The Medallion Fund appears to be nothing more than a high-frequency trader/market maker entity similar to VIRT (a very good mid cap in my AI/non-AI system now tho), being used to convert revenue from the Renaissance Fund into distributions of shares of the fund that can be held in a tax-exempt account for tax-sheltering purposes like Thiel. This reduces the pre-tax wages the company needs to pay its employees and also reduces marketing costs, both of which help Jim Simons' wealth.
Medallion funds have a long term average return of 60%+ and increase in periods of rising volatility, which is very strange because most positive alpha strategies have negative coskewness instead of a high positive coskewness aka convexity. Trend following strategy has convexity but can't do so well especially in 2010s. However, the Medallion fund did really good in 2010s. Buying options or shorting bias can make you have convexity as well but they can hardly earn money in the bull market of 2010s
Why? I just came to a conclusion when I checked VIRT's financial statements. Eureka! These weird phenomena are just similar to the characteristics of trading incomes of (HFT) market makers. VIRT's long-term trading income ROI is also ~60%+ and increases during periods of rising volatility. The leverage of the Medallion fund is 10+. Such a weirdly high leverage is rare in hedge funds but common in market makers like VIRT partly because they really hedge their positions unlike what hedge funds do. Also, the securities traded by hedge funds aren't diversified enough.
It is also confirmed by the braggings about the Medallion fund like:
As described by Zuckerman, Medallion’s strategy involved constantly opening and covering thousands of short-term positions, both long and short. According to Robert Mercer, one of Medallion’s key investment managers, Medallion was right on only about 50.75% of its trades. Nonetheless, he stated that taken over millions of trades that percentage allowed the firm to make billions.
This is also a characteristic of proprietary HFT traders, not hedge funds in general. The latter don't do such a lot of tradings in such short periods with such small edges per trade. And it introduces the "Chinese wall" issue. That is, many people reasonably suspect that the Medallion Fund is acting at the expense of Renaissance Technologies' clients - hell, they don't even keep the two at least superficially separate like Citdael does. But the 60%+ ROI on net trading revenue would suggest that even if they did, they are no more competitive than the average listed proprietary trader.
It still seems great, right? However, I have to mention that doesn't make high frequency market making a successful business model. In contrast, listed high-frequency market makers have negative long-term average returns as a industry worldwide even if you don't consider inflation and the positive equity premium during the period at all. This is due to their high costs and risks, which result in them not really making money.
In August 2012, a technological/managerial breakdown subsequently dubbed the "Knightmare" caused Knight to lose $460m in the course of one trading day, nearly putting the firm out of business. In December 2012, it agreed to be acquired by Getco LLC. The merger was approved by the respective stockholders and unitholders of both companies on June 25, 2013.
The IPO price of KCG is $14.5 (obviously the opening price is higher for the mania at that time but should be also adjusted by the 2 for 1 split in 1999) in July 1998 and is acquired at $3.5 in 2013. Flow Traders Ltd. Is another capital-destroying story as it has been down more than 10% since 2015 even if we consider dividend in such a bull market. VIRT has also underperformed the broader market over the same period, but given its relatively low beta and the fact that it's not a large-cap stock, that's a win in this industry.
Unlisted HFT proprietary traders such as Two Sigma, Susquehanna, Hudson River Trading, Tower Research Capital, DRW, Jump Trading, Optiver, IMC, Tradebot, Akuna Capital, Quantlab Financial, GTS, XR Trading, XTX Markets, Jane Street Capital, and Citdael tend to spend more money on recruiting staff than VIRT does as a publicly traded company that focuses on cost efficiency and compete in illiquid and higher risk business opportunities at lower prices than the already inefficient proprietary trading arms of inefficient banks and the even more inefficient listed high frequency traders. As a result, they even lost more money than the public-listed HFT players as a whole.
Interestingly, the WSB meme stonk moon YOLO apes who claim to be against these "evil hedgies" firms happen to be favourites of these firms add to the profits of these companies as they are the best liquidity takers because their retar...uninformed and reckless trading behaviour and the huge volatility they provoke. That's why Citdael and Jane Street are also the largest shareholders in the GME apart from the index providers.
Therefore, and given its smaller size in this area (so they lack cost-effectiveness), it is unlikely that this entity was established to make money. Connsidering that its fund shares are said to be "bought" mainly by employees as their "privileges", it is more likely that this is a (maybe somewhat illegal and obviously malicious) tax avoidance scheme designed to pay out large sums of money to employees' tax-free accounts. This would reduce the amount of salary that would need to be paid to employees and reduce promotional costs. In the current hedge fund world, which is a highly competitive industry despite the size is huge, it's a clever means of allowing him to maintain what is still a very large, albeit overstated, fortune.
Obviously, many of the smart people in the hedge fund world figured this out a long time ago. But as with Nvidia's secret, when the lies work in your favour, why rush to dismantle them? When retar..uninformed clients rush to donate their dumb money to your hedge funds because they believe the Medallion fund's Get-rich-quick lies, just as when NVIDIA apes donate their self-proclaimed-smart-but-still-dumb-as-hell money to your microcap strategies based on believing the lies of the AI revolution Get-ASI-quick lies, of course the really smart ones would take it with a very big heartful smile.
