Find out the secret behind one of the greatest moneymaking machines in history!
From the desk of Miles Everson:
Hi!
I’m thrilled to talk about another investing insight for today’s “The Independent Investor.”
Every Wednesday, I tackle investing insights and strategies in the hopes of helping you achieve financial freedom through this activity.
Today, I’ll be taking a deep dive on a fund that’s generated high returns for its investors since its founding in 1988.
Eager to know more?
Continue reading below!
Find out the secret behind one of the greatest moneymaking machines in history!
If you’d put USD 1,000 into the Renaissance Technologies ’ Medallion Fund when it launched in 1988, you’d have net returns of over USD 46 billion by 2024!
Founded by the late Jim Simons, the Medallion Fund compounded 66% annual returns over almost 35 years.
Simons isn’t just viewed as having “beaten” the market. Instead, some insist he solved it.
You don’t generate those returns just by getting lucky.
It took a lot of smart investment decisions to build the Medallion Fund into a market-beating machine.
Leveraging Technology
During its early years, Renaissance Technologies leveraged an early form of machine learning to analyze data on individual stocks, indexes, commodities, and other assets.
The company would then clean that data up and analyze it.
The team at Renaissance Technologies did this throughout the late 1980s and 1990s.
Eventually, this early advantage eroded when rival funds caught up to what the Medallion Fund was doing.
To stay ahead of everyone else and keep on generating eye-popping returns, Renaissance Technologies kept its greatest ideas shielded from competitors and the public.
How?
By coming up with a compensation structure no one else can compete with!
Motivating Top Talent to Stay
The Medallion Fund’s annual return since its founding is 66% before fees.
After fees, the fund’s return amounts to 40%—smaller, but impressive nonetheless.
Shareholders are charged a 4% management fee and a 44% incentive fee.
For those who aren’t familiar, an incentive fee describes what percentage of the fund’s annual return Renaissance Technologies keeps.
So in the end, investors only get 56% of the fund’s realized return.
Wait… why does the Medallion Fund charge such a massive fee?
It’s not just because of the fund’s impressive returns.
In fact, it has to do with retaining top talent.
You see, only current and former employees are invested in the Medallion Fund.
Instead of hiring MBAs or folks from Wall Street, the company hired mathematicians, engineers, scientists, and others from the academe instead to conduct deep research.
Employees become Medallion Fund investors through the bonuses—which are funded from the incentive fees charged to existing shareholders—they receive at the end of each year.
This is a system that works for the Medallion Fund’s shareholders because being invested in it makes people so wealthy that they never have to work anywhere else once they retire.
Renaissance Technologies then uses the money it made from prior employees to make its new set of employees so wealthy that they’ll never have to work anywhere else once they retire.
Simply said, no other hedge fund could afford to convince the employees of the Medallion Fund to leave.
Sure, the fund had a head start in the quan investing business, but its real “secret sauce” is the compensation framework it has put in place.
The bottom line for investors like you?
Competitive advantage alone won’t find you the best investment opportunities.
When investing in a company or a fund, it’s important to understand the tools it uses to make money… and more importantly, know if those advantages will last.
The best way to know those things is by looking into what motivates the people working there.
One way of doing this is by looking at the DEF 14A of any company—an annual statement that lays out the metrics behind management’s pay structure.
By understanding what management is paid to do, you’ll be able to ascertain whether these people will pursue the right strategies for the business they’re working for.
Make sure to keep this in mind the next time you hunt for opportunities in the market!
You never know, you just might find a winner.
Hope you’ve found this week’s insights interesting and helpful.
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Stay tuned for next Wednesday’s The Independent Investor!
Legends have a way of shaping industries, influencing strategies, and leaving lasting impacts.
Learn more about the number 3 key to beating the market in next week’s article!
Miles Everson
CEO of MBO Partners and former Global Advisory and Consulting CEO at PwC, Everson has worked with many of the world's largest and most prominent organizations, specializing in executive management. He helps companies balance growth, reduce risk, maximize return, and excel in strategic business priorities.
He is a sought-after public speaker and contributor and has been a case study for success from Harvard Business School.
Everson is a Certified Public Accountant, a member of the American Institute of Certified Public Accountants and Minnesota Society of Certified Public Accountants. He graduated from St. Cloud State University with a B.S. in Accounting.
