Are there any investors who have compellingly beaten the market? In his December 2019 paper entitled “Medallion Fund: The Ultimate Counterexample?”, Bradford Cornell reviews performance of the Medallion Fund from Renaissance Technologies as a clear refutation of market efficiency. He focuses on gross returns (including portfolio trading frictions, but not management fees), because they reflect the value added by the fund manager. Using Medallion Fund returns from its inception in 1988 through 2018, he finds that:
- Over the sample period, $100 invested in Medallion Fund grows to $398.7 million, translating to gross compound annual growth rate 63.3%. Average gross (net) annual return is 66.1% (39.2%), with standard deviation 31.7% (20.3%).
- For comparison, an investor who each month during the sample period is perfectly in the U.S. stock market when the market return is above the U.S. Treasury bill (T-bills) yield and otherwise in T-bills grows an initial $100 to a gross $331,288.
- The fund constantly opens and closes thousands of short-term positions, both long and short. Winning only 50.75% of millions of trades supports annual gains in the billions, after trading frictions.
- Over the sample period, Medallion Fund never has a negative gross annual return. During the dot.com crash and the financial crisis gross annual returns are 56.6% and 74.6%, respectively. After the first two years of operation, the lowest gross annual return is 31.5%.
- Realistically, however, fund holders did not achieve the indicated growth rate because: (1) there are times during the sample period when Medallion Fund does not accept investments (even reinvestment of gains); and, (2) some fund holders withdraw winnings.
- The market beta of the fund is about -1.0, and its betas on conventional size and value factors are also (insignificantly) negative. The fund therefore hedges market risk.
In summary, evidence from the extremely strong performance of Medallion Fund over its 31-year history refutes market efficiency within its realm of operation (thousands of short-term positions).
- Funds like Medallion (and associated methods) are inaccessible to most investors, who may therefore view them as trading counterparties constantly and adversely skimming (like market makers).
- Medallion Fund is closed, and the two primary funds available from Renaissance Technologies, Renaissance Institutional Equities Fund and Renaissance Institutional Diversified Alpha, follow different strategies (with relatively mundane returns compared to those of Medallion).
