[Welcome, Physician on Fire readers! This article was featured in the 2/12/17 edition of The Sunday Best. If you’re new to this blog, I encourage you to check out my welcome page! -WSP].
This is the first of what hopefully will be a recurring series of profiles of Wall Street traders, examining their lives, trading careers, and keys to their success. Their stories illustrate what it takes to succeed on Wall Street, and that us physicians stand little chance when competing against these traders.
We will start our series with Jim Simons of Renaissance Technologies. He is a former mathematics professor who started the Medallion Fund, which has had some of the most impressive returns in the history of financial markets. He is the pioneer of quantitative, or “quant” trading, a model where hedge funds hire basic science PhDs to develop winning trading algorithms.
Biography
Jim Simons was born in 1938, and grew up in suburban Boston. He went to MIT for undergrad, and got his PhD in mathematics from Berkeley when he was just 23 years old. Following his PhD, he took various positions, including working in cryptography at the Institute for Defense Analyses, before becoming professor and eventually chairman of the mathematics department at Stony Brook University. He was an accomplished mathematician, most famous for the Chern-Simons form, which earned him the Oswald Veblen Prize in Geometry in 1976. He left Stony Brook in 1977, and formed his hedge fund firm, Renaissance Technologies, in 1982. With the success of his hedge fund, he is now worth over $16.5 billion dollars.
With his significant wealth, he has been involved with numerous philanthropic efforts in conjunction with his Simons Foundation. He founded Math For America in 2004, a non-profit organization aimed to recruit bright young mathematicians and scientists to teach in high schools (similar to Teach for America). In 2011, he made a $150 million donation to Stony Brook University.
Renaissance Technologies And The Medallion Fund
Renaissance Technologies was formed in 1982, and the Medallion Fund was formed in 1988. In its 29 years of existence, it has had only one down year (1989). According to Bloomberg, if you had invested $1,000 with the fund at inception, it would now be worth a breathtaking $13.8 million dollars. This corresponds to a 38.9% annualized return over nearly three decades. What makes the returns all the more remarkable is that they are after fees. Since 1993, Medallion has charged fees of 5% of assets and 44% of profits. In comparison, most hedge funds charge fees of 2% of assets and 20% of profits. Of course, Vanguard Total Stock Market Index Fund has an expense ratio of only 0.05%.
So how can you invest in the Medallion fund? You can’t. The fund is only available to employees. And if you’re thinking about applying for a job, you better have some serious academic credentials. As a mathematician himself, Simons pioneered the “quant” approach to investing, hiring basic science PhDs and avoiding job applicants with economics or finance backgrounds. Presumably, he felt that a fresh perspective to the markets was necessary to beat it.
Keys To His Trading Success
1. Hiring basic science PhD’s
Jim Simons takes the approach of hiring academics with PhD’s in the basic sciences, such as mathematics or physics. He does not hire individuals with economics or finance MBAs or PhDs. He believes that people with science backgrounds, like himself, are the best people to discover novel profit-making investment opportunities in the global markets. This strategy of investing in individuals who have no formal finance background has been replicated by others in the industry. In college, I remember the mathematics and engineering buildings would be filled with recruiting posters by hedge funds with clever statements written in mathematical notation that only quantitative people could understand.
2. Identify profitable trading strategies
Given the backgrounds of its employees, it is likely that Renaissance Technologies utilizes quantitative trading strategies to make its money. How they specifically make money is a closely guarded secret. According to the Bloomberg article profiling the hedge fund, the scientists identify inefficiencies in the market, and exploit them until they no longer are present. There’s been many, many, many discussions on Quora about Medallion’s trading strategies, but frankly, we just don’t know how exactly this hedge fund makes their money.
3. Don’t share those winning strategies with anyone
Jim Simons is an intensely private person, rarely giving television or print interviews. Part of his success is being able to keep his employees from defecting and sharing their trade secrets with other hedge funds or investment banks. The fact that Renaissance has been successful for 30 years without anyone having any idea how they are making money is remarkable. If you have a winning trading strategy, you don’t share it with anyone. Ever.
Conclusion
Jim Simons is a clear success case of someone who has beaten the market. He has consistently demonstrated that markets are perhaps not as efficient as academics believe. Markets are inefficient, and they stay that way because he does not share his trading secrets. His trading formula is more closely guarded than the recipe for Coke. As a result, no one has come even close to replicating his success.
If anyone sells you a book showing you how to trade, don’t buy it. The trading strategy probably doesn’t work. If it did, why would they share it? Jim Simons could write a book about his trading secrets that would sell millions of copies overnight and be read by every trader on Wall Street, but why would he do that when he has made billions of dollars for himself over the past 30 years and will continue to do so in the years to come?
What do you think? How does Renaissance Technologies make money? Could the average investor replicate their success? If you’re interested in learning more about Jim Simons or Renaissance Technologies, check out this Bloomberg article discussing the Medallion Fund and this New York Times profile of Jim Simons.
Interesting profile of Jim Simons, WSP!
I’m not sure if the average investor could replicate his success as it probably took a long time to identify the inefficiencies of the market through the large amounts of data available.
Until we can obtain faster and more advanced technology like stronger quantum computers and faster machine learning for the general public, then I think it would be possible for the average Joe to be as successful as Jim Simons.
The problem is that Jim Simons will likely have the more advanced technology before us.
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Army of researchers do contribute knowledge and oversee criteria. Your fund has to earn enough to pay the wages of hundreds. All the hundreds of thousands of functions each do perform something, even as simple as accounting for changes in acquisitions, new internal systems, political, banking. My own pitifully simple models are undoubtedly missing thousands of features compared to yours. Heck your past company probably has better project management software than my own Trello. What management software did you use there? All things equal, begin a little better in A, then better in B, then C and D eventually all adds up. A car with better interior, distance, computer, design. A house with better view, furniture, larger, comfortable, colors. You would pick the slightly better one, I think everyone would.
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