Professor Cornell comes off as the epitome of ivory tower cluelessness. How is a so-called investments expert seemingly unfamiliar with the Medallion fund? To think that a regression is going to give him insight into their strategy.
RenTech soaks up arbitrage (the $20 bill laying around) and is able to compound this aggressively using leverage. Using a multi-strategy approach to arbitrage, the firm has room to 1) invest across a variety of different opportunities and 2) find new ones. What a lot of people (especially day traders) don't understand is that there are a variety of situations where arbitrage exists. For example, a merger announcement shoots the stock price up to "very near" the cash offer price. The difference is an arbitrage opportunity that, compounded, pays much more than the risk-free rate (you might get 3-4% annually buy making trades to eek out the final difference between the stock price post-announcement and the offer price). Occasionally, the spread between the target and acquirer widens (typically due to liquidity issues, or maybe a macro event), which allows arbitragers to scale into this position. This is just one example, btw, there are numerous forms of arbitrage that appear and evaporate.
Most of these arbitrages are aren’t really arbitrages. Risk arbitrage is a pennies and steamroller strategy. my guess is that Renaissance doesn’t have secret strategies but is really good at allocating to their strategies: adding to the right ones and shutting down the wrong ones. I also suspect that they made ALOT more money in the past and the 60percent average return will drop as the later years are lower. they also do wacky tax things which help their returns.
I used risk arb as an example. Obviously, the easiest way to make money, if you have the right infrastructure, is quote stuffing and order filling. RenTech is more like Virtu/Citadel/etc. than an actual hedge fund in the classical sense (Soros, Bridgewater, Ackman, Icahn, etc.).
I don’t buy that the individual contributors are substantially smarter than everyone else. I do buy that they have a culture that brings out the best in those people: like Goldman vs it’s rivals.