Ben Gilbert: uncertainty

Transcript context

…You could imagine, let’s say it wasn’t they were right 50.25% of the time, but they were right 50.0001% of the time. They would need to do a ton of trades in order to generate enough profits. That’s why you need $60 billion of cash to actually execute the strategy to produce the returns that they were looking for on $5 billion of equity. Anyway, there’s a second chapter to this. It’s all well and good that this is how they get a bunch of leverage. That’s one piece of it. The other piece is they thought this was a remarkably tax-efficient vehicle. The way that they were filing their taxes said, oh sure there’s stuff in that basket, but the thing that we actually own is an option to buy that basket or sell that basket. We only exercise that once every 13 months or so. I don’t know the exact number, but something like that over a year. Therefore, we’re buying something, we’re holding it for a year, we’re selling it. Oh, of course there are millions and millions of trades going on inside the basket, but we don’t own that basket. The banks do. We’re just advising them. You can see the logic here. Over time, eventually in 2021, the IRS said, no. You made all those trades. That was not a completely separate entity. You guys owed $6.8 billion in taxes that you didn’t pay. You’re going to need to pay that with interest, with penalties, and by the way, Jim Simons, we’re going to want you and the other few partners to really bear the load of that. And they did. For Simons alone, he paid $670 million to the IRS in back taxes for this basket option strategy that turned out not to be a long-term capital gain. All right. Numbers on the business today and then we will dive into power and playbook. Today, we’ve talked about Medallion, $10 or $15 billion depending on who you ask. Historically it was more like $5 or $10 billion. The institutional fund is about $60 to $70 billion, and at one point was $100 billion. The total carry generated, David, you said is $60 billion. Forbes estimates that Jim Simons alone is worth about $30 billion today, which pencils with a bunch of other stats over the years that he owned about half of Renaissance. The returns, obviously the Medallion fund generated approximately 66% annualized from 1988 to 2020. After those fees, was about 39%. Wild. An interesting thing to understand, I ran a hypothetical scenario, of how much money do you think Renaissance the business makes a year in revenue. The institutional fund, let’s call it 10% on $60 billion of assets. That’s $600 million from fees and $600 million from performance, so $1.2 billion a year in revenue to the firm from the institutional side of the business. I always ask myself the question, does that actually matter? They did all this work to stand up the institutional side. Who cares? Well, let’s say Medallion does their average 66% gross on $15 billion. That is $750 million in fees and $4.3 billion on performance. ey did all this work to stand up the institutional side. Who cares? Well, let’s say Medallion does their average 66% gross on $15 billion. That is $750 million in fees and $4.3 billion on performance. So a total of $5 billion from Medallion and $1.2 billion from the institutional side of the business. Now of course the employees are the investors in Medallion, so you could just argue it’s actually silly to cut them up, but I don’t know. It’s a $7, $8, $9 billion revenue business. That’s not including the LP return on Medallion.…

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