Most of what we know about Rentech's strategies comes from Senate hearings regarding the sketchy things they do. The common theme is that they find strategies with fairly low returns (~3%), and very low risk. They then use massive (and illegal) amounts of leverage, as high as 16x, to turn those low risk, low return strategies into outstanding returns. James Simons and Robert Mercer are among the largest donors ever to both political parties, so it isn't much of a surprise that these hearings haven't really gone anywhere.
Of course it isn't just that simple. Leveraging a strategy should increase it's downside risk along with it's returns. But somehow Rentech does it while never actually experiencing that downside risk. That's their mathematical genius. And the fact that they employ so many brilliant mathematical minds leads me to believe that part may be real.
Not me, The IRA thinks it's illegal. There are limits on how much leverage you are legally allowed to use, and Renaissance has made a name for itself by trying to bypass those laws in every tricky way possible.
> There are limits on how much leverage you are legally allowed to use
No, there aren’t. Reg T limits initial leverage for retail investors in equity securities to 2:1 and FINRA rules maintainence leverage to 4:1 [1]. There are no similar broad-market rules for institutions. (Retail investors, likewise, can leverage much more for FX and—more commonly—real estate.)
They weren't in violation of Reg T. They were in violation of Reg U and Reg X. You are right that there is no law saying you can't use more than x leverage, but there are absolutely regulations governing loans in margin accounts and using securities as collateral for leverage. And The government believes Rentech was in violation of them.
> there are absolutely regulations governing loans in margin accounts and using securities as collateral for leverage
No, there are not for institutional investors. Rentech fell into an interesting dispute (tigger with Deutsche Bank) with the IRS regarding long-term capital gains. If I want to lever my institution 10,000:1, and can find a lender who will lend against it, there is no law prohibiting me from doing so.
Disclaimer: I am not a lawyer. This is not legal advice.
But there are laws preventing a broker from lending you that money. The hearing cites the SEC net capital rules which Rentech and DB worked together to bypass. There are pages dedicated to how RenTech DB and Barclays knowingly and purposefully circumvented rules with some changing of terminology. Starts on page 79 [0].
I definitely should have been more clear with my original statements. Maybe something more along the lines of: at rentech's scale, using a margin account at a prime broker, you cannot leverage your firm 16x.
I understand where you’re coming from. Let me, too, be more clear.
The Senate report is crap. Yes, Reg T and FINRA rules limit the loans B-Ds can provide clients. But leverage, for Reg T’s purposes, is constrained to lending. I can buy a 3x leveraged ETF [1] as a retail trader without violating Reg T. (With options, I could easily increase that leverage without borrowing.) All of this is not only permitted, but common.
Reg T does not exist to protect investors. It exists to keep broker-dealers from going bust from dud margin loans. (And thereby prompting a systemic crisis.)
The leverage RenTech took is in the non-lending and non-systemic (legal) category. The exposure that most closely puts RenTech in the lending bucket is the exposure Deutsche Bank carried on its balance sheet for tax purposes. (This tax avoidance was the core of the scandal.)
Long story short, unless you’re a politician, it doesn’t make sense to talk about RenTech’s illegal leverage. Lots of other market participants, by regular practice, are levered far more.
If a senate report causes issues for you, I don't think it's exactly crap. But I understand your point :) It also keeps mentioning Reg T which I agree is not relevant here. I was wrong to say that RenTech used illegal amounts of leverage, thanks for explaining that. I'm still not convinced it's wrong to say that RenTech worked with BDs to bypass rules that would have stopped them from using the leverage they did in the manner they did.
Was the leverage in the non-lending category though? Isn't that like saying their gains were long-term? That's the whole point of this, no? They used some different terminology to reclassify loans and taxes, in order to use more leverage and pay less tax than they normally would have.
I guess another way to put it: would there have been a way for RenTech to hold the same portfolio, using the same leverage, with the same payout characteristics, that no government agency would have issues with? Maybe the answer is yes, but I doubt it.
> would there have been a way for RenTech to hold the same portfolio, using the same leverage, with the same payout characteristics, that no government agency would have issues with?
Yes, quite easily. In fact, highly-leveraged portfolios like the one RenTech held are an essential feature of market making, which was historically done using banks’ balance sheets. RenTech’s shenanigans were around tax. Everything else is commentary.
(On the Senate report, the whole thing isn’t crap. But that section is crap as in it’s written for political purposes and has limited bearing with respect to the law.)
the subject of this Senate hearing was widely written about wrt rentech back in 2014.
This is more about what rentech does after they've made all their money trading... To avoid capital gains taxes. Sure, it's just another way to make more money, but it's not their core strategy.
It was never about returns exceeding borrowing costs. Rentech is probably the greatest money manager of all time. They can make returns that exceed the borrow costs.
It was always about the amount of borrow available, and the tax paid on the gains. The (illegal) strategies they used allowed for much larger borrow amounts, as well as only paying long term capital gains, when in reality there were millions of trades.
The simple setup: Rentech pays the bank $1B for a call option. The call option is on a $10B pot of money. The bank then hires Rentech to invest the pot of money for them. After a year or two, Rentech then exercises it's call option, which gives it everything in the pot except the bank's $9B plus a fee. The banks loved this fee. And since this was a year long call option, all gains are taxed as long term. They avoided $6B in taxes doing this.
For a modern hedge fund, leverage doesn’t work that way... e.g. if I buy $1000 of AAPL (Apple) and (short) sell $1000 of MSFT (Microsoft), what is my “capital” and what is my “leverage”? My net capital use is $0 - I got $1000 selling MSFT and spent it again buying AAPL... in the end, it comes to a combination of margin required by the broker(s) - i.e. what they estimate is the black swan scenario where AAPL goes down, MSFT goes up, you start losing money on both trades and they can’t close the position fast enough - ultimately it depends on volatility but can be netted across many trades, and the overall volatility / risk of your strategy (i.e. how much you’re potentially willing & able to lose in a year).
When you short you need to post capital as part of the repo trade. You also need to borrow the shares which typically costs more than the interest you're earning on the posted capital.
So no, your net capital use is not $0 in your example
That depends on your borrowing costs. I doubt they'll be paying margin rates lesser mortals pay. ultimately they are screwing their lender because the lender is taking all the risk here without (seemingly) adequate compensation.
Their lenders likely understand the risks pretty well. Their lenders are going to be large banks that have entire departments dedicated to modeling risks like these, and making sure that the risks don't exceed certain limits on these accounts. Nobody's getting screwed, except arguably the government out of some taxes here.
>Their lenders likely understand the risks pretty well. Their lenders are going to be large banks that have entire departments dedicated to modeling risks like these, and making sure that the risks don't exceed certain limits on these accounts.
Three words: Mortgage Backed Securities. Large banks with entire risk modelling departments have made multi-billion-dollar errors in recent memory.
I have a complete lack of faith that any institution whose day-to-day experience completely differs from their catastrophic risk scenario is ever truly prepared.
The personal and organizational strain of maintaining constant vigilance against an invisible enemy is simply too high.
People get lazy, complacent, and think they're more prepared than they are. That's just human nature.
This is absolutely true. Due mainly to wishful thinking as well as some bizarrely bad statistical assumptions, the risk of something like 2008 was simply not forseen. There's absolutely no reason to think that other unforeseen crises couldn't arise in the future.
You're right. But there's very good reasons to think that they won't come from levered quant strategies like Renaissance's. They're extremely diversified and tend to be market neutral.
Yes, you can name one time that that happened. But do you understand the types of strategies RenTech is using? They're diversified across thousands of equities on the long and short side. They're market neutral. Taking on amounts of leverage that seem crazy to you is actually very reasonable in this setting, and it's very easy to show that this is reasonably safe.
Nobody outside of RenTech knows what trading strategies RenTech are using, because they're extremely secretive. There is a strong suspicion that they are generating very high returns by passing on concealed risks to other, less sophisticated players - in the case of RenTech, literally anyone else in the market counts as less sophisticated.
That's really not true. Everyone knows what they're doing. They're doing statistical arbitrage. There's many firms that do it, Two Sigma, Citadel, etc.. The only thing secretive about it is the exact details of each strategy. Renaissance, for instance, pioneered techniques like using satellite imagery to track sales. One of their early strategies noticed that the market tended to go up on days when the weather was nice in NYC. Things like this are what they're doing, but on a grand scale and with a lot of very very smart people working on them.
While it is possible that they're making their profits by shifting risk onto unsophisticated players, it's certainly not necessary for them to do that to make money. They have the smartest people in the world working for them.
I guess everything you wrote is correct, but it seems like a very white-middle-class perspective. Legal segregation in America only ended a generation or two ago. That's just one of many examples which meant that for many Americans, since the founding of the country, there was never a hill. More like a ditch they couldn't leave.
Of course it's a massive issue, but it always amuses me when people look back to how "great" it used to be. For a white male, the 50's seemed pretty great. If I was anything else I'm pretty sure I would choose 2019.
To be clear, I didn't say the past was good or equitable or that I would prefer it over today.
The progress we've made in civil rights — there are women alive today who were born before women could vote! — is great and the current administration shows that we still have a long way to go.
But note that while we have made progress on civil rights in many ways, the increasing economic disparity hurts underrepresented groups too. "It's worse for white people but better for black people" is an over-simplification. Black people are suffering under these economic problems too.
Yours is a phenomenal analogy, I thought, but as the comment opening this thread insinuated, you are naive.
> increasing economic disparity hurts underrepresented groups too
Close, but increasing economic disparity hurts underrepresented groups _most_. And, as it's been said, what we have made is only generously defined as progress--and most vehemently by those who seek to halt what little progress we've made as "sufficient".
> If you stick a knife in my back nine inches and pull it out six inches, there's no progress. If you pull it all the way out that's not progress.
This Malcolm X quote does a great job highlighting how the cessation of a particular oppression is hardly progress. Since slavery, Jim Crow, segregation, and Red-Lining, there has been little in the way of reparations to make African American communities whole--not to mention the millions of Mesoamericans(1) similarly exploited in the history of American Imperialism(2), and still to this day(3)!
So, thanks again for that completely brilliantly painted analogy. I hope you find these texts offer some compelling augmentations to your understanding.
1) Eduardo Galeano's "The Open Veins of Latin America"
2) Roxanne Dunbar-Ortiz' "An Indigenous Peoples' History of the United States"
This is a common problem I see in arguments with progressives. You are considering the failure to reach an ideal state as equivalent to zero progress, and attacking anyone who acknowledges incremental wins as undermining the cause.
> Close, but increasing economic disparity hurts underrepresented groups _most_.
Yes, so, you should celebrating that you and are in agreement that increasing economic disparity is bad.
> And, as it's been said, what we have made is only generously defined as progress
It is progress in any and all possible definitions. Going from "black people are legally considered property" to "a black person is the President of the United States of America" in less than 200 years sounds like a hell of a lot of progress to me.
> and most vehemently by those who seek to halt what little progress we've made as "sufficient".
Nowhere does anyone claim it is "sufficient". You are painting anyone who's not as idealistically pure as you as an enemy. That's not an effective strategy for gaining support or furthering your cause. It's a mixture of defeatism, elitism, alienation, and sanctimony.
This is something people on the right actually do really well. They are always celebrating their success and building each other up. Reading political news, I often feel like no one can tear down a Democrat quite like another Democrat. Where is the teamwork? Why don't we let our opponents attack us instead of doing their job for them?
> If you stick a knife in my back nine inches and pull it out six inches, there's no progress. If you pull it all the way out that's not progress.
Here's the full quote:
If you stick a knife in my back nine inches and pull it out six inches, there's no progress. If you pull it all the way out that's not progress. Progress is healing the wound that the blow made. And they haven't even pulled the knife out much less heal the wound. They won't even admit the knife is there.
Call me crazy, but I'm not aware of any strategy for healing a wound that doesn't involve removing the knife first.
Yeah. This is an issue that a lot of folks cant seem to grasp. For almost all Americans this is the best time in our history to be alive. One could argue Obama's years were better for some people groups but generally things are better than they've ever been for every single type of person.
I know there's still a lot of change that needs to happen but I wish people would pick their head up and realize this once in a while.
The underlying idea seems to be that the economic reality is worsening and this is true for every group. Meanwhile some groups have had more and more artificial barriers removed that make it easier to access that economic reality as say someone who is middle class and white (not necessarily equal, but let's just take white and middle-class as a standard for comparing). So yes, it is better for certain groups, but to continue the analogy of the hill, these groups have had artificial barriers removed that make it easier and easier for them to climb, but that hill itself is getting steeper and steeper.
So on the one hand those barriers are getting torn down slowly, which is progress in one dimension, but the economic reality is worsening for everyone. For example, people of color mighty be competing with other individuals on more level ground when it comes to getting jobs, but the supply of those jobs, the quality of life they support, and the security they afford seem to be decreasing, and the all important question isn't what it's like now, but what it'll be like on 20 or 30 years.
As a side note, worsening economic conditions can result in a flare up in racial tensions which might undo the progress that has been made.
Artificial barriers are only removed as they become irrelevant in the face of greater, more subtle and less infamous levers of control.
As the internet offers greater surveillance, phone taps become less relevant.
As offshoring jobs to nations w/o union protections, where beatings and murders of organizers is less punished, working conditions in the US can improve without cutting too deeply into the bottom line... just until they close the factory.
As manual labor is increasingly done outside our borders, or by precarious undocumented immigrants, as laborer reproduction is increasingly done by their wives, more white women will be allowed into management, executive, and leadership positions. Did you notice, all the heads of the Military Industrial Complex firms are now all women? (1) What allowed this to happen?
These articles are silly, and don't understand alcoholism. They give a few examples of successful ways that people have quit on their own, and since lots of people did it that way, then it must be more effective than treatment.
They miss the blindingly obvious point that every single person in treatment has already tried and failed those "self-help" ways. Treatment is a final, desperate, step for alcoholics, once all those self treatment methods have failed. You can't compare the two, and the first treatment has already failed for the second group.
It's like saying Tylenol is a more effective treatment than going to the hospital, because more people get better that way. Of course they do - because they have a less serious problem.
These statements and studies show how little the average person, even a doctor, understands about alcoholics. Anyone who's attended an AA meeting or worked with alcoholics can easily tell you what's so crazy about these types of studies:
AA is full of people who, by definition, cannot quit on their own. Other than some court-ordered cases, every single person in AA has already tried and failed to quit on their own. It's a nonsense comparison.
You are comparing a group of people who have never tried quitting before, with those who have already spent years failing to quit on their own. Of course the first group does better! The second group is filled with more serious conditions. If they were able to quit on their own they would have never tried AA.
> I showed them it is statistically very unlikely they would find a better candidate
So I get where you are coming from, but not having the 1/20 requirement is a much easier excuse than explaining why they don't want someone who thinks it's ok to do this.
I only showed them after they already told me it's a no. I didn't really have a reason to be polite after that. I was just a bit incredulous. The job posting is still open now 1 year later, although they refreshed the date.
You should always be polite, you might meet them again in a different time and place. It sounds like this rejection bothers you a lot. You are in danger of not seeing the bigger picture because you are hung up on not meeting that single requirement.
It doesn't bother me that I didn't get the job that much. Just the headline of this thread reminded me of it. I already had a comfortable position and I have a new position now in a great team. I think it worked out for the best.
The only way in which this bothers me is that these (I assume) fake, unfilled jobs are used for political reasons. But that's a global problem.
Most of them aren't hedge funds, they're private (HFT, Electronic Trading, Botique Firms, Proprietary Trading are all terms you'll hear) so they don't have public data. It is literally impossible to prove without insider information.
However the Virtu Financials, the Citadels, etc, will always exist, and will be doing exceptionally well whether people realize it or not.
Yeah, a better name for these kinds of funds is "independent research groups." Edgestream is an example of another. Renaissance is the most (in)famous one, but many others exist which profitably manage tens to low hundreds of billions while employing only 10 - 100 people.
I realize this doesn't actually matter and I feel weird defending Renaissance... but Virtu is a public company and hasn't been doing that well, and returns from Citadel's various funds are not hard to find. Also, I don't know how to compare a fund's returns to that of a private business. But Medallion has been around since before HFT was really a thing, and I'm not aware of any HFT places that have been growing at 70% a year for 20 years.
These are wildly different businesses. Virtu is a global electronic market maker which in reality is more like a mature technology company than a risk taking hedge fund. Renaissance (Medallion specifically) is a weird fund that manages employee money. Citadel is a large, diversified financial services company that happens to have overlap with both of the previously mentioned firms. They have a large market making operation and offer a variety of different hedge funds that they market
It's not unheard of for market makers to have returns well above 100%, and one you get into certain latency arbitrage strategies the returns can grow significantly.
The issue is that these business are capital limited, so you can't reinvest your massive returns to compound them.
> the rituals embedded in the doctor-patient encounter that he thinks are fundamental to the placebo effect
> “Medical care is a moral act,” he says, in which a suffering person puts his or her fate in the hands of a trusted healer.
I have a friend who is a naturopath, and this is basically what she believes her job to be. Almost more of a therapist at times, a friendly ear to confide in.
The average experience with doctors isn't always that pleasant. It feels clinical and rushed, and very non personal. They are concerned with symptoms, not the actual person in front of them. They don't really listen, as a therapist would. And it's not their job too.
Contrast that with an alternative healer. They will sit and talk and listen and empathize with you for an hour. For a person in pain, it might be the first time they have ever felt like someone actually understands and cares. It's not surprising that they feel better afterwards. I think that goes a long way to explain the popularity of fake medicine.
I imagine those are popular because for many problems there are not yet any real solutions.
Got a cold? A muscle tear, connective tissue damage? weird back pain?
There are no definite solutions to those. And ever smart HN person who think they know the solution to that, only knows a thing that they believed worked for THEM and won't necessarily work for ME and may not even have worked for them, it just got better with time and they think it was their special cross fit routine because of chronological fallacy.
Non of those things are helpful for gaining strength or building muscle. Do a basic barbell program and eat 6000 calories every single day and I guarantee you that you will see results.
Of course it isn't just that simple. Leveraging a strategy should increase it's downside risk along with it's returns. But somehow Rentech does it while never actually experiencing that downside risk. That's their mathematical genius. And the fact that they employ so many brilliant mathematical minds leads me to believe that part may be real.
The latest Senate hearing link: https://www.hsgac.senate.gov/imo/media/doc/REPORT-Abuse%20of...