What's up guys and welcome back to wall street millennial on this channel, we cover all things: stocks and investing, and today we're going to talk about the most successful quantitative hedge funds and proprietary trading companies operating today. These firms, colloquially dubbed quan funds and prop shops, dominate the markets. It's estimated that something like three quarters of all trading volume on the major stock and options exchanges involves quantitative trading systems run by these companies on an annualized return basis. Some of the trading strategies that these companies run can return hundreds of percent.

So who are these quantitative gods in the markets in this video? We'll take a close look at who's at the top of the food chain, their legacies as the apex market participants and exactly what kinds of strategies have landed them in their privileged positions. Before we get into the video we'd like to thank our channel members, members get access to these non-time sensitive videos one day in advance and get to vote on some of our video topics. Renaissance technologies or rentec, as it is known colloquially, is a hedge fund based in long island that specializes in systematic quantitative trading is widely considered to be the most successful quantitative trading company in the history of automated and systematic trading. It was founded 40 years ago by the mathematician james simons, who established the high-performing medallion fund.

Since the firm was established in 1982. It has consistently outperformed the market and the rest of the hedge fund industry by a wide margin because of the outlandish performance of the fund, as well as the incredibly mathematical and secretive nature of its operations and researchers. It has earned a reputation as being a cut above the rest of the industry. The fund has its roots in rigorous mathematics, with its founder, jim simons.

Being a former math professor at stony brook university. He also taught math classes at harvard and mit was a recipient of the prestigious oswald dublin prize and has his name on a type of three-dimensional, topological quantum field theory of the schwartz type. In essence, jim simons, is a mathematical genius. He carried that mathematical prowess with him into his hedge fund.

After leaving an illustrious career in academia. This firm maintains a data warehouse with petabytes of data in it, ranging from stock tick data to trade, execution data to financial analyst records and anything else that could possibly contain information about the markets. With that data, they develop statistical models to synthesize disparate data sources into meaningful trading signals. One type of statistical model that they are known to have used is a hidden markov model in its most basic form.

A hidden markov model assumes that a time series of observable events are the result of an unobservable latent process. While the observable events called emissions seem noisy and uncorrelated, the latent process is usually much simpler and can be explained by robust statistical models using the structure of the hidden markov model. Combined with statistical theory, a researcher can use the observable events to make conclusions about the latent process, thereby allowing for prediction of future latent states and thus future events. These types of models have been used in advanced modeling and prediction tasks in many areas of science, but renaissance technologies was one of the first to successfully utilize them in modeling financial markets.

Number two on our list is chicago-based citadel securities, something that some people don't know about citadel is that is actually split up into two different firms: citadel and citadel securities citadel is a hedge fund manager started by ken griffin. Meanwhile, citadel securities was started many years after citadel, when ken griffin realized that there is a lot of money to be made in quantitative trading today. Citadel securities is the world's most powerful market maker and liquidity provider on majors talking options, exchanges, the company's main source of income, is from electronic market making as an algorithmic market maker in equity options, citadel security stands ready at all times to both buy and sell options. On stocks, the way they are able to make money is by paying a slightly lower price for the options they buy, called the bid price than the amount of money that they sell, for, which is called the offer price.

In return for capturing this spread between the bid and the offer price, they are required by the exchange regulations to always provide the best execution for other market participants called market takers, no matter what the market conditions are at the time in a normally operating market. This arrangement can be extremely profitable, but in periods of market volatility, market makers such as citadel securities, can face huge losses. One of the reasons why citadel securities has risen to the top of all market makers is that they're able to manage their losses during these times. Better than any competitor, another major reason for citadel's dominance is their superior ability to quote tight market spreads, improving the market prices offered to other market participants and thus attracting more volume in profits.

According to barons citadel securities offers by far the best order, execution of any market maker and thus has grown to dominate more than half of all new york stock exchange market making, as well as many other markets. Besides stocks and options, the practice of market making also comes with significant controversy. Citadel and other market makers frequently participate in, what's known as payment for order flow. In such an arrangement, market makers pay retail stock brokerages for the right to make markets for the brokerage's customers.

This often leads to outsized profits for the market maker. The market makers argue that their retail customers end up with better order execution than had the market makers not been there at all. But the fact is that firms like citadel are willing to pay extra money to brokerages like robinhood, in order to take the other side of the trade to hood traders. This has been the cause of frequent controversy, especially since the legendary gamestop short squeeze from january 2021.

Next on our list is new york-based two sigma investments like renaissance technologies, two sigma was started by another mit phd david siegel, along with john overdeck and mark pickard. They also put a huge emphasis on intense math statistics and computer science research in their trading systems on their website. They proudly declare that they have over 200 phds on their research teams, including 14 math olympiad medalists. An impressive mathematical achievement.

This firm collects and stores over 20 petabytes of data each year and places on the order of millions of trades a day to support about 58 billion dollars of assets under management. They have built a reputation for returning abnormally high profits for investors over the 20 years. They've been in business historically, they have engaged in trend falling strategies which continued to be their best performing strategy in 2020, returning more than 20 percent. Their firm aggressively recruits top talent from the world's leading universities and research institutions in the fields of machine learning and artificial intelligence to pick out trends and hidden patterns in the markets.

This is an incredibly difficult feat to do, as today's markets are extremely competitive. However, by building a reputation of being one of the best and having the prestige to attract the world's top talent, two sigma continues to excel in the area after 20 years of business. Next we have d e shaw. D.

E shaw is an older competitor to two sigma and has a longer track record doing many of the same things as two sigma. It was started in 1988 by david, elliot shaw. He was a stanford phd and currently chief scientist at d e shaw research. After close to 30 years running one of the world's most successful proprietary trading firms, he is one of the richest hedge fund managers in the world and now spends most of his time doing.

Research in his true passion, computational, biochemistry the fund runs similar strategies to renaissance and two sigma, using quantitative methods to uncover trends and other inefficiencies in markets. It is currently one of the largest and most successful such hedge funds and recruits heavily at top schools in subjects like math and computer science. They manage a similar amount of assets as two sigma, but also combine quantitative methods with discretionary approaches. The benefit of this is that they can use advanced quantitative methods to identify tradable signals in the markets, but then they can use trained analysts to mitigate risks associated with unusual market events and circumstances.

This emphasis on risk management is one of the reasons why de shaw has been able to operate for more than 30 years as one of the highest returning money managers in the world, including through the dot-com bubble and 2008 financial crisis. Meanwhile, many competitors have gone out of business during the same time. Our final elite, quant trading firm, is tower research. Tower research is more similar to renaissance technologies, in that they use sophisticated statistical and mathematical modeling techniques to develop largely automated trading systems.

They place massive amounts of trades every single day to take advantage of non-random market dynamics which their researchers find and sometimes account for as much as 10 percent of u.s stock trading. They also engage in active strategies whereby their automated systems proactively engage with other market participants. In a sort of adversarial trading competition, while this approach has made tower one of the best performing high frequency trading companies in the world, it has also gotten them into trouble with regulators. In 2019 tower research was fined 67 million dollars by american regulators for spoofing index futures markets.

However, such a small fine is unlikely to move the needle in tower research's legacy, as they are one of the oldest and most prestigious qualitative trading companies in the world. Alright guys that wraps it up for the top five quantitative hedge funds in the world today, of course, there are many other quant shops that we did not mention on this list, as well as many other highly profitable hedge funds, that we didn't count as quantitative enough To compete with the friends on this list, but any top five list in the world of finance is inherently subjective and the five quant firms that we've looked at today are undeniably five of the world's best. If you like, this content, make sure to smash that like button and subscribe for future videos, if you have another hedge fund or trading firm, that you think should be on this list, let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next video wall street millennial signing out.