[mrchicity]

Return on capital isn't a super meaningful metric for capacity constrained trades. If a fund earns 80% returns, but has no means to compound the resulting profits through the same mechanism, whoever receives them naturally puts them into something with worse returns, so their wealth still grows slowly over time.

I think Medallion is somewhere between HFT and stat arb, probably a mix of multiple strategies along those time frames. The faster you trade independent opportunities, the more you recycle capital, and prime brokers extend tons of leverage. When I worked in HFT, our profits were bound by other factors way before cash, and my desk's ROC was far higher than this when doing well (even when doing poorly, ROC was quite high. It was the expenses of finding those returns that killed us).

If all the money is employees', Medallion is basically just a prop firm. The employees paid out of the fund are essentially partners/owners, and the rest earn discretionary payouts of management/performance fees.

Even within the fund structure, most profit is return on labor, not capital. I'm sure if you compare margins paid to partners in professional services firms like law or consulting vs. typical publicly traded companies, they're also far higher, but Cravath, McKinsey, etc. won't let you buy in as a passive investor; you have to work for it.

ETA: If you're wondering how it's possible to earn 80% returns, or even more: there are myriad tiny inefficiencies you can trade on given the right research and infrastructure. I'm sure 80% is simply the point at which Medallion makes the optimal $ per year relative to risk. They could probably throttle back, make less $ on smaller capital, but far higher percentage return, if they wanted.

[shostack]

Can you give an example of a strategy that dam it's course and reached a point of no longer being viable?

[b_tterc_p]

You might notice that the prices of trading A for B, then B for C, then C for A results in more A than you began with if done instantaneously.

But you can’t do that for a trillion dollars, because the “price” of an asset is just the best offer to buy or sell, and those are capped at the quantity of the best offer. Once you exhaust those, the arbitrage might not exist anymore because the remaining best offers will be worse. Say the market has capacity to actively exploit arbitrage for $10,000. You will earn the same amount of dollars if you have $1,000,000 or $10,000 if you exploit it to the max, but your return will be 100x better if your base is $10,000.

[mlevental]

i've been thinking about your comment for about 12 hours now (over night after reading it last night). i don't quite understand the force of it.

>If a fund earns 80% returns, but has no means to compound the resulting profits through the same mechanism, whoever receives them naturally puts them into something with worse returns, so their wealth still grows slowly over time.

i don't see why this matters at that AUM. treat it as a fixed annuity for the fund members and it's still fantastically successful (if you know of a savings account that i can safely withdraw 80% of 10b from every year for 20 years please let me know).

>Even within the fund structure, most profit is return on labor, not capital.

i think this is just a matter of "levels of abstraction". if i invest in a mutual fund that has portfolio managers and analysts are my returns thereby ROC or returns on labor? obviously according to GAAP they're returns on capital but inside the mutual fund there are people laboring away. if i in-house that mutual fund along with all of that research infrastructure why does it suddenly become return on labor? it's the same economic activity.