The Man Who Solved the Market

The most successful hedge fund in the past 30 years was founded by a math professor with no prior successful trading experience. It seems like that should not be possible, but Jim Simons accomplished this feat and became a billionaire in the process using his experience working with mathematicians and applying it to capital markets.

To call Mr. Simons a math professor is an oversimplification. After achieving his bachelor’s degree from the Massachusetts Institute of Technology and his PhD from the University of California, Berkley, Simons began his career as a codebreaker for the Institute of Defense Analyses. He applied high level mathematical concepts to decrypting communications during the Cold War. After his four years with the IDA, he taught mathematics at Harvard University and MIT and eventually Stony Brook University. At Stony Brook, Simons was appointed chair of the math department. Simons sculpted a top ranked mathematics department nearly from scratch using his ability to attract and to manage other talented mathematicians.

When Simons was 40 years old, he left his position at Stony Brook to found Monometrics (later renamed Renaissance Technologies LLC). He founded this company on the idea that it was possible to use computers and sophisticated mathematical models to find repeating patterns in the capital markets and profit from them. This vision was partly based on his experience using computers and models to decode communications for IDA. While it is hardly a unique concept in 2020, it was unheard of in 1982. After tinkering with a relatively small amount of money and achieving relatively mediocre results, Renaissance opened the Medallion Fund in 1988. Words don’t do the success of this fund justice.

This fund achieved spectacular results because of the input of a number of influential Renaissance partners. James Ax was one of the first people to employ the quantitative strategies to trading in currency and commodity markets. Elwyn Berlekamp, Sandor Straus and Henry Laufer took the reins after Ax left and overhauled the trading strategies and led Medallion to several successful years in the early 1990s. Peter Brown and Robert Mercer took the system to the next level by revamping the trading algorithms into one monolithic trading program that also incorporated the stock market into its trades. Peter Brown has been CEO of Renaissance since Simons retired in 2014.

Any time you hear financial experts talking about how the market went up because of such and such—remember it’s all nonsense.

Peter Brown

The Renaissance employees were cynical about the ability to predict price moves of specific stocks or markets. They read and analyzed every academic paper that came out about predicting market moves. Repeatedly, they would test the academic research against their data and find the proposed system lacking. Medallion made most of its trading profits by analyzing relationships between specific securities. Rather than predict the direction of any one of these, the model bet that, after some dislocation from the long term relationship between two or more securities, the relationship would return to what it had been in the longer term. By betting on these relationships, Medallion was able to make money during all market conditions.

While they were building the Medallion Fund, success was never inevitable. Even Simons occasionally had moments of doubt that his computerized trading system would be able to handle certain market conditions. In 1990, Simons was still doing his own trading based on charting certain commodities, specifically gold and oil in this story. In August as the Gulf War began, Simons repeatedly pestered Berlekamp (at that point the head of the Medallion Fund) to add more gold and oil futures to the fund. Berlekamp rebuffed Simons’ attempt at meddling with the system, but it was a prominent example of the doubts that even Simons had in computerized trading.

Even in 2018, after thirty years of remarkably high returns, Jim Simons called Ashvin Chhabra of Euclidean Capital, a firm that invests the money of Simons and his family, to ask if he should be selling short during the market decline of late 2018. This was apparently the day before the market bottom. This man who had the vision that computers could dominate trading and provide a better way forward still got just as nervous about price declines as the average investor after a 20% drawdown.

Jim Simons founded the greatest hedge fund that the world has ever seen. He wasn’t successful because of a strong feel for capital markets or because of a talent for trading. He was successful because he had a vision that computers would come to dominate trading. Simons was also adept at attracting and managing very talented mathematicians and programmers. Renaissance always seemed to have the right person on staff when an important breakthrough was needed to move the firm to the next level. Thirty-eight years later, Jim Simons is a billionaire many times over and Renaissance continues printing money for its investors.

I think everything is under control. As long as you keep making money for investors, they’re generally pretty happy.

Jim Simons

Have you read this book? Is there something that you found interesting that I didn’t mention? Leave a comment below!

4 thoughts on “The Man Who Solved the Market

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s