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Most Successful Quant Hedge Funds Guy ... Ever

Degree from MIT; taught at Harvard. Worked as code breaker for Department of Defense during Vietnam. Founded Renaissance Technologies hedge fund firm 1982. Flagship Medallion fund averaging 34% annual returns since 1988. Most expensive fees in the business: 44% of profits, 5% of assets. Hires Ph.D.s instead of M.B.A.s; employees use computer modeling to find market inefficiencies. Launching fund for institutional investors that could handle $100 billion. Chairs Math for America; group donated $25 million last year to train 180 New York City math teachers.

James Simons, the founder of Renaissance Technologies, a hedge fund, once said, “Luck plays a meaningful role in everyone’s lives.” Simons, a 71-year-old former university professor and a celebrated mathematician, has been blessed with the stuff. His flagship fund, Medallion, has had average annual gains of more than 35% for 20 years. Last year he was named the best-paid hedge-fund manager in America by Alpha, a hedge-fund magazine, reportedly earning $2.5 billion. Medallion gained 80% last year, and this year is up a further 12%. What makes this feat even more incredible is that Simons, one of the members of Alpha ’s inaugural Hedge Fund Hall of Fame (June 2008), charges a fat 5 percent management fee and 44 percent performance fee. To put it another way, Medallion — which has about $7 billion in assets — was up almost 160 percent before fees. Renaissance, which had $25 billion in total assets at the end of 2008, began this year with about $20 billion, presumably because of redemptions.

But Medallion is 98% employee owned and has not accepted new money for 15 years.

But, when rumors spread in 2005 that he was starting a new $100 billion hedge fund, people outside of his field also began to take notice of him. So to cater to outside investors, Renaissance has since 2005 marketed another “mega fund” known as the Renaissance Institutional Equities Fund (RIEF). The problem is that this has not proved anything like as successful as Medallion. Before its launch a small army of Renaissance PhDs—there are more than 70 on the payroll—back-tested RIEF’s performance with a simulated portfolio of $100 billion. From 1992 to 2005, its theoretical return was more than double that of the S&P 500, with less than two-thirds of the volatility. Investors queued up like Trekkies waiting for tickets to the new film.

In the first two years RIEF raised more than $1 billion a month. With new money coming in faster than it could be invested, monthly contributions were capped at $1.5 billion. By August 2007 the fund was managing almost $28 billion. But in 2008 RIEF lost 16% and investors withdrew $12 billion from Renaissance, which was the largest prime-brokerage client of both Bear Stearns and Lehman Brothers, two investment banks that failed. The downward spiral has continued this year, with RIEF losing 17% so far. It now has less than $10 billion of assets under management.

Jim Simons, businessman and founder of Math for America Credit: AP Photo/Jason DeCrow

Simons explains the lopsided returns by saying that the two funds approach investing in different ways. Medallion attempts to identify “predictive signals” in the market. Its high-powered computers are programmed to profit from split-second price distortions. RIEF moves much more slowly. Most positions are held for a year. Like Medallion, it uses computers to buy and sell stocks. The fund is designed to provide investors with smooth returns, the success of which is measured against the S&P 500.

It has, in fact, beaten the S&P 500 by almost 4% a year since inception, but it has also trailed behind an index of its peers. In general, computer-driven funds are becoming less popular with investors. But Simons is RIEF’s biggest investor, which gives him every reason to want to improve its performance. This could be the biggest lesson of the whole episode. Though investors may think they are seduced by the wizardry of Renaissance’s computer-driven models, what they are really betting on is the magic touch of the man himself.

Before becoming one of the top money managers in the world, Simons was a decorated mathematician. His work was primarily in geometry, peripherally related to the Poincare conjecture. Simons’ work on differential geometry, which he did in collaboration with S. S. Chern, has proved useful to string theorists.

Simons is also a generous philanthropist. He has donated significantly to math education, universities, and plans to give over $130 million in the next few years to the study of the genetic basis of autism. He also recently gave $13 million to keep the Relativistic Heavy Ion Collider at Brookhaven National Laboratory running when the Department of Energy announced a funding shortfall this past year.

In a recent interview: How do you select people for your company? We look for people who have demonstrated the ability to do first-class research. We are not a teaching organization. We are a research organization. We hire people to make mathematical models of the markets in which we invest. We look for people who have had success, typically academically, although some people come out of an industrial laboratory like IBM or Bell Labs. Most come out of academia. They’ve had three to five years, written a few papers, and already have some kind of reputation. First and foremost, we look for people capable of doing good science, on the research side, or they are excellent computer scientists in architecting good programs. We have very high standards and it works. Our business is wonderful as a result.

Simons in 2006 was around the #280 mark as the richest America according to Forbes with a net worth estimated at $2.8bn. In 2009, Forbes had him zooming up to #55 with a net worth of $8bn.
... btw ... why are the over 100 books on Warren Buffett and not even one on James Simons???!!

p/s photos: Deborah Priya Henry


Soon Hui said…
Medallion attempts to identify “predictive signals” in the market. Its high-powered computers are programmed to profit from split-second price distortions.

Seems to me like he's doing HFT -- nothing mysterious-- lots of funds can do that; the only thing that separates those losers and Simons, are hardware infrastructure and sheer computer power.

It has, in fact, beaten the S&P 500 by almost 4% a year since inception, but it has also trailed behind an index of its peers. In general, computer-driven funds are becoming less popular with investors.
Another stark reminder of why market is always smarter than you. Efficient Market Hypothesis still seems to have the last laugh.
alfaizal said…
Why no book on this guy? Simply because Mr. Buffett sense of investment is much easily understood by layman like me i.e value investing, looking at fundamentals, compared to using mathematical models.

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