Jim Simons’ Medallion Fund is the best hedge fund that we have come across. The fund’s returns are so spectacular that Jim Simons became one of the world's richest people. Medallion Fund employs high frequency trading and exploits inefficiencies in the stock market. One strategy it uses takes advantage of the inefficiencies in the execution of large transactions. One of its algorithms determines whether a very large order is executed and front-runs it. As a result, Medallion experiences high transaction costs and high expenses; that’s why it charges a 5% fixed fee. On top of that it charges a performance fee, initially 20% but after 2000 it was increased to 36% and then to 44%.
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Currently the fund’s investors are current and past employees and their families, so the fund’s 44% performance fee is a little irrelevant. Simons himself owns between 25-50% of Renaissance Technologies (RenTec), and he is also the largest investor in the Medallion Fund. So when Medallion reports a 50% return in a given year, the return is really close to 100% for most of the fund’s investors. Nevertheless, we’ll use its “net returns” to analyze Medallion’s alpha.
We obtained Medallion’s annual returns from several sources; when they weren’t available we estimated them using its cumulative returns. The main source is Rachel and William Ziemba’s Scenarios for Risk Management and Global Investment Strategies. Medallion’s annual returns since March 1988 are shown in the table above.
We used monthly net returns from January 1993 to April 2005 to calculate Medallion’s alpha. Our results indicate that Medallion’s returns weren’t correlated with the market, small caps, value stocks, or momentum stocks. Jim Simons’ Medallion Fund had a monthly alpha of 2.49% and an annual alpha of 34%. We have never seen a hedge fund achieve such a high alpha, so the Medallion Fund is the best hedge fund we have seen so far. Jim Simons’ alpha is even better than was Warren Buffett’s when he was much younger. If Simons had started investing 20 years earlier than he did, he would have been the richest man on the planet.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.