Inside One Of The Most Secretive And Successful Hedge Funds In The World

One of the most profitable and closely-guarded secrets on Wall Street is hedge fund Renaissance Technologies’ Medallion Fund. The Medallion Fund has averaged at least a 27.3 percent annual gain every single year since 2000.

Renaissance Technologies is staffed by about 300 employees, mostly mathematicians and scientists, 90 of which have Ph.Ds. Peter Brown, who co-heads the fund, came to Renaissance in the 1990s along with a team from International Business Machines Corp. (NYSE: IBM) who had been working on coding grammar using statistics and probabilities.

Unfortunately, the fund is only open to Renaissance employees, none of who will discuss its top-secret system. However, Bloomberg recently reported on the inner workings of the mysterious fund. Here are five things you need to know.

5 Things To Know

1. The code responsible for billions of dollars in profits is millions of lines in length. It includes dozens of different strategies all melded into one trading system. Renaissance has different teams devoted to researching different parts of the system.
2. The system is dynamic. The Medallion Fund has been able to outperform for decades because its trading system is constantly being scrutinized and modified.
3. The fund outperforms despite extremely high fees. After several years of success, the fund raised its fees to 5 percent of assets and 44 percent of profits way back in 1993.
4. The weather was once a Medallion Fund signal. At a conference in 2013, Brown used the weather as an example of a market signal that wasn’t particularly profitable. Researchers at Renaissance found a correlation between sunny days and rising stock markets, but it held true only slightly more than 50 percent of the time.
5. Renaissance studies and incorporates how its own trades move the markets. Observing patterns and signals in the market is one thing, but buying and selling billions of dollars of stock will itself have an impact on the market. This issue was reportedly one of the more complicated elements of the system to crack.