Jim Simons Hedge Fund Returns

“I wanted to do mathematics from the time I was 3. Literally. I would think about numbers and shapes.”

~ Jim Simons

Jim Simons Hedge Fund Returns: Those who knew Jim Simons at the start of his career had no idea where his love of mathematics would take him. Until 1978, Simons was known only for his talents as a mathematician. He was astonishingly successful at code-breaking, and he was an engaging professor held in high regard by his students and peers.

A deep understanding of mathematics gave Simons insight into the patterns and prospects of economic markets. Simons was convinced that by applying mathematical principles to financial data, he could spot trends and create formulas that would lead to profits.

That year, Simons launched Monemetrics. With the help of other gifted mathematicians, he worked to find hidden order in the apparent chaos of the currency markets. Three years later, Monemetrics was rechristened as Renaissance Technologies Corporation.

Today, Renaissance Technologies and its trademark Medallion Fund are beating the market year after year, and Simons’ estimated net worth is approximately $21.6 billion as of October 2019. That makes Jim Simons the 21st wealthiest person in the United States.

What is his secret? How has Simons harnessed the power of mathematics to profit from an often-unpredictable market?

Jim Simons Quant Genius & CodeBreaker

Quantitative analysts or “quants” are a very special breed of mathematician – one that can apply mathematical and statistical theories to finance in a way that brings order to complex markets. As Simons puts it, We search through historical data looking for anomalous patterns that we would not expect to occur at random.

They analyze massive amounts of data to spot patterns and trends, in some cases identifying obscure relationships between various assets. Once these patterns, trends, and relationships are spotted, quants create appropriate investment strategies in an effort to generate profit.

Jim Simons spent decades mastering complex mathematics, and when he turned his expertise to investing, he became the first to succeed with a quantitative approach to trading. It took him many more years to perfect his process, but by 2005, he made it onto Forbes’ Billionaires List.

Certainly, he has had bad years and years where Renaissance funds didn’t make the remarkable gains investors were accustomed to, but he kept on despite setbacks. He partnered with some of the smartest people in the mathematics world to develop algorithms capable of predicting how the market would behave, and he designed trading models able to operate independently.

By 2018, there was a general consensus in the finance world that Simons had perfected his quantitative approach to trading, and financial institutions around the world are desperate to duplicate his success. When asked about his closely guarded proprietary models, he said:

“Of course we can’t show the model or tell people how we calculate our forecasts. That would be like Warren Buffett telling the world what stocks he’s buying before he buys them.”

That hasn’t stopped the next generation of financial professionals and quantitative analysts from trying, though to date, it doesn’t appear that anyone has been able to figure out his secret.

Jim Simons Quotes

Though the details of Simons’ algorithms and models are carefully guarded, he has been generous in sharing some of the underlying principles that drive his investment activity. These are a few of Jim Simons’ most-often referenced quotes which, when considered as a group, give insight into the day-to-day work that goes into mastering the market. He says:

“Stocks are chosen based on signals generated by a series of proprietary predictive systems.

We search through historical data looking for anomalous patterns that we would not expect to occur at random. Our scheme is to analyze data and markets to test for statistical significance and consistency over time.

Once we find one, we test it for statistical significance and consistency over time. After we determine its validity, we ask, ‘Does this correspond to some aspect of behavior that seems reasonable?’

Efficient market theory is correct in that there are no gross inefficiencies. But we look at anomalies that may be small in size and brief in time. We make our forecast. Then, shortly thereafter, we re-evaluate the situation and revise our forecast and our portfolio. We do this all day long. We’re always in and out and out and in. So we’re dependent on activity to make money.

[On always having to continue to develop new trading models before the current ones lose their effectiveness in doing technical trading.] The system is always leaking, and we keep having to add water to keep it ahead of the game.

There’s no such thing as the goose that lays the golden egg forever.

And finally:

We don’t override the models.

The things we are doing will not go away. We may have bad years, we may have a terrible year sometimes. But the principles we’ve discovered are valid.

Simons Hires Brilliant Minds Full Of Imagination

Understanding how Simons staffs his organization is illuminating. It’s not about market experience, and even mathematics expertise isn’t necessarily part of his hiring criteria. He says:

I want a guy who knows enough math so that he can use those tools effectively but has a curiosity about how things work and enough imagination and tenacity to dope it out.

Simons also mentioned:

I have one guy who has a Ph.D. in finance. We don’t hire people from business schools. We don’t hire people from Wall Street. We hire people who have done good science.

Finally Jim Simons is a great believer in the importance of luck in long-term market success. Many of his most often referenced quotes say exactly that:

In this business it’s easy to confuse luck with brains. Luck plays a meaningful role in everyone’s lives.

Perhaps most interesting of all is this insight into Simons’ understanding of his own success:

Luck, is largely responsible for my reputation for genius. I don’t walk into the office in the morning and say, ‘Am I smart today?’ I walk in and wonder, ‘Am I lucky today?’

Jim Simons Hedge Fund

Renaissance Technologies operates differently from other hedge funds, in that it doesn’t focus on employing financial experts. Simons has always chosen his staff from the world’s greatest scientific minds, and he has leveraged that intelligence to create algorithms and models that can predict how the market will behave.

The only real issue with SImons’ methodology is that for the moment, it isn’t as effective on a large scale. Renaissance Technologies’ Medallion fund is its highest-performing investment, but Simons has determined that it can only maintain its impressive success if it stays relatively small – around $10 billion or so.

As a result, only employees are allowed to participate in this fund, which is helpful in attracting the world’s best and brightest minds to the organization. Most have approximately $50 million invested in Medallion, though Simons has a much bigger stake. It’s noteworthy that Simons made his fortune through strong Medallion returns. He never relied on growing his personal wealth through fees and commissions from clients. That differentiates Renaissance Technologies from its peers.

Renaissance offers two portfolios that are open to outside investors:

• Renaissance Institutional Equities Fund (RIEF) and
• Renaissance Institutional Diversified Alpha (RIDA).

These are much bigger, and while they don’t bring the same returns  offered by Medallion, they are still quite successful.

Simons explains the difference in returns to be a result of the fund sizes. He says that large amounts of money can’t be traded as quickly, and his models are most accurate in the short-term. He points out, “It’s like the weather. The nearer in, the higher the certainty.”

Jim Simons Hedge Fund Returns

Warren Buffett and Berkshire Hathaway might have a stronger brand in the marketplace, but the fact is that Jim Simons and Renaissance Technologies have produced better returns over the past 30 years. Before fees, the Medallion Fund produced returns of 66.1 percent annually between 1988 and 2018. After fees, investors gained 39.1 percent, equalling profits of around $104.5 billion.

Renaissance funds have certainly had less-profitable years, and one year there was a substantial loss. However, it beats basic indexes year after year, even when the market is in a downward spiral. Consider this – between 2001 and 2013, Medallion’s worst year still produced a 21 percent post-fee gain. In 2008, when the S&P 500 lost 38.5 percent of its value, Medallion went up by 98.2 percent.

Renaissance Technologies has no trouble attracting investors, though many are disappointed that they can’t participate in the extraordinary success of Medallion. Despite that, Renaissance clients have poured money into the other funds. In 2005, Renaissance Technologies managed approximately $5 billion in assets. In 2019, that figure was closer to $68 billion.

Jim Simons’ Book

Wall Street Journal reporter Greg Zuckerman had obstacles to overcome when he decided to memorialize Jim Simons’ career in his book The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution. The biggest challenge was the fact that Simons himself was opposed to any book about his career.

Nonetheless, Zuckerman persisted, understanding that Simons’ story needed to be told. For those who have made their living in the financial world, it’s an opportunity to understand the inner workings. For entrepreneurs who aspire to disrupt current business methods and transform the world, it’s an inspiration.

Zuckerman’s book gives a detailed history of Simons himself, along with the background story of Renaissance Technologies. It is the product of 2.5 years of research, during which Zuckerman interviewed a number of Renaissance employees, both past and present, before eventually spending hours with Simons.

The Jim Simons book is an important resource for anyone who has an interest in the markets as a whole, along with those who want to learn more about building an empire from the ground up. It also includes a discussion of how Simons’ investment principles can be applied to scientific research for the benefit of all humanity.

Simons took a large portion of his wealth and put it into the Flatiron Institute. This non-profit is structured along the same lines as Renaissance Technologies, but instead of examining financial data, the Flatiron Institute focuses on scientific data.

Using the power of quantitative analysis, researchers are working on everything from astronomy to genetics. They process massive, previously unmanageable data sets to find previously unseen patterns. The foundation partners with field researchers to expand on the results of existing experiments and trials, making those efforts more effective. Simons is committed to using the bulk of his wealth for large-scale betterment of humanity, and this shows through his on-going philanthropic work.

In the end, Simons has this to say about his overwhelming success:

I wasn’t the fastest guy in the world. I wouldn’t have done well in an Olympiad or a math contest. But I like to ponder. And pondering things, just sort of thinking about it and thinking about it, turns out to be a pretty good approach.

At number one on Forbes’ list of highest-earning hedge fund managers and traders, it does indeed appear to be a pretty good approach to mastering the market.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.