Why admire RenTech?
Memo to John Ioannidis: you’re popular with some extremely rich and important people! Sebastian Mallaby reports on RenTech:
Simons’s faculty of quants does not think like the rest of the financial industry. It does not hire people from the rest of the financial industry, either, and has little in common with academic finance. For a while Simons’s scientists picked through finance journals, looking for ideas that could be traded profitably. But they soon concluded that none of the ideas worked. When I visited Simons’s Long Island campus, a star statistician had stuck an article to his office door. “Why Most Published Research Findings are False,” the title proclaimed, summing up the faculty’s disdain for the crowd’s wisdom.
The Ioannidis paper is worth reading, and not only because it’s presented, for free, in a beautiful HTML (rather than PDF) format. (If it’s all a bit wonky, here’s Alex Tabarrok’s attempt to translate it into English.) Among his headings:
- It can be proven that most claimed research findings are false
- The greater the flexibility in designs, definitions, outcomes, and analytical modes in a scientific field, the less likely the research findings are to be true
- The greater the financial and other interests and prejudices in a scientific field, the less likely the research findings are to be true
- The hotter a scientific field (with more scientific teams involved), the less likely the research findings are to be true
- Claimed Research Findings May Often Be Simply Accurate Measures of the Prevailing Bias
All of these things, of course, apply in spades when it comes to finance. What’s not at all obvious is why anybody at RenTech thinks that they’re exempt from Ioannidis’s findings — especially given that RenTech’s very own Bob Mercer told Mallaby that “the signals that we have been trading without interruption for fifteen years make no sense.”
Mallaby is convinced that this band of science-hating scientists constitute the best possible group of risk managers, and that it’s unconscionable to interfere with what they do in any way:
Hedge funds have nurtured a paranoid and contrarian culture that makes them good custodians of risk—not perfect, but certainly superior…
If lawmakers understood the virtues of hedge funds, they would have written a bill that actively promoted them. Instead, their legislation will hamper Simons and his followers in myriad small ways, forcing them into pointless registration with the Securities and Exchange Commission. Tragically, a basic truth is being missed: Investment risk is not going away, and the best way to handle it is to entrust it to hedge funds.
I fail to see why it should hurt RenTech to register with the SEC; even Economics of Contempt concludes that although the registration requirements are a bit too fuzzy and capricious, “on net, in spite of the epically bad drafting, this could end up being a net positive for the financial system.” Certainly RenTech has more than enough money to be able to hire a couple of extra compliance officers if it has to. And registration with the SEC is not “pointless”: indeed, it’s the only way in which systemic-risk regulators can try to look directly at these key market players, with an eye to seeing whether unhealthy concentrations of risk are being built up across a group of large institutions. They might not succeed, but at least it’s worth at try.
Besides which, I’m not at all convinced that the best way to deal with investment risk is to start paying billionaires 2-and-20 to manage your money for you. For a good example, look at RenTech itself: the funds which are available to the public, RIEF and RIFF, have dropped to $6 billion of late, down from $30 billion in 2007; they might be closed down altogether. Clearly, RenTech’s management are better at enriching themselves than they are at building a long-term franchise for stewarding other people’s money.