Best Quantitative Trading Firms
The Power Players of Quantitative Trading: A Deep Dive into the Top Firms. The hedge fund industry controls about $3.26 trillion, with quantitative trading funds commanding a significant $500 billion slice. While most hedge funds track global market trends, a few standout quant funds consistently outperform, challenging the efficient market hypothesis. Discover the top quantitative trading firms driving innovation and delivering superior returns
Renaissance Technologies vs Two Sigma vs D. E. Shaw
In investment services and managed funds, no single company outperforms in every area. Instead, a few firms are exceptionally consistent, each catering to different investor needs—hence no monopoly in this market space.
This article reviews the three most successful quantitative trading firms: Renaissance Technologies – Medallion Funds and Institutional Equities Funds, Two Sigma, and D.E. Shaw – Composite Fund. Before diving into the details, here’s an overview of their approach and trading performance.
Renaissance Technologies – Top Quantitative Investment Firms
Company Background Renaissance Technologies was founded in 1982 by Jim Simons. This early start in quantitative trading is a testament to Simons’ mathematical innovation. The Medallion Fund, their most profitable portfolio, launched in 1988, building on Leonard Baum’s mathematical models. The fund trades shorter-dated, automated decision-making systems.
Renaissance Technologies is known as one of the top quantitative investment firms and operates on an invite-only basis, primarily including employees—mostly data scientists and mathematicians, with around 90 holding PhDs. Their trading strategy remains one of Wall Street’s best-kept secrets.
Renaissance Technologies Performance The Renaissance Technologies Medallion Fund has grown 24% year-to-date as of mid-April 2020, achieving a 9.9% gain in March despite the largest day point drop in history. The Medallion Fund boasts a 66% gross annualized return from 1988 to 2018. In contrast, other Renaissance funds like Diversified Alpha have underperformed, down nearly 20% through June 2020.
Renaissance Technologies Strategy While details are scarce, the Medallion Fund is known for short-term holdings across global equities, commodities, currencies, and futures, with significant leverage and high turnover. The fund likely employs a vast array of signals, including unconventional ones like weather patterns.
Renaissance Technologies Market Presence Renaissance Technologies, managing $110 billion in assets as of 2019, is the second-largest hedge fund firm globally. The Medallion Fund is revered as the gold standard in quantitative trading, influencing market patterns through its transactions.
Renaissance Technologies Fees The Medallion Fund charges some of the industry’s highest fees: 5% of assets and 44% of profits since 2002, justified by its impeccable performance over three decades.
Two Sigma – Best Quant Funds
Company Background Two Sigma is known as one of the best quant funds worldwide was founded in 2001 by Mark Pickard, David Siegel, and John Overdeck. Inspired by D.E. Shaw and Renaissance Technologies, Two Sigma built its foundation as a technology company, employing data scientists over MBAs and focusing on infrastructure from the outset.
The Two Sigma website captures this philosophy: “We follow principles of technology and innovation as much as principles of investment management.”
Two Sigma Market Presence Two Sigma manages over $60 billion in assets with a workforce of over 1,500 employees, growing rapidly from $8 billion in 2011 to $32 billion in 2015.
Two Sigma Strategy Two Sigma operates various funds with different strategies. The Compass Fund trades futures across multiple markets, while the Spectrum Fund is an equity portfolio. Known for crowdsourcing techniques, they hold competitions to discover new trading signals.
Two Sigma Performance Two Sigma has achieved impressive returns, such as a 57.55% net return in 2014 from their Enhanced Compass Fund and a 25.56% return from the Compass Fund. In 2016, the Compass Fund gained 10.35%, and the Spectrum Fund delivered a 3% return.
Two Sigma Fees Two Sigma generally follows a Two Twenty fee structure: a 2% management fee and a 20% performance fee, which is cheaper than Renaissance Technologies’ Medallion Fund but still relatively high.
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D.E. Shaw
Company Background David E. Shaw founded the company in 1988. Shaw, has a net worth of $7.3 billion and is considered the “King Quant” by Forbes after exploiting market inefficiencies with high-speed computer networks. Notably, a young Jeff Bezos worked there while developing Amazon.
D.E. Shaw Market Presence D.E. Shaw, ranked the 21st largest hedge fund in 2011, managed $50 billion in assets by 2019, with continued growth in 2020.
D.E. Shaw Strategy D.E. Shaw employs complex quant trading and has expanded into non-systematic and traditional strategies like distressed debt. In 2020, they raised $2 billion in commitments for the D.E. Shaw Composite Fund, a $13 billion flagship.
D.E. Shaw Performance Institutional Investor reported that D.E. Shaw delivered the 5th highest returns among hedge funds globally. As of 2019, it was the fourth highest-grossing hedge fund company, returning over $29 billion to investors since 1988. The Composite Fund has had an annualized net return of 10.8% since 2011.
D.E. Shaw Fees D.E. Shaw initially charged a 3% management fee and a 30% performance fee, lowered post-2008 crisis to 2.5% and 25%. In 2019, they reverted to the 3-and-30 pricing model, still cheaper than Renaissance Technologies’ Medallion Fund.
Which Quantitative Trading Funds Come Out on Top?
These three are the best quantitative trading firms are among the highest returning funds globally, making quantitative trading increasingly popular. Traditional firms like Barclays are shifting to algorithmic strategies.
All three firms are exceptional, but RenTech’s Medallion Fund stands out despite the exclusivity and secrecy. Two Sigma offers competitive performance with a more open approach, and D.E. Shaw is a consistent performer with diversified strategies.
Even flagship funds face challenges during market turmoil. The Medallion Fund’s 9.9% return in March 2020 proves its resilience. Understanding which company fits your needs is crucial as quant trading gains popularity.
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