Paper: arXiv 2405.10917

Abstract

It is a challenge to estimate fund performance by compounded returns. Arguably, it is incorrect to use yearly returns directly for compounding, with reported annualized return of above 60% for Medallion for the 31 years up to 2018. We propose an estimation based on fund sizes and trading profits and obtain a compounded return of 31.8% before fees. Alternatively, we suggest using the manager’s wealth as a proxy and arriving at a compounded growth rate of 25.6% for Simons for the 33 years up to 2020. We conclude that the annualized compounded return of Medallion before fees is probably under 35%. Our findings have implications for correctly estimating fund performance.

Complexity vs Empirical Score

  • Math Complexity: 6.5/10
  • Empirical Rigor: 3.0/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper employs advanced financial mathematics (compounding formulas, proportional profit allocation, and volatility calculations) but relies on a simplified model with assumed parameters rather than real transactional data or backtesting.

Research Flowchart

  flowchart TD
  A["Research Goal:<br>Estimate Medallion's True Annualized Compounded Return"] --> B

  subgraph B ["Methodology & Data Inputs"]
      B1["Method 1: Fund Size & Profits<br>31 years (1988-2018)"] --> C1
      B2["Method 2: Manager's Wealth<br>33 years (1988-2020)"] --> C2
      B3["Challenge: Avoiding Direct<br>Annual Return Compounding"] --> D
  end

  C1 --> D["Computational Processes"]
  C2 --> D

  subgraph D
      direction LR
      D1["Est. Fund AUM &<br>Trading Profits"] --> D2["Compound Growth<br>Calculation"]
      D3["Simons' Wealth<br>Growth Rate"] --> D2
  end

  D --> E["Key Findings & Outcomes"]
  
  subgraph E
      E1["Method 1: ~31.8% return<br>(Pre-fees)"]
      E2["Method 2: ~25.6% return<br>(Manager Wealth)"]
      E3["Conclusion: True annualized<br>compounded return is likely<br>under 35%"]
      E4["Implications: Highlights<br>correct performance<br>estimation methods"]
  end