The Best Thing Going Today

A wise man once said: to be the Man, you gotta beat the Man.

So true.

A few weeks ago, we learned how a simple automated strategy matches up against a Market Wizard.

But as great as the Market Wizards are (and they are great), those books were written a while ago. Who's the best right now?

The answer? These guys.

While it's not easy (or possible) to find published results of every trader out there, it's generally acceptedthat Renaissance Technologies' Medallion Fund is "the best money making machine in the world".

The fund is super secret, traded by genius scientists, and not open to the public. Ninety of its 300 employees are Ph.D.s, and it's made $55 billion in profits, more than Ray Dalio and George Soros (in a shorter period of time).

According to Andrew Lo, a finance professor at MIT's Sloan School of Management, "[Renaissance] is the pinnacle of quant investing. No one else is even close."

More specifically, here's what their last eight years look like:

  • 2009 +47.0%
  • 2010 +33.9%
  • 2011 +36.6%
  • 2012 +28.8%
  • 2013 +46.9%
  • 2014 +39.2%
  • 2015 +35.6%
  • 2016 (through June 30) +21.0%

With no compounding, that's an average return of 36.1% per year. No doubt about it: They're the best going today.

The problem is we'll never know how they're doing it. Medallion is only available to its employees, and the methods, as I said, are top secret. Renaissance does have other funds open to the public, but these don't do nearly as well.

I guess we'll just have to accept the fact we'll never be as smart as them and simply live vicariously through their outrageous numbers and expensive yachts.

It's the usual refrain: The rich get richer and average get average-er.

Or do we?

For comparison, let's take two robots we've already talked about (you can find those here and here), and compare those simple robots to the Medallion juggernaut.

First we'll combine those two robots into the same portfolio. I like trading just one robot at a time, but two should be no trouble at all.

Then we turn up the trade size to a pretty aggressive level. This level may not be suitable for you or anyone you know, but I have gotten emails from people who can handle this level of risk, so I don't think it's preposterous.

What kind of aggressive are we talking about? Using hypothetical past data, in the past 161 months the worst losing month at this trade size was -$2,492.09. On the hypothetical $20,000 I was testing it on, that is a month-end max drawdown of 12.5%. That's a lot to lose in one month, and the daily drawdown you'd see in your account would be higher than that.

But let's say you are one of those people who can stand that kind of risk. What kind of returns would that bring?

Before that, though, please keep in mind that Medallion uses proprietary systems created by some of the best scientists in the country, and their fund uses layer upon layer of non-correlated strategies to maximize their returns. While we don't know exactly what they do, it's safe to say we wouldn't understand it even if we did.

That being said, here are the returns for the past eight years using two simple robots (hypothetical $20,000 account/no compounding):

  • 2009 $28,192 or 140.9%
  • 2010 $20,448 or 102.2%
  • 2011 $13,058 or 65.2%
  • 2012 $9,902 or 49.5%
  • 2013 $23.405 or 117.0%
  • 2014 $9,780 or 48.9%
  • 2015 $7,906 or 39.5%
  • 2016 (through June) $13,073 or 65.3%

To keep apples to apples, that's an average return of 78.5% while Medallion averaged 36.1%.

That's correct. Two simple robots returned more than double of the best fund in the world over the past eight years.

But, as I said, that's a lot of risk to take on. Who could possibly suffer a 12% losing month and keep trading?

So what if we cut the risk in half? If we did that, the worst losing month would only be about 6%.

With that level of risk, the average return drops to 39.2%, just slightly ahead of Medallion--but still ahead.

So what's the point?

The point is, great returns are not just for the uber intelligent yacht-buyers of the world. If you find a simple system with good fundamentals and ample research (and be strong enough to handle the losing), you can trade as well as the best traders in the world.

You could be the best thing going today.