A Hedge Fund That Returned 80% in 2008

Unless you’ve been living on the dark side of the moon, you’ll know that most equity markets around the world absolutely tanked in 2008. Actively managed mutual funds and index funds alike suffered horrible declines. However, that doesn’t mean that everyone lost money.

About 18 months ago, I wrote about a man named James Simons. I had written about him because his compensation in 2006 was $1.7 Billion – derived from his management and performance fees for managing the Renaissance Technologies Medallion Fund, a hedge fund. That year, the fund returned 79% while managing $6 Billion.

Well fast forward and the Medallion Fund returned 73.70% in 2007 and did even better in 2008 – it returned 80%. Simons’ compensation was up to $2.8 Billion for 2008.

I’ll stop you right now: the fund is closed to new investors. Read the original post here.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 12 comments
  • Henry

    Any idea how he did perform so well? Did he use credit default swaps?

  • Andres

    Preet, what strategy do they use?

  • Brian

    Apparently the the company uses complex computer-based mathematical models. Quite impressive none the less.

    http://www.traderslog.com/jimsimons.htm

  • Preet

    Of the 200 people involved in running the fund (including research), over 80 of them have Ph.D’s – mostly in math. The Medallion Fund basically looks at arbitrage across multiple markets and instruments (stocks, options, futures, etc.), high-frequency trading and using mathematical models to determine what price movements are not random and exploiting them. That’s my understanding anyways. It’s very secretive.

  • Jordan

    I think this is a pretty good test to see what kind of an investor you are. It’s dangling a huge carrot on a stick in front of your face. If you read this and your first response is “Damn I need to be making 80%/year, how can I invest?” I think you should be cautious with yourself, 2 years of great performance is awesome, and we all wish we had been there. But the past is the past, and trying to get in on the latest and greatest investment is risky. That one investment was just 1 out of 50,000 possible choices, your odds of getting it right are slim. I bet you’ve got better odds picking the fund that lost 80% each year.

    Personally when I read this I think it’s more akin to winning the lotto. I wouldn’t go buy lotto tickets because I saw someone else picked the winner last night.

    Slow and steady win the race for the average personal investor I think.

  • Preet

    @Jordan – I agree with your conclusion, however note he has managed a compounded return of over 35% since 1989. I’m not against active management, and I think that if someone could understand why exactly this fund has had such a spectacular return then they may want to consider learning (if they were allowed to invest), because they should understand the risks and if they want to invest so be it. Of course, with 80 Ph.D’s behind the strategy, chances are not many people would have the ability to understand it – so therefore your original conclusion stands – they would be solely performance chasing. It is quite possible that whatever they are exploiting adapts to their strategies going forward (and thus nullifying their advantage). Who knows. I wouldn’t be surprised if he kept pumping out incredible numbers, and I wouldn’t be surprised if he didn’t.

  • Jordan

    Even with 80 Ph.D’s it can’t all be roses, according to a NYPost article last year one of their other funds went from $28b the previous year to $15b. At least when your investment is nearly cut in half the managers don’t get their 44% bonus :P

    According to Wikipedia the Medallion fund doesn’t even invest in common stock, it’s in commodities futures, currency swaps and bonds. I’ll make a wild guess that their ~70% gross returns must use a huge amount of leverage. If the computer algorithm gets it wrong or high volume trading is further vilified for taking advantage of other investors things could get nasty.

  • Preet

    @Jordan – I’m not disagreeing with you, but in the interests of information, the other fund you are talking about (I think) is the REIC fund, which is an institutional fund designed to have a capacity of $100 billion – in order to do that they had to change the duration of the trades and some other parameters. So it’s a different fund strategy – although, I believe it still outperformed the S&P500 by 4 to 6% or something (although still negative absolute performance).

  • Ink-stained gorilla

    My general rule of thumb is if you can’t understand how it derives its returns – no matter how brilliant – it’s probably not the right investment for the majority of investors. It’s certainly not for me.

  • Preet

    @Ink Stained Gorilla – you can put me in that camp too.

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