Why admire RenTech?

By Felix Salmon
July 6, 2010
Sebastian Mallaby reports on RenTech:

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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.

5 comments

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Rentech should lobby FOR these costly but insignificant regulations. Competition is limited when small firms are destroyed by a fixed cost to each firm in an industry.

Regressive taxes kill the poor, after all. Works for firms just like it does for individuals.

Posted by davew | Report as abusive

I agree with every word – having spent my life as a market researcher and extrapolator from data….aka, adman/marketing strategist.

Felix’s thesis is borne out by the truly third-rate interpretations of almost all medical causality (hence the 1000 contradictory scare stories each and every week) and the historically awful conclusions drawn by social scientists about almost everything.

The best finance minds and writers in my experience come from other fields – usually to do with human behaviour in general,or social anthropology in particular. Chart-guys will talk about gradual panics – and people like me say “There is no such thing”.

This doesn’t make us bigoted Luddites – it just means we didn’t get the commonsense bypass procedure yet.

An example: being a wonk, France’s Christine Lagarde thinks a colander-style eurobank stress test showing everything is AOK will end the EU crisis. This is because Madame Lagarde doesn’t understand the importance of trust and belief in that magic word ‘confidence’: she knows only the confidence trick.

The first thing you learn as a research interviewer is that your job is to spot when people are telling you defensive lies.

The second lesson you learn is ‘don’t listen to what they say, audit what they do’.

It works for me.

http://nbyslog.blogspot.com/2010/07/you- cant-play-secret-squirrel-with.html

Posted by nbywardslog | Report as abusive

I saw RIEF and RIFF when they were first launched — obvious asset gathering, nothing special. Medallion Fund is the thing you have to look at in order too see the fruits of the RenTech thought process.

Posted by JDB | Report as abusive

I wasn’t impressed by the original article…he sounded like a shill for the hedge fund industry.

His whole thing about risk fell flat. The Hedge Fund industry has its own crooks and theives who robbed people blind while feeding them misinformation. By making them the ‘preferred vehicle’ of people who know to take ‘risk’, you’re in effect painting a big “Start a Hedge Fund R Us” sign to all the unscrupulous people out there who want to find a way around any kind of oversight with false promises.

Holding people accountable for their words and promises takes a bit more then just saying “use hedge funds.” Those managers, too, need accountability, or the abuse will continue to fester in that segment of the industry.

Posted by REDruin | Report as abusive

“It can be proven that most claimed research findings are false” reminds me of a circular logical impossibility (e.g., “there is no such thing as absolute truth”).

Posted by Polycapitalist | Report as abusive