Medallion Fund “Stretches Explanation to the Limit,” Professor Claims
Of the wild theories I&#x27;ve heard to explain the Medallion Fund, my favorite is the &quot;money wormhole.&quot; I have no finance qualifications whatsoever -- I just stick my money in index funds -- but I love a good conspiracy theory, so here goes.<p>The idea is that you have two theoretically unrelated funds that take complementary positions with uneven odds. One sacrifices performance for the other, effectively transmitting money. The trick, of course, is doing this in a manner so that you have plausible deniability with regulators and, more importantly, so that other market players don&#x27;t grab the money in flight, because that&#x27;s what an efficient market would do. Still, consistently creating and hiding complementary pairs of good&#x2F;bad opportunities is a much easier problem than consistently beating the market.<p>OK, so you&#x27;ve got a way to transmit money from a &quot;sucker fund&quot; to a &quot;winner&#x27;s fund&quot; with plausible deniability, what do you do with this ability? In reality you&#x27;d probably have many &quot;sucker funds,&quot; rotate the one that gets sucked, and limit the extent to which it gets sucked, but still, nobody&#x27;s going to just buy the sucker fund, not for long, anyway. That&#x27;s how efficient markets work. Well, one major, well-known, boring inefficiency is the principal agent problem: trusting others to invest your money. They can&#x27;t just steal it, because that&#x27;s illegal. They can&#x27;t just invest in a private fund that they just happen to oversee and which just happens to pay them an enormous salary, because that&#x27;s illegal. However, if they were to invest in one side of a money wormhole, which is designed to look like a perfectly reasonable investment on its own, in exchange for a cut of the proceeds from the other side of the money wormhole, who&#x27;s to say the theft even happened? Such an accusation would need to untangle the coordination behavior of the money wormhole to make its case, and those inner workings could be made very convoluted indeed, hidden deep inside complementary pseudorandom behavior.<p>So, in short, the conspiracy theory says it&#x27;s a heist -- but one that&#x27;s well hidden under the veil of statistics and plausible deniability. It provides investment managers looking to monetize the confidence placed in them a way to make that happen without getting caught.<p>It&#x27;s probably a dumb theory, but it&#x27;s enough to entertain someone who knows as little about finance as I do :)