting early nineteen hundreds even 180 stuff totrytojust say at some pointhopefully will be able to make use of this and i want to have this just really really clean data set about the way that these markets interact yeah， i mean hes doing etl on the data yes！

i think before anybodynew whatetl was again no one told them to do that that was just a selfmotivated， almost， like obsession of， like overgonna have data it should be well formatted and well understood and labeled。

and all that so thats one thing that happens the other thing is Jim says oh！

yougoing out to California let me hook you up with my buddies whos a Berkeley professor out there l win burla camp and burlecamp had studied with folks like John Dash and cloudchain had mit i love the cloudchain is coming in again i know we talk about a lot on the Qualcomm episode father of information theory really the center of gravity for attracting tons of talent mit and kind of paving the way for what would become phone technology Intellicommunications broadly in the future but the fact that burla camp is crossing pabs at mit with cloud chain in so cool so cool and most importantly for this specific use case。

burla camp had worked with John Kelly who developed the Kelly criterion on betsizing， which poker players will likely be well familiar with yep so with this combination now of much much much better and deeper data from strouse and burly camp coming in and working with ax on the models and saying hey， we should be smart about the betsizing that were doing in the trades that are coming out of these models versus i dont know what they were doing before， maybe it was naive of like every trade was the same or this late？

we should actually be systematic about this the models start really working yep this is the turning point yeah in these kind of mid eighties years x com is generating IRRS of like 20 plus percent on the trading side you know， not necessarily Gonna beat venture capital IRRS but Liquid yes！

reliable well thats the thing they dont know how reliable yet they know theyve done it kind of a few years in a row here but the question is how on correlated the stock market over a long period of time and how predictable are these returns or is it just superhigh variants？

yes！

but the earlyresults are really good and Jim and burly camp especially are very encouraged by this so in nineteen eighty eight， Jim and Howard Morgan decide to spin out the ventureinvestments and Howard goes to manage those with basically their own money funcodo on this when howardstarts first round a number of years later with Josh copplemen gym， of course is a large lp and Howard of course， remains an invester in rentec the first institutional fund that firstround ended up raising A50X on A25 million dollar fund it had Roblox， Uber and square so i believe this is right i think Jim made as much money from his investments in firstaround， as Howard did from his lpstate no in rentec thatwild isis that amazing wow！

that is a untold story about Jim Simones i think i read basically every primary source thing on Jim or retiss on the whole internet but i see you got that from Howard yeah！

it was super fun talking to Howard about this and does the history of have first round started early superangel？

invastig and everything that became i also didnrealize that first roundsfund one was a fifty x on a hundred million dollar fund first institutional fund， which i believe they called fund to i mean wild wild stuff totally wild！

so whenhowardspinseouttheventureactivities， decidestosetup a new fund has a joint venture between rentec and xcom and they decide to name it after all of the collective mathematical awards， the James and James and Burla camp and all these prestigious mathemetitions have one in their careers they name it the medallion fund budana。

but Ada and listeners web arrived this is the part of the story that matters the medallion fund is the crown jewel or you might even say actually， the only interesting thing about renaissance and it is boring out of this observation that oh， my god what theydoingover there at xcom is really interesting maybe they should be doing it all the way over there， maybe thatshould be a deeper part of the fold here at runtec and we should have let that get away or frankly given up on the quantitative trading strategies too early and again still just currencies， still just commodities futures not playing the stockmarket at all but the seeds and the ideas the huge amount of clean data the robust engineering infrastructure to process all that data， the mining of signals from data to figure out what trading strategies to execute that is really starting to form here in this new joint venture this medallion fund those ideas had all existed before this is the first time that its all brought together yeah and actually working an operationalized and frankly that computers got good enough to actually do it to thats another big piece of this yeah！

i dont know that strouz could have done his data engineering too much earlier in time yeah。

but before we get into the just absolutely insane run that this medallion fund is about to go on that continues right through to this day now is the perfect time for another story about service now service now is one of our big partners here in season 14 and is just an incredible company yep service now digitallytransforms your enterprise helping automateprocesses improve service delivery and increase operational efficiency all in one intelligent platform over 85 percent of the fortune 500 runs on them and they have quickly joined the microsofts and the nvidias as one of the most important enterprise software companies in the world today。

so we talked on our novonoredisk episode about how service now founder Fred letty discovered this core insight that software can transform an eliminate manual tasks and on her mes， we told the story of how currentceo bill Mcdermatt came in interba charged that into an absolute monster hundren fifty billion marketcap global behemoth the keythread that connects those two errors is that from day one Fred new the service now platform could be used across the whole enterprise， but at the same time， he also knew from his decades of prior software experience that launching a broad horizon a offering right out of the gate as a startup was a recipe for failure you need to start with a specific vertical usecase and in this case。

he chose it service management yep and thats been true for us here on acquiredto David if we didnt name， it acquiredand cover technology acquisitions that actually， went well， we never could have broadand and become the podcast that tells the stories of great companies you cant just start as that totally well， this is whats so cool and where i think the playbooklesson really is for listeners because you cant just pick any use case you have to be strategic about it and it was the perfectvertical because everyotherdepartment has to interface with them from the ceo on down， so theyre going to notice when it service management rapidly improves， all of those support tickets that used to take forever are now just magically resolved and that greases the wheels for the other departments to say hey！

maybe we should adopt service now to turbocharge and digitallytransformare service levels to yep once those other departmentsdo pull the trigger on joining the service now platform who is in charge of rolling it out for them of course， its i t who are already true service now believers im honestly not sure that theres a better enterprise of our playbook in history than servicenals so once they establish the beach had an it they then took the same platform to HR with employee experience they took it to CSM with customerservice reques they took it to finance with regulatory reporting audit and expense approvals and now theyre adding ai。

which will take everything to the next level yep so if you want to learn more about the service， now platform in playbook and hearhow it can transformat your business head on overtheservice now dot com slash acquiredon when you get untouchjustellm？

the Ben and David sent you so theyve got this grand new plan and vision with the medallion fund unfortunately right out of the gate the fund stumples a bit an ax ends up getting burned out burla camp though is like no， no， no， no this is an anomaly like weve gonna fix this i really really believe that what were doing with these models is going to be extremely profitable， so he buys out most of axes stake in the summer of nineteen eighty nine and he movestheoffices up to Berkeley and there he comes up with the idea that he we should trade more frequently， a lot more frequently because of what were trying to do is understand the state of the market from the data we have and then predict the feature state of the market and then combine that with figuring out the right betsizing to make we actually want to make a lot more trades to get a lot more data points and learn a lot more about the beast were making so that we can then size them up or size them down its that and its two other things one is the further into the future you look the less certain you can be about it if you know somethingisworth ten dollars！

right now what you know five minutes from now is is probably gonna be worth about ten dollars the most likely situation is its within five percent of that if you ask me three years from now， i have almost no intuition about that and a state machine is the same way if you flash forward a whole bunch of states， you sort of lose predictibility as you sort of continue down that chain the second thing is if your models are showing that youre going to be right， call it something like fifty point to five percent of the time then the amount of money you can make is gated by the number of bets you can make at a quarter percent edge if i walk up to the casino and i think im right about this particular rouletwheel which of course， youre not fifty point to five percent of the time and i decide to play once or play twice or play five times theres a chance i could lose all my money or if i have tiny little bit sizes then im just not going to make that much money but if i walk up to said game with a little bit of edge and i use small bat sizes and i play ten thousand times im Gonna walk out with a lot of money there is a great Bob mercer quote about this later he says were right fifty point 75 percent of the time and i do think hes making up that number i think its illustrative right， but were one hundred percent right fifty point 75 percent of the time you can make billions that way its so true when you have that little edge its about making sure that youre not betting so much that a few bets that dont break your way can take you down to zero and to make sure you can just play the game a lot a lot yes and then back to the Kelly criterion adjust your bat sizes over time as youmaking those bats yep now of course， this is all great in the abstractifits that youre literally sitting at a casino when youre somehow perfectly making these bets and youre just sitting right there at the table then you can walk over to the cache year it gets a little bit different in the market for example， there are realtransactioncos especially at this point in history before some of these more ainnovative trading business models with Payforderflow and a zerotransactionfees all this stuff theres realtransactioncost to putting on these trades and of course， youve gonna move the market when you put on these trades yes， this is slibage theres all sorts of practical consideration you could get front run by other people its not just a computer program that gets executed you actually have to meet the constraints of the real world when youre deciding instead of a few bigbats were gonna have a hundred thousand tiny bats yes， and as time goes on in the whole quant industry emerges and becomes much more sophisticated i think its particularly the slipage there that becomes the governor on how high velocity you can actually beyonthis and the slipages that whats your at a certain scale you are going to move the market with your trades so the deeper you get into the orderbook like lets say you want to buy five million dollars of something maybe your first hundred thousand dollars youre pretty sure you can get the quoted price but by your last hundred thousand dollars of that five million dollar by the price might have gotten pretty different already yeah were gonna come back to this in just a minute but this certainly for earlyrentec and then even now still for all of quantitative finance is a really really really important thing yep and David in a very crude way calls back to last episode on air mes the idea that the price would be highest for the family member that is willing to sell now and sort of goes down over time if the family was gonna sell to Bernard or no， it would be who view to be first in the order book not last in the order book yes！

i feel like theres this metal lesson that ive been learning the required and my own personal investing over the past couple years every market is dependent on supply and demand you can see quoted valuations enquoted price streams， but oftentimes thats like the mistakeofjust looking at averages exactly yes！

looking at the quoted price of an asset is wrong you actually should be looking at what is the volume that is willing to buy and what is the volume that is willing to sell and for all of those buyers and all of those sellers what are the price at？

which they are willinga transact and with the way that tends to manifest on the stock chart is heres the price of the share right now， but thats not actually whatgoing on under the surface its a whole bunch of buyers and sellers who have different willingness to pay and have different amounts of theyre trying to buy yourself yes now at this point in time when the medallion fund is firststarting to work and say late。

1989 early nineteen 九十 its small enough that this isnt big consideration yet yeah right medalian was about 27 million dollars undermanagement when Burla camp bought out ax in 190， thefirstfullyearafter that the fund gains 77 point 8 percent growth， which after feeds in carry was 55 percent net now what were the feeds in carry？

i mean either one of those numbers is shooting the freaking lights out assuming that this is not a crazy highrisk strategy that they executed and will completely fall apart under different market conditions like if this is an actual repeatable strategy that produces the numbers you just said unbelievable worldchanging hell yeah lets go yes and indeed it was a hell yeah lets go situation so the numbers you quoted me the growth on the netsounded quite different talk to me about the feeds and carry so Carey ive seen different sources of whether it was twenty or twenty five percent in the early days。

but the management fee on the fund was five percent who is crazy the top venture capital firms in the world charge at 3PERCENT management feed even that is like everybody holds their noises like this is ridiculous how on earth were these nobodies charging A5PERCENT management fee output their investors well， a couple things one theyinvestors were not tefescated it was mostly their own money and their buddies money。

so they set that president they set that president。

but to though they actually needed the money yes， because strousinfrastructure costs were about 800 dollars a year， so they just backed into the management feedbase on like hey！

we need 800 dollars a year to run the infrastructure plus we need some money to you know payfolks and what not like great five percent management fee and so the pitch theymaking to the investor basis like if you believe that we should be able to massively outperform the market doing quantative trading what were gonna need a lot of fees to do that and so the investors basically took the deal if they thought about it enough， OK， so thats the feeds on the performancethat twenty or twenty five percent its just not actually that far above market if its above market at all what youve ingis， a highfee， normalish performancefee fund at this point in time yes！

highmanagement fee， normalish carrier performance element yep so at the end of nineteen 90 sims is so jased about whatgoing on that he tells braille cam hey， you should move here to long island lets recentalize everything here i want to go all in on this i think with some tweaks we can be up eighty percent after feeds next year burricamp is a little more circumspect a he wants to stay embartly he doesnhave any desire to move to log island and be i couldnt tell how much of this is just hes a little more conservativethem Jim or how much of this actually might be his hey wholepoker betsizing thing heturns to Jim and he says well！

if youre so optimistic what dont you buy me out so Jim does at 6X the basis the burla camp had paid ax a year earlier on the onehand making a six sex in one year sounds great on the other hand this is the equivalent of when downvalentine sold sequoias apple steak before the ipo to lock in a great game but miss out on all the upside to come David i think we should throw this out so people understand the volume of this theygenerated on the order of sixty billion dollars of performance fees for the owners of the fund over their entire lifetime so on the onehand sixx anyyear aintbad on the otherhand you own a giant part of something that has dividended sixty billion dollars in cache out to its owners oof yeah！

thats just on the carry side i mean the owners are the principles so just like dollars out of the firm its probably twice that i would estimate probably a hundred fifty， two hundred billion dollars that have come out of midalian over the last thirty five years so Jim buys out braille camp he rolls everything in the medalian fund back into rentec itself moves everything back to stonebrook stroussmovesistony brook so its now the jimsims show in New York with strouse building the engineering systems and acs i think still had a small stick yes， thats right and strouse had a stick as well so once gem takes control and moves everything back he basically decides that hes gonna turn tech into an even better， even more idealized version of idea and the math department at stony brook， hes going to make this an academics paradise where if you are one of the absolute smardest mathematicians or systems engineers in the world， this is where you want to be so of course， he starts rating the stony brook department itself again and this is when Henry la for joinsfulltime， lelford had been consulting with medallion in the early days， im working with barla campus， theydoing bat sizing as theymaking more frequenttrades， but now whats the whole operation is moved back to long island lovers like oh okay great im come full time im here its Donnie broke anyway。

this is way more fun than teaching and listeners i imagined this is probably the point where starting to get confused and saying there are so many people in this story i think were on eight or nine we should keep introducing more people and that is the story of retisots it is not this singular clean narrative it is a very complex reality of a whole bunch of different people that came in and out at different errors where the firm was trying different things and eventually became phenomenally successful with a very particular approach， but while they were figuring it out along the way it took a lot of people。

a lot of people and just a lot of time to this is twenty five years this is a quartercentury from the time that balm and simonswitch the paper at idea until medallion really starts to work it takes a long time and we havent introduced the two people who would become the co ceos of this company for twenty years yes！

well！

lets get to that so Jim moves everything back to long island setsedupaas this academic paradise is recruiting the smardest people in the world in 991， the next year the firm does 54POINT 3 percent growth returns and 39POINT 4 percent netreturns after fees so not jimsmogie of 80 percent。

but still pretty freaking great and we should say the years of moduce performancearebehind them from every single year forward they shoot the lights out from 1990 onward they never lose money and on a growth basis they never even do less than thirty percent its working its going of the whole rest of the story is about hold on keep the machine working and were on the train the historic run has begun whats just say yep so 1992 Grace returns。

er 47 percent 93 theyfifty four percent at the end of ninethree simonsdecides to close the fund and not allow new lps in so if youre existing lp， you can stay in， but theyre no longer open for new influence he has so much confidence in what theyre doing that he thinks theyre all gonna make more money withoutaccepting new capital by just keeping it to the existing investors 94 growth returns are 93 freaking percent medallia at this point is stacking up cache it is a meeting for fun its about two hundred fifty million dollars total at this point in time， which is small。

but were talking about nineteen 94 with a bunch outsiders in academics that have managed to amass a quarter billion dollars here people start to pay attention and the performance fees on this are 7 million dollars thirteen million dollars 52 million dollars the free cache flow flowing to partners here is certainly becoming real to yes！

but as they get into that call it on the order of magnitude of a billion dollar scale they start bumping into the moving markets problem and the slippage that we were talking about earlier yep and that sort of in the mid 九十 yep as theyre hitting this tuner fifty million half a billion dollar scale right the computer model spits out we should go by this huge amount of something at this price they go to do it they can only by ten twenty thirty percent of the amount they want at that price， and then suddenly the price is very different yeah up to this point the vast majority of what may dalian is doing is trading currencies and commodities not equies cuz you might be thinking okay， yeah， i hear you the ninese was a different error but half a billion dollar fun doesnt sound that big how are they moving markets with half a billion dollars？

its not the equity markets its becausetheyinthese thinner markets its not that commodities and futures are small markets theyre large， but theyre thin compared equities theres just not that much volume in you just cant trade that much without slip it becoming a huge issue emadalien is now hitting that limit so simonsdecides the only thing we can do here to expand， which im such a believer in what were doing we need to expand is we need to move into acquities acquities are the wholeground if we can make this workthere the depth in those markets will let us scale way， way way bigger than we are now and theres so much more data about equities pricing that we can feed into our models and the signal processing that we can do in the signals that we can find aregonna be even better right there are so many buyers and sellers everyday showinguptotrade so many different companies at such high velocity its almost this honeypot for reciencesystems this is sort of their moment this is what they were built for and its kind of funny that theyve just been in kidglovely on the whole time with these thinlytraded markets with minimal data yes and this brings us to peterbrown and Bob Mercer and in 19931 of the mathematicians， the Jim had recruited to rentec a guy name Nick Patterson gets especially passionate about going out and recruiting new talent along with Jim and this is i think what are the keys to rentec in the culture that peoplewanteothersmartpeopledacombthere 2NEXSITTING there like this is a joy i want to go find other best people in the world to hangoutwith and he had read in the newspaper that ibm was going through costcutting and was about to do layoffs and he also knew that the speech recognition group ibm had some absolutely fantastic mathematical talent and really what they were doing was again another vector in the earlyai machine learning research specifically。

ibms deep bleu chest project of the time had come out of this group and Peter brown there was the one that actually spearheaded the project yep and its interesting that you talk about speech recognition as the perfect fit for what they were doing and you might say why is that well the actual work that goes into speech recognition natural language processing is kind of the same signal processing that renasanses doing to analyze the market its not just kind of its exactly the same signal processing right speech recognition is a hidden mark of process where the computer thats listening to the sounds to try to turn it into language doesnt actually know English right obviously but what it does know is when i hear this set of frequencies in tonalities and sounds theres a limited set of likely things that could come after it and in gregsbookie greatly points out this perfect example， when i say apple， you might say pi， the probability that pi is going to be the next word following apple is significantly hired and so these people who spot their careers not only doing the math and the theoretical computer science behind speech recognition to help figure out and predict the next words that you have a narrow set of likely words to choose from so when youre listiting to those frequencies， you can say its probably gonna be one of these three rather than search the entire dictionary for anywhere that it could be it a narrow the processing power its not only the theoretical side， but its also people who have built those systems at ibm， like a real operational computer company yes！

at operational scale and this is whats so important and why the two of them become probably the most critical hires in rentexhistory individual including all the great academics the game before them because theyre good on the mathside， but they have this large systems experience and Jim and Nickno that if theyre going to move into equities， causethevolumeofdata， and becauseof have its more complex that market is they need more complex systems and the current talent rentag coming from academia has just never experienced that are built anything like it and the world that theyre entering is just exploding in complexity and dimensionality and when i say that heres？

what i mean the data that they are mining that theyre looking for is this interday take data between every stock trading so there is this sort of trying to map the relationship between onestock and everyotherstock not just at that moment in time but every time before and every time after it theyre also once they do identify patterns， which this is key the algorithms identify the patterns is not a human with a hunch saying i think when oil prices go up the airline prices are going to get hit its computer is doing machine learning to discover the patterns in the data then theres the second piece of well what trades do you actually put on to be profitable from the probabilities that you just discovered all these weights of relationships between all of these different companies younot just putting on one trade youre putting on ten thousands of simultaneous trades both to heads to be able to isolate some particular variable that youlooking for again not you， but a computer is looking for and you also need to do it in such specific bytesizes so that you dont move the market so youre looking for a super multivariate multidimensional problem both on the data ingestion side and on the how do i actually react to it side and all of this computation cant take a longtime because you must act you know not in milliseconds its not a high frequency trading thats fronrunning the market thats not actually what they do a lot of people think it is but weget to that later but they do need to act with reasonable quickness probably or in the order of minutes so these need to be really efficient computer systems to yep and the universe vecities is so much more multidimensional aninterrelated there are only so many currencies in the world and there are especially only so many currencies that are largenoftrading markets that you can operate and theres not information， but thousands and thousands of equities in the world that are deep enoughmarkets that you can operate in and to some degree theyre all correlated with one another and just keep adding layers of complexity here keep adding new things to multiplyby many of these are traded on multipleexchanges so you might also be looking for pricing disparities on the same equity on different markets at different points in time so theres just dimensions upon dimensions of things to analyze correlate enact upon so Patterson and simonsgo raid IBM theyxsteve jobs rating zerox park they bring！

Peter and Bob and one of their programming colleages David Magaman over for my bm interrentec and they get started on building theacodejs model but it turns out a there obviously very successful that but the impact that they have and what they build is even bigger because Bob and Peter realize that he actually， we should just have one model for everything here for currencies for commodities for equities every thing is correlated everything is a signal its not like the equitys market is wholly independent and separate from what happening in currencies or whatappining in commodities there are relationships everywhere we really want just one model this is legate， fantastical undertaking， especially in the earlytomid 九十 right？

but if you can nail it， it means that you can do interesting things like hey， we dont have a lot of data on this particular market but it looks a lot like something we do have data on so if its all part of the same model。

we can kind of just apply all the learnings from this other thing onto this brand new thing that were out looking at with little data for the first time and because were putting it all in one model and no one else in the world is we can discover patterns that no one else knows about it turns out that this was actually the second most important innovation the Bob and Peter bring to rentec the actual product in performanceof having one model the most important thing is that if you have only one model， one infrastructure everybodyinthefirm is working on that same model you can all collaborate all together， which is especially important when you have the smartest people in the entire world， all in one building before this there were separate models within rentac so insights and innovations of work that one team was doing on one model wouldnt get applied or translate over to work that was happening by another team not another model they did have the cultural element where was encouraged that you share your learnings but someone would have to take the time during their lunch break and go learn from you about those and then implemented in there version theres a lag and it may actually not get implement yep this is wholyunique and revolutionary no other at scale investment firm period and especially quant firm operates this way today with just one model there portfolio managers in teams a multistrategy people are culturally competitive with oneanotherbut even if theyre not the work that youre doing on this side of citadl is not impacting the work that youdoingon that side of cdid l right what Bob and Peter do is the unify everything aren text so allthewood is going behind one error yes！

and before we talk about the impact of that we want to thank our longtimefriend of the show vanta the leading trust management platform Vanta ofcourse automates your security reviews and compliance efforts so frameworkslikesoc 二 ISO2701 GDPR and hippocompliance on modering， which is quite topical if you are in the heavily regulated finance industry， i you need a lot of security in compliance vantatakescare of these otherwise incredibly time and resource training efforts for your organization and makes them fast and simple yeah！

vanta is the perfect example of the quote that we talk about all the time here on acquired Jeff Basius his idea that a company should only focus on what actually makes your beer tastbetter i ee spend your time in resources only on whats actually gonna move the needle for your product and your customers and outsourceeverythingelse that doesnt in rentexcase this would be the model every company needs compliance entrust with their ventures in customers， it plays a major role and enabling revenue becse customersome partners demand it。

but yet it adds 0 flavor to your actual product ventitakes here evolvit for you no more spreadsheets， no fragment tools， no manual reviews to cobble together your security and compliance requirements is one single software paint of glass just like one model that connects to all of your services via apis and eliminates countless hours of work for your organization there are now ai capabilities to make this even more powerful， and they even integrate with over 300 external tools plus， they let customersbuildprivate integrations with their internal systems and perhaps most importantly。

your security reviews are now realtime instead of static， so you can monitor and share with your customersome partners to give them added confidence。

so whether youre startup or a large enterprise and your company is ready to automate compliance and streamline security reviews like Vanta 7 customers around the globe idgobacktomaking your beer takebetter head on overtovantadot com slash acquiredand just tell him that Ben and David sent you and thanks to friendofthe show crstiena Vanta ceo all acquiredlisteners get a thousand dollars of free credit Vetadocom slash required so David the equity is machine！

yes and indeed a machine it is so Peter and Bob comin in 193 AT 194115 theyirbuildingthisruntech is getting into equities and yeah just imagine the computers that you were using during 994995 it is astonishing the level of computational。

complexity and coordination and results that they are pulling off again in real time analyzing these markets with the technology that was available during those years and heres whats amazing returns godown maybe slightly certainly certainly a bit from the blowout year that was。

but theyre still above thirty percent every single year most years above 40 percent this is unbelievable that theymaintaining this performance as theygoinginto this hugely more complex market and theyscaling assets under management so by the end of the nine 九十 medallion has almost two billion dollars in assets under management。

while maintaining roughly the same performanceby getting into accoties this is huge yep and David if you just kind of look at this and do the math OK so 94 there aum was 276 million and they grew 93 percent and then there aum the next year was 462 million and then they grew fifty two percent and there aum the next year was 637 million you cant quicklyget where im going here， which is oh theyre scaling aum not by bringing in new investors right its closetonew investors its alljust compounding this is the same capital that they had in nine 93 that has gone from a hundred and 22 million at the beginning of that year to 99 being 一 point 5 billion yes！

and then in the year two thousand they just totally blow the doors off a hundred and twenty eight percent growth returns netreturns after feeds of 98 point five percent this is Bannana they grow the fund from one point nine billion to threepoint 8 billion of assets undermanagement again purely by investing gains not fired getting any new investors the year the tech bubble burst yes！

while the whole rest of the market is downbig time medallion is up a hundred and twenty eight percent gross on the year and this becomes a theme high volatility is when medallion really shines and here you go on correlated they have their final stamp of approval right here of not only are we a moneyprinting machine we are a moneyprinting machine in all environments regardless of the state of the broad market and David as you said volatility actually makes their algorithms work even better because what are they doing theyre looking for scenarios where the markets gonna act irradically and they can take advantage of people making decisions that they shouldnt any time any investors are under pressure theres a little bit of edge thats gonna occur to a medalian thats saying oh， OK， youre fearselling right now well。

i can determine if you should be fearselling or not and if i determined that you should be dumping that asset on buying it from you so theres a really fun story around this that really illustrates genius in managing the firm and the people and how this year was when they really figured this out so the first couple days of the tech bubble bursting medalian actually takes a bunch of large losses and part of it might be that the model wasntuned right yet because nobody at rentec had seen this type of behavior in the market before， part of it might also be to that it didnperform well for those couple days its a really stressful time for everybody its everybodys in Jim office， James a cloudous moke and theydebating what to do and Jim makes the call to take some risk off hes worried about blowing up were not very far removed at this point from longterm capital management eh the model may be saying we should stay long here but lets not blow up the firm yup after this goes down Peter brown comes to Jim and offers to resign given the losses that they incurred over these couple days and Jim says what are you talking about？

of course， you should resign you are way more valuable to the firm now that youve live through this and you now know not to one hundred percent trust the model in all situations fascinating its such a good insight that illustrates Jim as a leader right there， it totally does theres a parallel story when Jim ultimately does retier in 209， Peter and Bob take over as Cocos where a year so before the quota quote quant quick had happened where similar to the tech bubble bursting there was all the sudden very large drawdowns about all quantitative firms in the market and rentec get hit and duringthat period Peter argued very strenuously that we should trust the model stay erisk on this is gonna be incredibly proftabletime for us and Jim pump the brakes and stepped in interving and took risk off and petergoes to Jim again around the ceo transitional， it says hey， Jim arent you worried that with me running the place now im going to be too aggressive and blow it up one of these days and Jim says no im not worried at all i know you were only so aggressive in that moment because i was there pushing back on you and when youre in the sea。

yougonna feel esagressivehes just such a master insight into human behavior it is so true though i didnt find this about myself that i will naturally take the position of the foil to the person across from me so if somebodys being pushy in some way， ill find myself taking a position where if i repausing reflect im like， i dont think i expected to take this position coming into this conversation but you know you naturally want to sort playtheotherside tobalance out the person sitting across from you yeah so back to the year two thousand in this。

incredible performance bend to what you were saying earlier about on correlated returns not only do they shoot the lateoutthat year theyre doing it when the market is down， we got to introduce this concept of a sharp ratio now！

which for all of you listeners that are in the finance world youknow this but for everybodyelse this is a really important concept and i think people grasp it intuitively weve mentioned this concept a couple times this episode where OK great its amazing to have a fund that twenty five axes or a year where you have a hundred percent investment return？

or i bought bitcoin yesterday in it doubledovernight does that make you one of the best investors in the world we all intuitively know it doesnt because maybe that was a fluke， maybe youre taking on an extreme amount of risk， and then the question is always adjusting for the risk that youre taking can you produce a superior return taking the risk into that account and so you basically can provide value to investors as a fund manager in two ways you can outperform the market or you can be entirely uncorrelated with the market and get market returns or what you can do as rentec is both you can be uncorrelated and massively outperform， which is effectively the wholly grail of money management yes， and so the sharp ratio is a measurement combining these two concepts exactly so its named after the economist William f sharp it was pioneered in 1966 it is effectively the measureofa funds performance relative to the risk free rate so if you performed at fifteen percent that year in the risk free rate was three percent， then you know your new berator is gonna be twelve percent， and it is compared against the volatility or the standard deviation is technically what it is but effectively how volatile have you been the last x years and typically its looked at as a threeyear sharp or a five year sharp or a tenyear sharp the sharp ratio represents the additional amount of return that an investor receives per unit of an increase in risk and so David， youre starting a throughout numbers low sharp ratios are bad， negative sharp ratios are worse， because that means your underperforming the risk free rate high sharp ratios are good， because it means that your producing lots of returns and your variant or your standard deviation or your sort risk is low so in nineteen 九十 they had a sharp of two point o， which was twice that of the SMP 50 benchmark awesome yeah， good nineteen 95 to sharp ratio of two point 5 really starting to hum pretty unbelievable good where do i sign up to invest at some point？

they added forin markets and achieve the sharp ratio of sixpoint three， which is doublethebest quant firms this is a firm that has almost no chance of losing money at least historically and massively outperforms the market on an on correlated basis and i believe if i have my research right in 204 they actually achieve the sharp ratio of seven point five establishing you do i get back to our sports inality here？

these arent Hola fame numbers these are like i dont know make Tom Brady look like a thirdstringer yes， exactly so on the back of 20 this rise the next year in 2001 they raised the carried interest on the fund to 36 percent up from either twenty or twenty five percent whatever， it was before now remember theyre already closethefund to new investors， so theyre still outside investors in the fund， but no new investors are coming in and then the next year in 2022 there is the carried A4 十四 percent ivengreatworkif you can get it but for context the sequoias the benchmarks out there they have obseamcarey of thirty percent 44 is unprecedented theres two interesting ways to look at this one theyre trying to jacket up so high that they just purged their existing investors out where theys saying were not going to kick any one out yeah！

but weve been closetonew business for a longtime now you should see yourself out at some point the other way to look at this， which i think is probably the right way to look at it is investors are arbitrosures they see a miss pricing they come into the market they fix that miss pricing so anytime that theres an opportunity to bring the way that a currency is trading on two different exchanges closer together investors are serving their purpose of coming in arbitrodging that difference taking a little bit of profit as a thankyou and then sort of fixing the market to make the market a true waying machine， not a voting machine， but making it so that all prices reflect the value of what something is actually worth and in some ways， thats what render sense is doing here to themselves or to their investors theyre coming in and saying look this is obscene we so clearly outperform the market youre still going to take this deal even if we take more of this because theres system here this product should not be priced at 2025 percent Carrie this product should be priced at a much higher carried interest and youstill get a love it you should pay twenty percent Carey for a firm that delivers you fifteen percent annual returns were delivering you fifty percent annual returns totally， so i have to imagine it didnt go over well with the existing investors？

but they just have so much leveraged that whats gonna happen OK once again im sorry audience i have to say hold on one more minute for another perspective that i have to offer on the carry element， but i wanna finish the storyfirst OK so two thousand theyraised 36 percent 2200 theyraised 44 percent and then in two thousand they actually say hey， we cant incentivize you out of the fund outsideinvestors we are gonna kick you out so starting in 203 everybodywhois an outsideinvester whois not part of the rentec family you know， current employee or a lomnine of the firm gets kicked out and not all a lomnight get to stay theys select a lomi that get grandfather then yes now why did we do this subway to talk about one reason in a minute， but one reason is super obvious the medalian fund is now at five billion dollars in assets undermanagement that theyre training even in the acquitdismarket， they are now hitting up against slippage yep and so if they want to maintain this crazy！

crazy performance they just cant get that much bigger this is the problem that werenbuffet talks about all the time and why he has to basically just increase his position in apple rather than going and buying the next great family owned business the things that move the needle for them are so big that thats really all they can do and when you are big youre going to move any market that you enter into yeah and the strategy that rentec is employing right now theyre just daming doesnt work at north of five billion dollars so in 203。

they start kicking all the outsideinvestors out of medallion but clearly， theyre still lot of institutional demand to invest with renaissance so what are they do well time to start another fund？

so they start the reciance institutional equities fund and theres a couple things to add a little bit of context to really why they decide to do this well， the first one is sometimes theres just more profitable strategies than they had the capital to take advantage of imitalian， but they werent sure it would be on a durable basis if they were sure that they could manage ten fifteen twenty five billion in medalian all the time then they would grow to that but if just sometimes theres these strategies that appear， or we dont want to commit to a much higher fun size， and then not always have those strategies available theotherthing is that a lot of the times those strategies arent really what medallion is set up to do they require longerhold times and so theres a little bit of downside to that because these new strategies， the predictivabilities are less because they have to predict further into the future to understand what the exit prices will be on these longer term holds but they still figure hey， even though its not quite our bread and butter with the short term stuff， we should be able to make somemoney doing it yeah！

theres a fun story around this that peterbrown tells of Jim came into his office one day and said Peter i get a thought exercise for you if you married， a Rockefeller would you advise the family that they should invest a large portion of their wealth in the SMP500， Peter says no of course。

not thats not a great risk adjusted return and these guys are very used to sharp ratios that are far better than the smb right and so Jim says yes， exactly now get to work on designing the product that they should invest in right and so thats basically what they come up with is can we create something thats likeen smp 5 hundred with a higher sharp ratio can we beat the market by a few percentage points or frankly even match the market each year with lower volatility than if they were buying an index fund and you can see who this would be very attractive to pensions large institutions firms that want to compounce at market or slightly above market rate but dont wanna risk these massive drawdowns or frankly just big volatility in general should they need to pull the capital earlier and the nice ingabout being investor in a hedgefund versus venturefund is you can do redemptions like if you look at the thirteenapps， the sec documents that the renaissance institutional equities fund files over time， it changes every quarter because theres new people putting money in theres people doing redemption so its a pretty good product or at least the theory behind it is a pretty good product of a lower risk similar return thing to the SMP500 handthe marketing is built in its not like theres any lack of demand of outside capital that wants to invest with rentec right its really funny theres only stories about how the marketing documents literally say this is not the medalian fund we dont promise returns like the medalian fund in fact were not charging for it like the medalian fund you know， David， you said that the feeds incarian medalian went up to what five and 44 well， on the institutional fund， the feeds are one in ten youre only taking one percent annual fee and ten percent of the performance clearly。

this is a very different product。

but people did not perceivethat people were very excited as a renaissance product its the same analysts there using all their fancy computers im sure weve gonna get this crazy out performance and at the end of the day it is a extremely different vehicle yeah！

that has not performance anywhere near how medallion has performed correct has it served its purpose yeah！

but is it medallion？

no， its not special in the way the medalian the special yes， a couple other funny things on the institutional fund so i spent a bunch of time scrolling through thirteenfs over the last decade from the medalian filings and theyre all from i think they have two institutional funds yep， theres institional equities and diversified alpha so the funniest thing is they file these thirteenefs and David， and i are very used to looking at the thirteenapps of friends of the show who runhedgefunds， who weve had on his guests or perhaps really just any investor where you want to see， like or what are they buy in selling this quarter and usually， you see 1525 maybe fifty different names on there well， the thirtedf for resides has 43 stocks in these tiny little chunks and theres a little bit of persistence quarter to quarter for example， weirdly novonordesk has been one of their biggest holdings biggest i say at like one to two percent thats their biggest position for several quarters in a row hey， theybeen listening to a query thats right thats one of the signals in the model you kind of get the sense from looking at these filings that these things were flying all over the place and this was just the moment in time where they decided to take a snapshot and put it on a piece of paper and even though this is the end of quarterfiling of what their ownership was if you would take in it a day or a week earlier， it could look completely different yes！

the way the somefolks we talk to described the difference between the institutional funds of medallion to us is that medallions average holdtime for their trades and positions is call it like a day maybe a day and a half whereas the average hold time for the institutional funds， positions is like a couple months so across 4030 stocksnaportfolio theres a lot of trading activity that happens on anygivenday， but its a lot slower in any givename than medallion would be yep， which make sense again i get back to the slipage concept if you have a bigger fund in your investing larger amounts， which the institutional funds are you cant be trading as frequently or all of your games are Gonna slip away！

yep and Frankly， it just looks a lot like the SMP500 when you look at as of November 23 A1， the twelve months of the year had happened they were up 8POINT 6PERCENT OK， thatsounds like an index typereturn you look at the first four months of twenty twenty right after the crazy debt from the pandemic， they were down ten point four percent less than the broader market， but they still were sort of a mirror of the broader market so i think the rif there institutional fund yes， it works as expected no， its not medalian and if it were standing on its own。

theres zero chance that we would be covering the organization behind it on acquired zero percent chance speaking of the fund that is the reason why we are covering this company on this show we setup during the tech bubble crash the volatility is when medalian reallyshines well， theres no more volatile periods than 2007 2YUP 27 medalian does 836 percent growth 28 medalian does 8052 percent growth 来 get out of here this is 208 whiletherest the financial world is melting down and so this really does illustrate where they make their money from whois on the other side of these trades？

its people acting emotionally they have effectively these really robust models that are highly unemotional that are making these super intricate， multisecurity bets， and they are putting on exactly the right set of trades to achieve the risk and exposure that the system wants them to have， and who is on the other side of those trades， its panic sellers， its dentists， its hedgefunds who dont trust their computer systems are like uh crap we gotta just take risk off， even though its a negative expected value move for us theyre basically trading against human nature and importantly in this business versus every other business that we cover here on acquiredor most other businesses this is truly zerosum its not like there here in an industry thats a growth industry and lots of competitors can take different approaches but the whole pie is growing so much that i dont care if no your fight over a fixed pie here im training against someone else i win they lose yes！

well。

theres one slate nuance to that but i dont know how much it holds water and the apologist nuance would be well warren buffer could be on the other side of the trade and medalian could make money on that trade with warren over its timehorizon of a day in half and warren could make money over his timehorizon of you know fifty years superfair so i think the argument against that though is that medallions sold after a day in a half to somebody else who bought at that lower price and so somewhere along the chain that loss is getting offloaded to somebody the direct counter party of Medalian and the quante industry rightlarge might not take the loss， but somebody is gonna take the loss along the way it is as you say a zero sum game yeah！

but i think the important thing is can you when your adversary both benefit and i think in this caseyou and your counterparty the person youre training against yes， you have two different objective outcomes like can i get a penny over on warn buffet by managing to take him on this one trade sure。

but his strategy is such that that is irrelevant so after the historic performance during the financial crisis as i olated to earlier gem retires at the end of two thousand 9 and Peter and Bob become Cocos coheads of the firm in twenty ten they take the portfolio size up to tenbillion dollars when they take over， it have been at five for the last few years of jims tenyear， they take it up to ten and reallywithno impact。

which i assume means that rentec was getting better and the models were getting better because otherwise they would have gone to ten before right they gained confidence that they had enough profitable trades they could make that they could raise the capacity without damping returns yes， and perhaps they could have done it earlier and they just didnt have the confidence that it would work at larger size。

but i bet theyre very good at knowing how large can our strategy workup to before it starts having to minishing returns yeah and importantly during periods of peak volatility like say twenty medalian continues to shoot the lights out so from at least the data that we were able to find on medalliance performance over the past few years twenty they were up A 49 percent growth and 76 percent that so the magic is still there and one way to look at it， which may not be the beyond all but i think is a good way to compare Jimsara at Medalian versus Peter and Bobsara during Jimse， tenyear medallions total aggregate IRR from 198 when the fund was formed to 29， he retired was 63POINT 5 percent growth， annual returns， and 40POINT 1 percent annual returns， which of course， did include many periods of lower carry 20 percent versus the forty four percent during the post gem era， the Peter and Barbara from 2010 to 2022 was when we were able to get the latest data， irrrs are 77 point 3 percent growth， and 40 point 3 percent net so better on both fronts even with matriaverage fees so yeah。

i think medallion is doinfine itamazing and we werenable to tell theres some sources that report that theyve grown from ten billion dollars in the last few years to be uncomfortable at a fifteen billion， dollar， fun size。

and if so that just means that they continue to find more profitable strategies within medallion to keep those same unbelievable returns at larger sizes yeah and at the end of the day this is all just insame so as far as we can tell benyoualluded to this a bit at the beginning of the episode and as far as anybodyelse can tell medallien has by far the best investing track record of any single investment vehicle in history so give me those netnumbers so during the entire lifetime so far of medallion from 1988 to 2022， thats thirty four years， the total netannualreturn number is 40 percent 40 over 34 years after feeds its 68 percent before fees which equates to total lifetime carrydollars for the whole firm of sixty billion dollars just in carry by our calculations astonishing that is a lot of money also。

David rosenthall good spreadsheet work on this you have not done a spreadsheet for an episode in a while， so i admire your work on this one yeah！

i still know how to use excel barely its gonna be a dying art now with copilid and ppts thats right？

OK？

so sixty billion in totalcarry so sixty billion in total carry is a lot of money and well speakingof a lot of money we do need to mention before we finish the story here that that rentec money has bought a lot of influence in society so Bob mercer that name may have sounded familiar to many of you along the way Bob was the primary funder of bright bar and cambergenelica and one of the major financial backers of both the 2016 Trump campaign and the Brexit campaign in grey Britton now less you think that rentec dollars are solely beingfunneled into one side of the political spectram Jim Simons is a major democratic donor as are many other folks。

a rentec yeah had reliable for and other folks are also huge donors approximately to the same tune as what Bob mercer is on the right yeah tenths of millions of dollars！

many tense of millions of dollars on all sides and through many campaign cycles here from renteemployees nlmnine this did become a flash point for the firm in the wake of the 2016 election mercer obviously became a controversial figure both externally an internally within the firm。

especially once people realized he was the throughline through bright bark cambrage analytica the trumpelection and brakeset yes！

ultimately Jim asked Bob to step down as Coceo in 2017， which he did？

but he did remain a scientist at the firm and a contributor to the models even though he wasnt leading the organization with Peter from a leadership standpoint any longer ultimately the thing that surprises me the most is how these people all still work together despite having about the most opposite political believes you could possibly have yeah understatement of the century and allbeing extremely influential and active in those political systems yes， Bob Mercer is no longer the ceo of friends technologies or the coceo he still works there hesteelassociated they all still speak highly of each other its unexpected yeah， i think unexpected is the best way to put it like everything with randocence it works a little bit different than the rest of the world yes！

OK speakingof lets transition to analysis and i have a fun little monolog i wanna go on if you will you bear with me Ben， i think this qualifies as the rentec playbook， but i really kind of think of it is the rentec tapestry and i was inspired by cosgo here because we were talking to folks in the research everybodysaid you know rentec it just has these puzzlepieces that fit together on the surface rentec does the same things that citideldshaw， 2 Sigma， Jane streetothers， etc they higher the smardest people in the world and they give them the best data in infrastructure in the world to work on and they say go to town and make profitable traits those are very expensive commodities， those two things the smartest people in the world and the best data in infrastructure but they are commodities like citidelcansay the exact same things just the same as like Walmarden， Amazon can say we to have large scale supplier relationships that we leverged to provide low prices to customers just like custom， but its underneath that where i think the magic lies there are three very interrelated things that make rentec unique hmm so number one they get the smartist people in the world to collaborate and not compete pretty much everyother financial firm out there employees and teams within the firm quaside compete with one another yeah！

i mean typically in kind of a friendly way， but yeah！

lets take it like in a venturefirm youve got your lead partner on a deal or a deal team theyre working that deal and maybe some of the other partners helpa little bit， but mostly theyve off prosecuting their own deals yeah， and i think thats the most collegial way that this happens in finance yeah， then yougot multistrategy headfinds out there were literally firms are being pitted against one another to be weighted in the ultimate trading model for the front 嗯， yep at rentec though because of the one model architecture， everyone works together on the same investment strategy and the same investment infrastructure that means everyonesees， everybodyelse is work， everybodywhoworks are rentec on the research team， on the infrastructure team， they have access to the whole model thats not true anywhere else yeah thats a good point the whole code base is completely visible， and that also means because its just one model， just one strategy when somebody else improves that models performance that directly impacts you as much as impacts them this is really different than any other headsfund out there so why is that different than if i roll some my compensation into a multistrategy fund that i work out dont love otherteamscreating highperformancealso sure but you dont love it as much as your team because either compensation or career wise you are much more dependent on your performance than you are otherpeoplesperformance oh！

yes， this is a big thing you intend to have a job after that job at most places most of the time so you care about credit and you care about smashing the penada and then going elsewhere or building reputation and then going elsewhere most the people at rentech are not going to have another job what did you find on LinkedIn at least the media in tenyear of employees is like sixteenyears yeah， i just got LinkedIn premium and you can see media in tenyear and its crazy theres only like three four hundred of plays at range and the media in tenyear at least as reported by LinkedIn is like fourteen years yes！

OK， this brings me to point number two， which he said this is unobcertainly small team there are less than 40 employees that work at rentec only half of which work in research and engineering and the other half are either back office or institutional sales for the open funds so lets call it i dont know a hundred and fifty two hundred people max who are like hands on the wheel here for medallion yep every other peer firm of rentag kido citideldshaw 2 Sigma， etc allthem you blemp Jane street you know jump the high frequency guys in here minimum two to five thousand people work at those places wow， i realize it was that big it is an order of magnitude more people who are working at the other farms， versus who are working at rentec？

and lets do you think that thats like a capital base thing no， the institutial funds of gotten big they peaked over a hundred billion， but theyre currently between the sixty and seventy billion that they manage on top of the tenor fifteen thats in the medalian fund yeah！

so au m is like the same yeah as these big funds， this has all sorts of benefits number one， theres like the armes atalia workshop benefit everyoneknows， eachotherby name you know your colleags kids you know your colleague families yeah！

they put right on their website there are 90PHDS in mathematics， physics， computer science and related fields the aboutpage has these ten kind of randombulletpoints and thats one of em yes！

then theres the related aspect of this the firm is in the middle of nowhere on long island you actually know your colleagues families in kids！

because youre not going out in getting drinks with someone from two Sigma new York city youre not comparing notes or measuring parts of your anatomy with someone else youre like hanging out at the swimming pool totally and sense renaissance doesnt recruit from finance jobs its kind of unlikely that you know someone else in finance you came out of a science related field you now work in east to talk it long island， which has its like ten thousand people or something or less that live there so youre in this little town youre not actually going into the city that often and if you are its again not to grab drinks with other finance people so even if you didnt have a manypage noncompete and a lifetime nda youre very unlikely to be in the social circles you just not getting exposed。

exactly and rentex hiring established scientist some phds theyre not hiring kids out a undergrad like Jane street or Bridgewater is mysenseis that the places like a college campus without any students have you seen the pictures online yeah if you look up redis technologies at Google and you go and look at the photos on campus its little courtyard and winding。

walking path and woodsale around it tendis courts yep so then theres the last piece of the small team element。

which is just the magnitude of the financial impact what i dont think is true， but lets say that there were another quant fund that made the same number of dollars of performancereturns that rentac does errentech yousplitingthat a couple hundredways at citidelyousplitting that 5000WAYS it just doesnt make sense to go anywhere else！

we are chatting with someone to prep for this episode and they told us you can never compete with them， but theyre pay you enough that you wont want to yes OK！

so this brings me to what i been categings im super excited about i think the thirdpuzzlepiece of what makes rentec so unique undefenssible is medallions structure itself that it is a lpgp fund with five percent management fee and 44 percent carry so its not like a propshop or like proprietary but just one pod a money its literally a gplp even though the gps and the lps are the same people so heres my thinking on this now i dont know how it is actually structured but there was something about this whole crazy 44 percent Carey that just wasnt sitting with me right throughout the research because i kept asking myself why right？

theyre already kicked out most of the lpsiffnot all so why are they raising the carry？

right？

its all themselves its all insiders why do they chargesthemselves？

44 percent carry on five percent management fees i think Jim talks about this theyll oh i pay the feeds just like everybodyelse yes！

its always a funny argument its i who are you paying the fees two right？

so i was like what is happening here so OK heres my hypothesis this is not about having crazy performance fees this is not about having the highest Carey in the industry this is a value transfer mechanism within the firm from the tenyear base to the current people who are working on medallion in any givenyear so hereso i think it works when people come into rentec， they obviously have way less wealth than the people who have been there for a long time both from the direct returns that yougetting every year from working there and just your investment percentage of the medallion fund which by the way i think they took was either the state of New York or the federal government to court to be able to have the 401K plan at rentec be the medalion fund no way yeah！

so like if you work there your 400 1K is the medalian fund thats crazy so really doesnt take more than a few years before youre set for life totally！

im a depending on your definition of set for life， i think it happens very very quickly yeah！

OK！

so given that though how do you avoid the incentive for a group of talented younger folks to split off and go start their own medallion fund right？

especially， when they all have access to the whole code， base the whole thing is mentor function like a university math department， where everyoneconstantlyknowledge sharing， because were going to create better peer reviewed research when we all share all the knowledge， all the time， you would think thats a super risky thing to give everyone all the keys right。

so i think its the forty four percent Carey structure that does it because basically what yousaying is every year five percent management fee so five percent off the top and them 44 percent of performance so lets say medallion is on the order of call it doubling every year lets round that up and just Adam and say 49 percent of the economic returns in any given year go to the current team and fifty one percent of the economic returns go to the tenyear base i was like what is the equiven here i think its kind of like a academic tenyear kind of thing the longer tenyear you are the firm the more your balance shifts to the lpside of things and the younger you are the firm the more your balances on the gpside of things but at the end of the day， its 5149 so theres this very natural valuetransfer mechanism to keep the people that are working in any givenyear superincentivised and as you stay there longer you are paying your younger colleages to work for you right funny i think its a good insights that it structured like a university department tenyear well i just kept asking myself why why why do they have this？

if theres no outsidelps and this was the best thing i could come up with and i actually think its kind of genius yeah！

its more elegant than its all one persons money and theyre deciding to bonus out the current team every year and just give me enough money to make sure you retain them right what is how？

i think most propshops work like Jane st is mostly a propshop i think it is mostly the principles money but thats a static situation its not like you know if that were true， then Jim would just own this thing forever and i dont think thats true here rentec yeah！

so essentially David， the real magic is theyve got one fund its evergreen and when you start at the firm， youre only getting sort of paid the Carrie amount but over time you become a meaningful investor in the firm in you sort of shift to that fifty one percent your kind of the lp and then over time you eventually graduate out entirely in your only nlp and so youright thats a valuetransfer mechanism from the old guard to the new guard in a way that is clear well， understood！

probably tax advanased versus just doing im the owner and igiveneveryone arbitary bonuses yeah and at the end of the day i think these three pieces to me are the core of the sort of tapistry of rentec one model that everybody collaborates on together a super small team where we all know each other and the financial impact that any of us make to that one model is great to all of us and three thislpgp model with very high Carey performancefees that creates the right set of incentives both for new talent on the way in an old Talon on the way out yep i think thats right OK！

theres a few other parts of the story that we skipped along the way because there was no real good place to put them in， but these are objectively fascinating historical events that are totally worth knowing about， and the first one is called basketoptions so the year is two thousand two rentec has thirteenyears of knowing that they basically have a machine that princemoney so what should you do when you have a machine that prints money leverage， now there are all sorts of restrictions around firms like this and how much leverage they can take on you cant just go and say im gonna borrow you know a hundred dollars for every dollar of equity capital that i have in here so you need to sort of get clever to borrow a whole bunch of money from banks or from any lender to basically juicer returns if again you have a money printing machine thats reliable most people dont most people probably shouldnt take leverage because theyjust as likely to blow the whole thing up as they are to be successful so basket options i am going to read directly from the man who solves the market because Greg sargarmen just put it perfectly basketoptions are financial instruments whose values are peg to the performance of a specific basketof stocks， while most options are based on an individual stock or financial instrument basketoptions are linked to a group of shares if these underlying stocksrise， the value of the option goes up its like owning the shares without actually doing so indeed the banks who of course， loaned the money who put the money in the basket option were legal owners of the shares in the basket but for all intention purposes they were made dalians property so this is very clever medallion saying what the way weve got a lever up is theres a basket we have an option to purchase that basket most of the capital in that basket is actually， the banks capital， but the bank has hired us to trade the options in the basket and then after a year when long term capital gains stacks kicks in， we have the option to buy that baskets so anyway， all day medalians computer sent automated instructions to the banks sometimes in order a minute or even a second， the options gave medallion the ability to borrow significantly more than it otherwise will be allowed to competitors generally had about seven dollars of financial instruments for every dollar of cache bycontrast medallions option strategy aladditude of twelve dollars in fifty censeworth of financial instruments for every dollar of cache making it easier to transrivals assuming they could keep finding profitable trades when Medalians spiden， especially juicy opportunity， it could boost leverage holding close to twenty dollars of asset for every dollar of cache in 2002， Medalian managed over five billion， but a controlled over sixty billion dollars of investment positions David， this exposes something we havent shared the on the episode， which is its not just that they could find five billion dollars worth of prof 头 trades its that they wanted deliver the crap at a fivebillion dollars and fines sixty billion dollars of profitable trades to make and basketoctions gave them a legal way to have an incredible amount of leverage in a way that they felt safe about yeah！

the unlevered returns if you were running。

this strategy would be much lower yup so a big piece this playbook that we didnt talk about as leverage， but every quant fun does leverage and so renaissance was just more clever than everyone else yeah！

its an important point though nine out of every ten companies that we cover on required leverages zero part of the story right and for us coming from the world we come from in tech inventor capital leverages like a dirty word like iscared of it right i mean you could imagine lets say it wasnt they were right fifty point to five percent of the time but they were right fifty point oh！

one percent of the time they would need to do 8 ton of trades in order to generate enough profits so thats why you need you know sixty billion dollars of cache to actually execute the strategy to produce the returns that they were looking for yep on five billion dollars of equity anyway， theres a second chapter to this， which is its all well and good that this is how they get a bunch of leverage thats one piece of it theotherpieces they thought this was a remarkably tax efficient vehicle the way that they were filing their taxes said oh， sure theystuff in that basket， but the thing that we actually own is an option to buy that basket or sell that basket and we only exercise that once every thirtemonths or so i dont know the exact number but something like that over a year and so there for were buying something were holding it for a year were selling it oh， of course， theres millions and millions of trades going on inside the basket but we dont own that baskettheybanksdo were just advising them you can kind of see the logic here overtime eventually， in twenty twenty one， the irs said no， you made all those trades that was not a completely separate entity and so you guys oled 68 billion dollars in taxes that you didnt pay youve Gonna need to pay that with interest with penalties and by the way， Jim Simons were Gonna want you and the other few partners to really bear the load of that and they did so for simons alone， he paid 六七 million dollars to the irs in backtexas for this basket option strategy that turned out not to be a longterm capital again yeah alright， so numbers on the business today， and then we will dive into power and playbook so today wetalked about medallion， ten or fifteen billion depending on who you ask historically it was more like five or ten billion the institutional fund is about sixty to 70 billion and its one point was a hundred billion the total Carey generated David， you said a sixty billion dollars forms estimates the Jim Simones alone is worth about thirty billion dollars today， which kind of pencils with a bunch of other stats over the years that he owned about half of renaissance the returns obviously the medallion fund generated approximately sixsix percent annualized from nineteen eighty eight to twenty twenty after those fees was about thirty 9 percent wild so an interesting thing to understand i ran a hypothetical scenario of how much money do you think renaissance the business makes a year in revenue and so the institutional funds lets call it ten percent on sixty billion of assets so thats 6 hundred million from fees in 6 hundred million from performance so one point two billion a year in revenue to the firm from the institutional side of the business cause i always ask myself the question does that actually matter they did all this work to stand up the institutional side who cares well lets say medalian does there average 66 percent growth on fifteen billion that is 750 million in feeds and 4 point 3 billion on performance so a total of five billion from a dalian and one point two billion from the institutional side of the business now of course， the employees are the investors invited align so you could just argue its actually silly to cut them up but i dont its a seven eight nine billion dollar revenue business right cuz thats not including the lp return on medalia a hundred percent its not which again is we spent a log timetalking about its all the same thing yes， but its kind of interesting just to compare against other companies to have this in the back your head this is a seven eight billion dollar a year revenue business now i think there are a lot of expenses on the ofa structure side totally that was another thing i want to talk about the fact that they do lets say medallion alone so they have seven 50 million dollars in feeds i dont think they come close to seven hundred fifty million dollars a year and expenses but they are running who knows what infrastructure， some kind of supercomputing cluster？

what is it cost to run？

one Amazon data center i mean its i think much smaller scale i dont know i mean youtalking about a lot of data here yeah， it says right on their website they have fifty thousand computer cores with a hundred and fifty gigabits per second of global connectivity and a research database that growth by more than 40 terabytes a day thats a lot of data right is that 750 million a year i dont know but its not zero i dont think so theyre certainly not losing money on the fees but there are actual hard costs to this business right， i wandertwo if the fee element of medallion basically pays the base salary is for the current team that feels like its right if youre someone who has done a data center buildout before or has anyway to sort of back into what the costs of medalians operating expenses are on the compute and data and network side we would love to hear from you hello， idequire data fam OK power power this is a fun one yeah， so listeners who are new to the show this is Hamilton helmers framework from the book seven powers what is it that enables a business to achieve persistent differential returns to be more profitable than their closescompetitor on a sustainable basis and the seven r counter positioning scale economies switching costs network economies process， power branding and cornered resource and David， my question to you to open this section is specifically about rentexlifelong non competence that feels like a big reason that they maintain their competitive vanage and im curious if you agree with that what would you put that under well？

i think its lifelong nds and noncompetees as long as the state of New York legally allows for hmm but at its not left time Ive heard various figures sixyears five years something like that yep i mean at the end of the day noncompetors are more alike what is one side willing to get accord over right， but the reality is people dont leave people dont leave period and people especially dont leave and start their own firms yeah， i was thinking about this in the middle of the night and i think theres three layers to the effective noncompee that happens with rentec theres the legal layer， the base layer that youtalking about just like the agreements you sign then theres the economic layer of what we spent a longtimetalking about in tapestry of it would just be done to leave your better off staying there as part of that team with a smaller number of people thing going to Sigma with a lot more people yep i think thats the next level of and then i think the highest level is just probably the social layer youthere with the smartest people in the world in a collegial atmosphere， where youre all working hard on something that has direct impact on you right its your community， its your community totally， youre not New York city， youre not in the hampdance， youre not in Silicon valley you are selecting into that， and i think if thats what you want！

they like what better place in the world all right so classify it what power does that fall under well。

i mean i think the people specifically you would put into cornered resource， but im not actually sure that fully captures of here i was thinking more process power cause i think it is the combination of the people and the model and the incentive structures yeah！

i think thats right i also had my biggest one being process power you actually can develop intricate knowledge of how a system works， and then build processes around that that are harder replicate elsewhere， i think these systems have been laired over time also， where anyone whocoming to the firm in the last fiveyears doesnt know how it works start to finish get an ask any one to verify that but its over ten million lines of code and the level of complexity of the system of whenits putting on trade is what trade is putting on why the speed at which they need to happen i actually dont think anyoneholds the whole model in their head so i think theres process power just because its thirty plus years of complexity thats been built up yeah！

i totally agree with that particularly in the modelitself i mean， maybe could argue the model is a cornerdresource。

i am going to argue that the data oh， okay， is a cornerdresource i dont know for sure about the model maybe i mean， i guess thats the same thing is saying the knowledge of what the ten million lines of code does thats the model but i actually think the fact that they have clean data and theyve been creating systems like they have the best phds in the world thinking about data cleaning thats not a sexy job and yet they have probably the treasure trove of historical market data in the best format that nobodyelse has thats an actual corded resource i have a couple new answers on this。

so one i think it probably is true that they have better data than any other firm thanks to sandorstrouse and the work that he started doing in the eighties before anybody else was really doing this yep so they have that anotherfirms dont that said certainly all the other quant firms arethrowinguntold resources it all this to right they want to do this and money is not the issue so enchatting with a few folks about this episode idmore than one person say to me theres two ways that rentec could work and one version of how it works is they discovered something twenty plus years ago that is a timeless secret and theyve been trading on that for twenty plus years right， theres one particular relationship between types of equities that theyve just been exploiting and no one can figure out accept them right and that may entirely be possible isnc crazy right now rentec will say they will all say that is a hundred percent not the way that it works its not that it all if that were the way that it works。

they would of course still say that because they dont want anybody not right dont look at the relationship between swayebean futures and gm just dont do it right。

so lets accept that there is a possibility that that might be true more likely though is that what rentec does say is true， which is no there is no holy grail what we do here is we completely reinvent the whole system continuously on a two year cycle two years is kind of what i heard that the model is fully restructured every two years is not like on a date every two years its being restructured every day but collectively its about a twoyearcycle so that would be an argument then that the people actually could a five people left they probably could go recreated and all they would need is the data its also an argument that there is no actual cornode resource here in terms of either the model itself and may be not the data either i bet the data is though lets say youve been working there for ten years you dont know how the nineteen fifty five soibean futures data ended up in the database even if youused to using that data and youre able to go recreate the model elsewhere you dont know how it originally found its way in i think its fair i think there might also be some argument to the data that that older data is helpful， but its valued decaseover time as markets evolv definitely the brotherpoint i wanna make year this is the everyother major quant farm out there is also spending hundreds of millions if not billions on this stuff to and people are looking for all data everywhere。

the bridgewaters of the world are paying gobs of money for things that you would never dream could possibly have an effect on the stock market and yet theyre paying millions or tens or hundreds millions dollars for it yeah！

so i think we can rule out scale economesforsure if anything there antiskill economeshere oh！

yes！

theres totally theres disaconomes a scale your strategy stop working when you get too much jum yep you get slippage i dont think theres any network economies here i mean they literally dont talk to anybody although well！

they do have some very well established relationships with electronic brokerages and different players and the tradeexecution chain i think they have very good trade execution and very fast market data therability to pull data out of the market is very high quality do you think its actually better than their competitors？

though i dont know thats probably not the secret SaaS yeah！

i dont think so its the tablestics switching cost i dont think apply branding may be applies in there ability to raise money for the institutional funds。

but thats not a big part of the business the feedstream of the institutional fund may entirely belong to branding yes， but i think theres a lot of public equity firms and a lot of hedgefunds that have a lot of branding power that have on average market returns with decent sharp ratios and are able to raise because theyve built a brand yeah venture firms the same way totally so for me this kind of leaves counter positioning i actually think theres some counter positioning here and i think were gonna have two episodes in a row of counter positioning at scale tell me about your counter positioning who is being counter positioned in what way there direct competitors in the market theother quant firms and when i say direct competitors。

i obviously dont mean for lp dollars， i mean for like the same type of trading activity like their counterparties in traits i dont think they are counter parties i think they are all seeking to exploit similar types of trades i think the counter parties are the people theyre the Denis that theytakingadvantage of well， but quantfunds are often counter parties to each other thats true but i think yes adversaries in finding the similar types of trades and i think the counter positioning for rentec or for medallion specifically is one i do think the single model approach verses， the multimodelmultistrategy approach the most others have does have benefits like i was talking about in the tapistries， but i think also and maybe bigger is every incentive at rentec is fully aligned to optimize fund size for performance in a way that is not true just about everywhere else hmm！

i think they have the most incentive of anybody to truly maximize performance were able to achieve right even though the dollars would continue to rise because they get feed dollars from more money in the door， they are incentivized in a unique way that makes it so theyre not willing to trade the dampener on performance to get those dollars yes！

particularly because its all the same people on the dp and lp side oh！

we keep going around that action i loosely by the counter positioning thing i just think the answer is discussingly simple and kind of annoying here， which is theyre just better than everyone else at this particular type of math and machine learning and theyre doing it for longer， so theyre just gonna keep beating you oh！

thats another argument i heard from people in that rentag basically is a match department in a way that none of these other firms are it could be culture yeah！

could be culture i mean honest i got it could just be that the culture is set up in a way that continues to attract the right people and incentivize them in a sort of fake ultruistic way like this is just a fun place to do my work and yeah the outcome is getting really rich！

but i wouldngo work at citidle yep i think that could be so maybe that feeds into process power yep OK， for me， it is some combination of process power in counter positisting and i dont think its any theother powers for me。

it is process power and cornered resource yep OK， i bite that and a thing thats not captured in seven powers is tactical like execution the whole point of seven powers is strategy， is different than tactics and i think legitimately rentec may just have persistently been able to out execute their competitors theres part of it， thats just like theysmarter than you yeah well。

if you buy the the whole thing gets reinvented continuously every two years then yes！

and theres remnant knowledge like if you started building a machine learning system in nineteen， whatever， it was sixty four， youre gonna be really good machine learning today and the people that youve been spending time with for the last fifteen years learning all of your historical knowledge and working in your systems are also going to be better a machine learning than probably the other people who are out the world learning it from people that just got inspired to start learning machine learning based on the new hodness so learnings compound is my answer great OK playbook so in addition to the three part David rosenthal tapistry that you have woven i have nothing more than there are a handful of things that i think are worth hitting so the first one is signal processing is signal processing is signal processing they inotcaringabouttheunderlying assets they literally dont trade on fundametals except in the institutional fund when they trade on fundametals a little bit they use price， turningsratios and stuff like that in the institutional fund， which is kind of funny because thats a completely different skill， said， but if you just look at Italian， its all just abstract numbers you dont actually have to care about what underlies those numbers you just have to look for whether its linear regression or any the fancy or stuff that they do just relationships between data and once you reduce it to that it is so brilliant that they can just recruit from any field its not relevant how someone has done sophisticated signal processing in the past whether its being an astronaumer and trying to denoys a quota quote photo of a star， superfar！

away or whether theyve try to do like natural language processing its just signal theres this really funny line that Jim and Peter and others will say when asked about why they only higher academics enough from be the Wall Street whatnot and theylike well we found its easier to teach smart people the investing business than teach investing people have to be smart right thats cernicus they dont teach anybodyanything about investing theyre just doing signal processing i bet at least half the people at rentec on the research side could not read a balance sheet its so funny its a whole bunch of people who are in the investment business？

none of which are investors yes， another one that you can decide if this fits are not i was thinking a lot about complex adaptive systems its always been on my mind since we have the nzs capital guides on a few years ago and read their work in the cenfe institutes work on this in a complex adaptive system its really difficult to actually understand how one thing affects everything else because the idea is the relationships are so combatorally， complex that you cant determanistically nail down this one thing is the causeof that other thing its the butterfly flapping its wings but there are relationships between entities that you cant understand or see on the surface do MER wayback we did our second Nvidia episode i opened with the idea that when i was a kid i always used to look at fire and think like if you actually knew the composition of the Adams in the wood and you actually knew the way the wind was blowing and you actually knew that like all the could you actually model the fire and when i was a kid and you always just assume no， but actually， the answer is yes， this is a known thing of what will happen when you like this log on fire for the next three hours and can you see exactly， the flames i think rentec is basically they havent figured that out for the market they cant predict the future but if they have a fifty point O1 percent chance of being correct then they can sort of take a complex adaptive system and say we dont care that as a complex adaptive system are models understandenough about the relationships between all these entities that were just going to run the sibilation a bunch of times and were going to be profitable enough from all the little pennies that were collecting on all the little coin flips where we have a slate edge over over over again that theyre sort of the closest in the world to be unable to actually predict how the complex adaptive system of the market will work now i dont think they can back out to it no person could explain it but i think there computers can yes and i think when ive heard people from rentec talk about this。

they will all say the model does not actually understand the market but it can predict and we can be so confident in its predictions about what the market will do that we rely on it whether it understandor doesnunderstand， doesnt actually matter like it cant tell you why right？

but thats OK but it doesknow it has a slide edge and so itll trade on it even though it cant explain why yes or speaking of models Ivan trying to nail down an answer to this question do you think rentec was the birthplace of machine learning？

this is such a tough answer to tell we actually emailed some friends who are very prominent ai researchers， ai historians and sort of ask this question and the answer we get back is unsurprising they said we dont know！

cause they dont share anything right its like the principle certainly came out of the same math community that spawned machine learning， but is what rentec has figured out of the last couple decades in Googles Gemini model and in chatchi no， its not because they dont contribute any research back it may be the case that actually rentec has beat everyone else to the punch and they have a strong ai or something that is actually much more sophisticated than all the ai we have out the world today and theyve just chosen that theyre rather keep it locked up than captive and make a bunch of money i mean it could just be the case that renaissance is just taking in as much unstructure data as it possibly can and they sort of were just a decator to ahead of everyone else and realizing that you can have unstructured unlabeled data and if you have enough of it， you can make it in the case of an lm say things that soundright or soundtrue or in the case these trades be writemore than 50 percent of the time right make tradesthat soundright right they figured out this big unsupervised learning thing before anybody else all the way up until last year when ai momen happened who if never the case we should have very different answer to powers to illustrate this point its quite interesting Peter Browns academic advisor was Jeffrey Hinton yes！

oh im so glad we brought this up yeah it was the exact same Stu and the exact same cohorde of people and social group at academic groups that rentac came out of that ai came out of the other person just for people who are like why are you saying that to make it superexplicit？

theotherperson whose academic adviser was Jeffrey Hinton is illegous geever， who is the cofounder of open ai？

i mean many years later。

but still yeah i mean its like we are talking about with markofmodels in hidden markup models daisthe foundation of rentec daisone of the foundations of ai and generative ai today yep OK！

another big one is this concept that you should trade on a secret that others are not trading on so on the face of it seems obvious of course， i should come up with some strategy to trade on the other people arent trading on but i set a couple of words there which is of course， i should come upwith and therein lies the fallacy i think most investment firms try to get their ideas out of people， and then do an incredibly rigorous amount of data analysis to figure out if they should put those trades on or not i could be wrong， but i do not think modern rentec does that i think all of their investmen ideas come from data and come from signal processing and so therefore， you are going to put trades on that make no into sense and so when youre putting trades on that are profitable and make no into it of sense， you arent going to have competers if you find a relationship between two things that a human could never come up with or dream of those relationships and i were saying to it n things you know， ten things， twenty things， a hundred things and in various different weights at various different timescales that is a killer recipe to exploit a secret that no one else know is and be able to beat other people in the market such a good point and many if not most of the other quant firms are not doing that some of them may be。

but i think most of them are the models suggesting things and there is a person or persons who are the master portfolio allocaters that pull the trigger or dont pull the trigger yes！

and to be super illustrative， because i think the your natural tendency is like oh， i can understand why these two things should be related the relationship may not be what you figure for example， there could be two things that always moved together testless， stock and wheat futures and you might try to because humans are storytellers can cocksomestoryiner head of why those move together and if you believe it， then you might decide there some data where they should stop moving together well， it could very well be that someotherbigheadgefund just owns both of those things and when they rebalance， it causes those assets to move together but you would never think of that you would think these things have a direct relationship with each other， not just that theres liquitity in the market from both of them at the same time because someoneelse owns both of them， so i think what rentac sort of advantages we have no idea why anything is actually connected？

but it doesnmatter matter yep totally and that was surprising for me in the research like i sort of assumed that was the whole quant industry and it was very surprising to me to discover that i believe no it is pretty much only rentec and maybe a couple other people OK！

my next one is brought to you by a friend of the show brat Harrison， who has worked in the quant trading industry for a long time and shared an idea that he has with us， which is that theres basically， this two by two matrix you have on the one access fast and slow in terms of trade execution and on the y axis you have smart versus obvious yeah！

the way he phrasted to us was smart versus dumb。

but dumb doesnt mean dumb right its the obvious traits and the highlevel point is all quant funds are not highfrequency trading firms and vicefersa and this is something that i didnt know not coming from this industry and now makes total sense to me i think i thought they were the same thing but fast and obvious is your classic i frequency trader there front routing trades there are locating in a data center thats really near the you know this is flashboys or theyve got a microwave line between New Jersey and Chicago and theyre trying to arb the difference between two markets you need to have the fastdisconnectivity in the world to pull this off yep this is Jane street yes， theres fast and smart which you kind of dont need to be both you dont need the fastest connectivity in the world and the most clever trades to put on so people kind of tend to pick a lane that there either a high frequency trader or theyre trying to make these smartest you know， most nonobvious trades possible and that of course leads us to medallion， which is in these slow and smart quadrant all the machine learning system discovered the relationships in the data so theres a huge amount of compute the nonobvious trades exactly that goes into findingthan on obvious trades， but then theyre actually made reasonably slowly they still have to happen within seconds or minutes， but the advantage isnt that theyre highfrequency the way that all the flashboys stuff is my senses rentec is not a highfrequency trading shop they are not frontrunning things seedo they are not flashboys compared to you and me they still operate incredibly fast but its more about the smartness and less about the fastness Craig has a quotnew book they hold thousands of long and short positions at any giventime and theyre holding period rangesfrom one to two days or one to two weeks theymakebetweenahundred 53 万 tradesa day but much of that activity until buying or selling in small chunks to avoid impacting market prices rather than profting by stepping in front of other investors this is another thing that we heard rentec is world class at disguising their trades yeah， they can make it so that they dont move the market and you dont know who is acting or when and this is because in the early days， they werent good at this and people basically intercepted the trades that they were making and were front running them and they had to adapt and develop these clever systems to make it so you dont know whos buying and you dont know and what quantities and you dont know if theyre gonna keep buying， yep， my last one before we get a devalue creation value capture is that this is a terrifying business to be in the amount of controlls and risk bottles that you need and kill switches are just so important what if the software has a bug is it possible to make a ton of unprofatibletrades in a matter of minutes and lose it all you know that wasnpossible in the old world were your calling your broker that totally is possible here and it happened yeah and while its never happened to rentec there was a company called nightcapital in 二十一二 that lost 460 million in a single day there was a bug in their process to deploy the new code and basically what happened it was a simple flag air a misinterpretation of setting a bit from zero to one that causethis infinitloop to run whereonce a certain trade happened it was supposed to flip the bit it flipped a different bit the systems were not looking at the same location in memory for the same bit and so i basically thought it was never flipped this infinite loop ran four million trade executions in 45 分钟 and there wasnt the appropriate kill switches built in and they basically watched it all to just drain out and there was nothing they could do yeah so like the whole portfolio gone right yes， uh well， i dont is the whole portfolio but it was enough that they lost a huge amount of the lp capital and then they were republicated firm overnight there equity traded down 75 percent and then someone stepped in and bought them when they probably got margin called by all their counter parties， so whoever is in charge of the financial controlls and safety systems at rentac thats a huge job for someone in this industry totally alright to kick off value creation valuecapture i have a provocative statement， which is David relecence technologies is actually not in the investment business they are in the gambling business an in particular theyre the house why would tell i thought where you thought youre going with this？

i was like yes or totally agree theyre not the investment business they have no idea how do invest the model does ill say this theyre not investors and theyre not the investment business there is investment going on all around them in the markets that they trade in， but the fact that there in those markets theyre not there as investors there， there setting up shop as caesers palace letting everyone come in and do business with them well， they have a slide edge and theyll lose sometimes， but most of the time theyre gonna come out slightly ahead and i think lets say they do have a fifty point O1 percent chance of being right theyre just there to collect their vig on everyone who is willing to trade with them over all these years and its scale it really worked Jim Simones managed to drain 30 billion dollars into his own pocket out of everybody that he ever traded with now i think we are going with this is perhaps similarly along the lines to caesars palace or casino they are not in the investment business。

but they are providing a service sure is this where you going with this well。

i mean the investment business it sort of depends how you define investor if you want to be like all whoidie about it， which im you know in this illustrate of example， im kind of being one and saying an investor is someone who providescapital in a risk capital to a business for that business to create value in some way in the future， are you lendmoney to some intrinsic underlying asset so that it can be productive with that capital and producerreturn for you as an investor and of course， lots of things are called investing that are not that is it investment if i put money to work and then i get more money back later， and i dont actually care how the money got made and its actually zero sum im just vacuing it out of right？

right yeah！

the money is not being invested in anything to produce correct but its literally the same business model as a casino you have a slide edge and you let a whole bunch of patterns command and lose moneyto you in your slidedge what where i was going with the service provider？

i think casinos are service providers they are providing entertainment to their customers everybody know is that the games are stacked in the casinos favor similarly i think you could make an argument and i think this is probably quite accurate that rentec and all other quant firms like them are providing a service to the market in that they are allowing trades the people want to make to happen faster and at much lower spreads absolutely that is the underable yes！

quant funds create value in the world thing， which i think is very easy to say quant funds provide no value because its like its zero some theyre not actually providing the capital the businesses to do something with theycurly looking to do an arbitrage or any of the strategies we talk about this episode but youre totally right that there is a value to market liquiity creating more depth to a market makes it so that if we go back to the error that render sense was started theres no chance that retail is able to function like it does today with zero transaction feeds and people able to invest in all these different companies near real time and any single one of us can go by a security in just about any market adjust about any time of day pretty much instantaneously and get a very very very granular price on it yep none of which used to be true no the fact that there is a whole bunch of quant funds hedgefunds out there that are ready to be willing counter parties to anyone who wants to trade that is a service youright theyre also not all medalian they actually dont all have an edge even though they might preport to lots of em are gonna lose money to you right lots of unlose muddy you two listeners could beat the market not investment device please dont try right on average medallion will not lose muddy to you but you know there are playofotherhedgefunds out there and highfrequency shops and counterparties for you where you could take them its just not just assignents uh theres this great great venue at the end of great book when was it was during one of the lake selloffs in the MID 20 teens in the market where Jim calls the head of his family office is real long retired from rentec at this point calls the head of his family office and says what should we do with all the cell off in the market its like your Jim Simongs right your Jim sims what should we do？

what should we do？

yeah！

all humans are fallable totally a couple of other are squintable the value creation exists its easy to knock that all these smart people are going into finance and you wish they were doing something more productive for the world at the end of the day humans are going to do what they are incentive to do and so absent a larger global concern that is incredibly motivating to people i mean you look at world where two peoples level of patriotism and wanting to go save the world from evil was a huge unbelievable motivating factor to move mountains when that is absent or when people feel that there are some existential thing that is absent theyre gonna go do whats best for them and their family and if theyre an empire builder go build empires and if theyre fierce capitalize go make a budget money and so the system is set up the way that it is so like you can be mad about that given that OK， people are gonna go engage in quantitative finance as a lucrative profession fortunately， theres a bunch of valuable stuff that comes out of that， and i think that is often missed is that these really lucrative professions and businesses can often produce rnd that becomes valuable elsewhere， for example， which did this big Nvidia series what do you think melinox was used for before large language models？

oh， yes！

this is such a really mindblowing point here in value creation， value capture go for take it away well。

theres not much to it other than a huge amount of infiniband was used by highfrequency trading firms and i dont know for sure but i kind of think melanox built their business on quant finance yes， thats one of many examples but now you know that has limits but i think it goes over looked that theres a lot of technology innovation here yep！

these are all great points they all came up in the research i totally agree with all of them it is in my opinion falseto say that quantitative finance does not create value for the world it definallydoes in my opinion but does it create anywhere near as much as it captures thatsaid theyre really really good of valuecapture yes！

this is not Wikipedia here this is about as far away on the specterm as you can get theres a great always sunny in Philadelphia where Frank Danny devido sort of goes back to his whatever business he found it in the eighties and hes like dressing and his pen stripes and stuff again and hes taken back over he brings Charlie with him and Charlie you know its like so frank what is the business uh what we do here？

what is the business make and Danny divide a looks and we goes what you mean we make money hes no no like what are you build he goes we build wealth i think thats a pretty good memfor can i was going on here？

yeah total very very good of value capture to yes OK！

bare bowl so this was a section that we had for a long time that we did not put in the last episode and boy did we hear about it so listeners thank you so much for expressing your concern bearer vs ball is unkilled and it is back resurrected like a phoenix resurrected however， this is about the laymist episode to resurrected on whatstheballcaseforrentec pass performanceisan indicator of future success right like theyre gonna keep attracting all the smarts people on the world theyve gonna have the ability to keep theyincredibly unique culture theyre not gonna get tempted to let the business of institutional funds become the dominant business you know keep on keeper on is basically the ballcase maybe uh that theyre actually still ahead the ballcase for the gpnlp stakeholders in medallion。

which is i dont know five hundred people in the world and none of the rest of us can get any exposure to it yeah！

the barecase is things are changing and i think things are changing basically on any access is the barecase for them so things are changing where competitors are catching up maybe maybe the fact that the tech industry has figgered out these large language models maybe that trickles into making it easier to compete with rentec its a blury line， but it is plazable like maybe rentec actually was here a decade before everyone else and now everyone else has arrived to the party theres things that are changing maybe about their culture like Jim Sims has been gone for a long time Bob mercer is no longer a Coceo Peter brown is a Coceo and they just announce that theyre making the guy who was in charge of the institutional funds David lippy he is becoming a co ceo as well so maybe theres a Barry case around that that someone from the institutional side of the house is becoming the current coseeo and maybe eventually， ceo， if you believe the medalianias， the special thing and the institutional funds are sort of a blemish on the business， you know there， the airmes， apple watch， strap and Davis parlance maybe thats a bearcase uh maybe theres a bear case that there talent is becoming kind of the same as everyone else is talent when you look on LinkedIn， i recognize a lot of the companies that people work at who are more junior at rantech and in the past。

i think it would have been all people just out of university research shops so i think if its true that theyre starting to see the same talent flow as everyone else that would be concerning these things are all sort of narratives you can concoct and really know waitinoff theyre true or not right theres no wayforus to know anythis cause theres no way to know anythis right its all the secret yup OK are new ending section the splinterer in our minds the takeaway the one thing you cant stop thinking about what is the one thing for each of us personally from doing this work over the past month on rentec that sticks with us for me perhaps this is obvious from my little diet tribe on the tapistry i just think this is such a powerful example of the power of incentives and getting them right and setting them upright and culture to i dont want a short change that i think the culture of managing an academic environment in a fashion like a lab but without letting it spin into the forevalityof a lab that Jim Simon setup right in other words earlygoogle yeah， this is like earlygoogle exactly， there historically has not from our research and as best as we can tell currently is not anything going on at rentec that is frivolous they are all very focused which again to me， then speakback to the power of incentives when youre there with less than 4 hundred people and on the research engineering side less than 200 people and those colleages who you work with are the soul pervayers supervisors in beneficiaries of all of this that youre doing like that is so powerful yup i cant think of anywhere else like that in the world i mean maybe some better funds or other investment firms but not on a day to day fullylick with returns like this theres nothing like it no pure gasoline right now the veins yeah！

which is not to say i would necessarily want to work there i think i would totally not yeah but it is truly unique yep the one thing i cant stop thinking about is the idea of the complex adaptive system that always talking about earlier i think from what everything we intell from the outside renaissance actually has built a large scale computer system that discovers relationships between different entities in the world stocks， commodities， bond prices， and whether it can explain them or not it is correct most of the time and it might be a small most， but all you need is most and then you can operate a casino business that is my takeaway is that they are the house and they have an edge and that edge is predicatedon a graph of all the relationships between these entities that we think are just noise and they know the signal it does make you wonderto what you were talking about with the tech industry catching up quoon quote in recent years！

how hard is it to build this now giventhe technology opensourceotherwise thats available for sale out there thats the best case i dont know yeah and then whats gonna happen by nature given that its a complex adaptive system if you can now buy in build this well。

the returns will get arbitraged down yup alright should we have some fun carvouts？

whats have some fun sweet Ri listeners i have three people have been expressing that theyre loving the carvout section so i decided to load em up a little bit more right whats indulge wespingofa whole new podcast called carvouts 44 percent Carey lets go so i have one announcement， onetvshow， and one otherfun thing for listeners so firsttheannouncement David and i are going to be mcying modern treasurytransfer again this year and so if payments are your thing， you should come join us is awesome last year itbe may fifteentth 20 二 4 in servitisgo and weput a link in the shownotes to register， we would love to see you there can wait my second one is a tv show and it is actually acquiredrelated it is called the new look on apple tv plus ah！

yes！

but Christian is such a new look exactly so for anyone who listen the LVME h episode remember， we were talking about the groundbreaking thing that Christian Dior did was his collection the new look that was a postworld were to explosion onto the scene celebration of life yes go on are the days of the military stic box c clothing and now were in with these seductive and dare i say somesuse materials war rationing is over exactly yes， provocative dresses the apple TV show is this incredible drama of kind of flash backs to the war time experiences herroring war time experiences of Christian of Blanc aga of cocochannel and everything they went through and how all their paths crossed oh cocos it yes， oh wow how do they treat that it will be very interesting if a lot of people watched this show to see if that affects product cells of channel im also very curious for people are watching feel free to put a thing in the slack and carvouts do you think shes a sympathetic figure？

do you think shes a villainous figure？

im curious how you think of her portrail versus reality？

so what is the whole crazy thing with channelwhere？

the company ends up getting bought by channel the perfume division， which is the two Jewish Brothers in New York the worthimers indeed ah god！

we get a doation l episode at some point but the new look on apple TV plus i promise you whether or not fashion luxury is your thing its a beautiful adinhering story ah as you and listeners know im not a tv guy but this is so upmy Allie the whole thing it takes place in war time Paris uh alright i gotta watch it you gotta watch it OK， my third one is a fun thing for listener so after are Nike episode the president of call on which if you listen the episode you now know is its own company spun out from Nike years ago the presenter of cohan reached out and it turns out he like all of you is also an acquiredlistener and so we were chatting and he brought up the idea that theybe happy to create a specific call on deal for acquirelisteners and i told them frankly if its good enough。

then all shared on air to be clear this is not a sponsorship no！

no just like hes a fan and reached out to us hand dive owned a bunch of coal Han products over the years and really like them so for 35 percent off anything you can go to call on dot com slash acquiredor use the code acquired 35 at checkout and thank you to Dave for providing this to us this is only live i think for a couple weeks so if youlistening this episode soon after it drops go check it out i think they intentionally want to cut it off at some point so doesnt get shared around all the couponsites but fun thing for acquiredlistings super goes he likes quiredi wanted to share the lovebacks love it i love it all right David your carvouts my carvout is related to the new look he very different way but both video consumption and fashion and luxury and style it is the class of Palm Beach Instagram and TikTok account this is so good David you and i get a Palm Beach for two days and you get hooked on this is amazing so better and i went to Palm Beach for a couple days for speaking event recently！

which was amazing inever been upon beachbefore who it is nice so great we didnt knowingly spot any rentec people there but we may have we did knowingly spot some berkenbags though yes， the style impum beach we had just recorded the urmas episode and oh， man i was so pleased to be there and then i got home and Jenny my wife was like do you not know the class upon beach TikTok account and David like im a thousand i have no idea what youre about Jenny yeah right？

right？

i live under a rock im a dad and she showed to me this is a woman who lives in Pompeach and she goes around she post on Instagram on TikTok and she just interviews people on the street about what theyre what brands theywearing their style it is magnificent my favorite is also we can find it unlinked in the shownotes theres a video of one woman whob being interviewed who has a mini Kelly insideherberkin uh access！

truly access！

and thats what i was hooked i was just like this is the greatest thing i have ever watched！

uh im obsessed all right if i used to TikTok， i would subscribe no you can get it on Instagram to oh！

alright good i actually subscribe the acquiredaccount on Instagram to class of pompeach i dont know people were following its not many but were following class of pompeach look at David opening up our Instagram account！

youre so useful uh no right listeners well， a huge huge thank you to jp Morgan paymentsservice now and Venta you can click the link in the shownotes to learn more David， i know youve got some thankusefrom focus you talk with and a few of them we did together yes！

for sources for this episode who were so generous with their time and thoughts first huge thank you degree socket author of the men who solve the market the cononicalbook out there about rentec and Jim simonsyeah Greg was super generous spending time， talking to us， emailing with us， making sure were getting things right he also he and the book is the econotical source of medalians investment returns and i know he worked so hard to get that table together that is now all over the internet as it should be。

it is crazy everywhere you hear that sixty six percent number quoted and that is from gregsanalysis yes， truly a service to us and to corporate historians and finish historians everywhere that he did that researchingout this returns and theres a few other primary sources theres really not much so we can actually list all of them here theres a congressional testimony of Peter brown about the basket options thing theres Peter brown doing an interview at gs exchanges， which again many of the questions were straight out of gregsbook and the stories told yeah！

is a funny moment where Peters like where are you getting these questions？

how do you know all this stuff you know like come on there on the book clearly yeah！

theres a great book called the quant， which is a little bit earlier i think its twenty eleven， so its not as updated as the man who solve the market theres only a sort of a couple chapters about rentac， but some good stuff in there and then theres a good blueberg peace from 2016 that will link to that i think between that and the quant it was sort of the first time there was really anything at all that was published about rentec， so all those will be in the shownotes otherpeople the thankdavid otherpeople the thankhoward Morgan who we spoke to？

which was so fun to get a bunch of the first round history from him and that of course， the people founding of rentac， comparing with jimman investing in each others funds and all that so fun Bret Harrison who you mentionban Brett is now building architect， which i love this， this is so needed in the world the interactive brokers for the twenty first century well， anybody who uses interactive brokers news exactly the opportunity there so thank you， Brett and then Matthew Grenade， who i spoke with matt is the cofounder of Domino data lab， which is a great enterprise ai ops platform back by Sequoia， many others it allows modeldriven businessystem products to accelerate research， increase collaboration rapidly deliver new machine learning models all of the sorts of things that we were talking about here with rentec matt before starting domino data came out of the quant world he was a point seventy， two and Bridgewater， which isnreally quant sort of a its own thing， but hes a longtime of senior employee about those farms and he gave us great great perspective on the landscape of everybody out there and where tech fit in awesome well。

if you like this episode， you should check out our berksure hathway episodes from a few years ago for a very different style to investing， you can sign up for new episode emails at acquiredatafm slash email will be including little tidbits that we learn after releasing each episode including listener corrections， even listen to acq to search and subscribe in any podcast player and listen for our most recent episode with the well really creator or person who lead the team that created leer gluetide， which went on to become some glue tide， which of course is osampack we govy set up yeah all modern glp ones lasa beer nudson from novonordesk was awesome to have her on the show and after you finish the episode come talk about it with other smart members of the acquiredcommunity， acquireddatafm slash slack if you want some merch， weve got some acquireddatafm slash store and with atlistners Wes next time well？

see you next time who got the truth。