Renaissance Technologies, Considered the "Best Money Manager on Earth", Uses Technical Indicators to Drive its Automated Trading Systems
Shell Capital Management, LLC uses "technical indicators" to drive its trading systems for trend following and countertrend signals, and we are in great company.
What Is a Technical Indicator?
"Technical indicators are heuristic or pattern-based signals produced by the price, volume, and/or open interest of a security or contract used by traders who follow technical analysis." - Investopedia
As straight-forward as it may sound to use "technical indicators" to drive buy and sell decisions, the "technical indicators" part is a little controversial and provocative within the "quant" world.
Or is it?
For the decades I've been an investment manager, "technical analysis" has gotten a bad rap from parts of the industry, and its champions have long defended its usefulness to understand investor behavior and the sentiment of supply and demand.
“I always laugh at people who say, "I've never met a rich technician" I love that! It's such an arrogant, nonsensical response. I used fundamentals for 9 years and got rich as a technician." - Marty Schwartz
But then again, so has
funnymentals fundamentals analysis.
The reality is, "analysis" means "a detailed examination of anything complex in order to understand its nature or to determine its essential features" so any and all analysis is necessarily liable to be erroneous.
Tweet a chart of a price trend on Twitter and anyone who isn't skilled at identifying supply and demand driving a price trend glosses over.
We could probably say the same for discounted cash flows.
I was fortunate to become an expert at a quantitative methodology in the 1990s that fused fundamental and technical data to find the true market leaders. I also had a Bachelor of Applied Science in Accounting, so I knew fundamentals alone didn't determine the price in an auction market.
How can a chart of a price trend provide any insight if stocks are driven by earnings growth?
By and large, stocks are driven by earnings growth over the long haul, but in the short run, it's all about sentiment, and sentiment is reflected in supply and demand.
Rising prices are a direct result of bullish investor sentiment pushing the stock price up as it's being accumulated, that's demand.
Supply is seen visually in a price chart because falling prices are the direct result of selling pressure, and when investors hit the panic button, they often flow out faster than they came in.
Fundamentals tell us what may have happened to cause a price change, but "technical indicators" tell us what is happening.
You can probably see why these "technical indicators" make more sense in trading systems.
The price, after all, is the final arbiter. It doesn't matter what we think a market, sector, stock, commodity, or currency is worth; it only matters how the market prices it after we have a position.
Argue with the direction of the price trend at your peril.
In the 1930s, economist John Maynard Keynes said: “Markets can stay irrational longer than you can stay solvent."
If your stocks are trending down and you don't think they should, that's just you, being wrong, not the market.
The market decides the value, you decide how big your loss will be, holding on to your opinion.
Wait, what does this have to do with Renaissance Technologies?
Renaissance Technologies LLC, also known as RenTech or RenTec, is an American hedge fund based in East Setauket, New York, on Long Island, which specializes in systematic trading using quantitative models derived from mathematical and statistical analysis." according to Wikipedia.
Wiki goes on to say:
Their signature Medallion fund is famed for the best record in investing history. Renaissance was founded in 1982 by James Simons, a mathematician who formerly worked as a code breaker during the Cold War.
Renaissance's flagship Medallion fund, which is run mostly for fund employees, is famed for the best track record on Wall Street, returning more than 66 percent annualized before fees and 39 percent after fees over a 30-year span from 1988 to 2018.
Renaissance draws a lot of interest because of its vast performance, and their use of the maths, and "quantitative" data, and more specifically, price data, also known as "technical indicators."
Renaissance Technologies Uses Technical Indicators to Drive its Automated Trading Systems was taken directly from its form ADV filed with the SEC.
Wait, what? You mean the "best money manager on earth" uses technical indicators?
Because of the success of Renaissance in general and Medallion in particular, Simons has been described as the "best money manager on earth". That's what The Telegraph said in "Quants: the maths geniuses running Wall Street."
Yes, the hedge fund manager who is described as he "best money manager on earth" uses technical indicators.
In the Renaissance Technologies LLC FORM ADV: Uniform Application for Investment Adviser Registration Part 2A – Firm Brochure, a required disclosure document filed by registered investment advisors including Shell Capital Management specifically discloses:
Item 4: Advisory Business... (emphasis mine)
"Renaissance uses quantitative analysis, specifically, mathematical and statistical methods, to uncover technical indicators that drive its automated trading systems. These systems, or models, are the product of an extensive research effort by Renaissance's technical staff who hold advanced degrees in mathematics and the sciences."
Then again in Item 8: Methods of Analysis, Investment Strategies, and Risk of Loss: (emphasis mine)
"As stated above, Renaissance uses quantitative analysis, specifically, mathematical and statistical methods, to uncover technical indicators with predictive value. This analysis is used to construct proprietary computer models that use publicly available financial data to identify and implement trading decisions. The Firm uses these computational trading models to seek appreciation of assets through speculative trading in securities-related and futures-related financial instruments."
So, yes, Renaissance Technologies, considered the "Best Money Manager on Earth", uses technical indicators to drive its automated trading systems...
So much for those who say they've never met a "rich technician." According to Forbes, Jim Simons, as founder of Renaissance Technologies Corp. has a net worth of $28.1 billion as of 2/23/23.
What would we expect from someone who's earned billions a year trading "technical indicators"?
Institutional Investor says in The Rich List: The 21st AnnualRanking of the Highest-Earning Hedge Fund Managers:
"Jim Simons is back on top.
For the fifth time in seven years, the 83-year-old founder of quant specialist Renaissance Technologies leads Institutional Investor’s Rich List, the definitive ranking of the highest-earning hedge fund managers.
Simons retook the throne after earning $3.4 billion in 2021, supplanting last year’s leader, Israel “Izzy” Englander. The Millennium Management founder had to settle for second place after he made “only” $3.1 billion in 2021."
The reality is, if you review other publicly available regulatory documents, you'll find many other top "hedge funds" use similar "technical indicators" in trading systems.
Most people just don't know it, even if they agree with variant perception, knowing things others don't yet know, thinking ahead of the curve, and anticipationg when something is going to happen, is the best way to make money in the markets.
It turns out that following price trends itself is a variant perception.
Mike Shell is the founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.