There’s a crazy, lopsided irony in Jim Simons’ position as founder of the world’s most successful hedge fund, Renaissance Technologies. A lot of the time he literally doesn’t know what it is doing.
This is not a criticism, but a fact and a tribute to the genius system Simons pioneered in founding Renaissance Technologies, whose flagship Medallion Fund has returned a gargantuan average of 66% per year for the past three decades.
Simons’ visionary automated systems use every piece of big and small data, algorithms and computer modelling to a degree that completely removes all human bias and emotion from buying and selling decisions. This is a fund whose average holding positions across multiple asset classes — global equities, futures, commodities, currencies — last just two days as they chop and change with the weather. Sometimes, as no data is off-limits to Renaissance Technologies, decisions will be made even because of it.
Such quickfire, reactive pivoting would surely go against even the most butterfly-minded instinct – few people would trouble themselves constantly switching and tracking for the smallest of incremental gains. But the computer quietly, instantly, does its thing – without Simons’ team ever needing to know its reasoning.
“The advantage scientists bring into the game,” Simons once said, “is less their mathematical or computational skills than their ability to think scientifically. They are less likely to accept an apparent winning strategy that might be a mere statistical fluke.”
“The advantage scientists bring into the game is less their mathematical or computational skills than their ability to think scientifically. They are less likely to accept an apparent winning strategy that might be a mere statistical fluke” - Jim Simons
Becoming the renaissance king
Simons is undeniably the father of the Quant revolution. A maths prodigy and former security services codebreaker, he began playing the markets in 1978 and realised algorithms, not sentiment, was the key to investment success and therefore past performance data was key.
So when he founded Renaissance in 1982, he didn’t hire financial wizards, but mathematicians, programmers, physicists, even astronomers, to collate and work with every scrap of data, however insignificant, some going back 300 years. It’s a system that has generated $110bn in assets and made Simons personally $23.5bn.
“Today, a lot of the world of investing is quantitative, automated mathematical-inspired trading systems,” says Wall Street Journal journalist Gregory Zuckerman. “The world has embraced Jim Simons’ approach, but he was the pioneer.”
Of course, Simons, now 82, does macro-manage and monitor the big moves – such as the firm’s recent decision to dump all its 193,000 Amazon [AMZN] and 979,000 Apple [AAPL] shares. Even so, you sense only an unbiased algorithm would take Renaissance Technologies’ recent rollercoaster approach to Tesla [TSLA] – in Q1, it sold 80% of its 3.9 million shares, only to increase its holding by 44% to 1.1 million in Q2.
Renaissance Technologies’ biggest holdings currently are pharma giants. Top of the list is Bristol-Myers Squibb Co [BMY] (2.2%), followed by Novo-Nordisk [NVO] and AbbVie [ABBV]. Zoom [ZM] also rose to fourth place in Q2, after Simons boosted its stake by 160% to 7.3 million shares worth around $1.8bn.
A fast trading investment strategy
As for investment strategies, Simons obviously saves his most effective for the Medallion fund, which is open only to employees. “I think it’s about 95% alpha, so it really doesn’t matter where the stock market is going,” he says. “By having a lot of fast trading, spreads have come way down, volumes have gone up, and therefore it’s easier to get off a trade because there’s more volume,” he told CNBC in 2016. “I think it’s actually brought short-term volatility down, not up. So I think it’s been good for the market.”
But Renaissance Technologies is not just about Medallion. “We have some publicly available funds, which do have some beta,” says Simons. “Of course, they don’t do as well, but they do quite well.”
“By having a lot of fast trading, spreads have come way down, volumes have gone up, and therefore it’s easier to get off a trade because there’s more volume. I think it’s actually brought short-term volatility down, not up. So I think it’s been good for the market” - Jim Simons
Not so much this year, though. The Renaissance Institutional Diversified Alpha and the Renaissance Institutional Diversified Global Equities Fund were, respectively, down 20% and 18.6% for the first seven months of 2020, according to Bloomberg. In contrast, the Medallion fund gloried in its secret self-isolation to return around 24% this year through 24 April, including a 10% return in March as the markets crashed.
Observers have variously put Simons’ public funds’ mediocre performance down to the Alpha fund’s move away from trend-following strategies in 2018, as well as circuit breakers preventing such automated funds being able to liquidate positions as quickly as they’d like.
A lesson in leadership
That still doesn’t explain Medallion’s continued rise, though. Unsurprisingly, Simons isn’t about to either. It may simply be the unorthodox way he assembles his team, says Zuckerman, who profiled Simons in his recent book The Man Who Solved The Markets.
“He’ll target people who've accomplished important things in the world of math and science,” said Zuckerman in a recent interview on the Opto Sessions podcast, continuing: “and then hire them, even if they don't really know what they’ll do at the firm.
“They just make the bet that when a smart, driven person is hired, they’ll find a way to improve their trading system. In other words, you just hire somebody super smart and driven and accomplished and let them figure out a way to add value. Most companies don't have that luxury of being able to do that.”
“In other words, you just hire somebody super smart and driven and accomplished and let them figure out a way to add value. Most companies don't have that luxury of being able to do that” - Gregory Zuckerman
Simons himself concurs. “My idea of leadership is to hire the very best people you possibly can,” he said in a recent interview with University of California physics professor Dr Brian Keating. “And I have a good taste in people.”
Secrets to success
What is his secret? “Just to stay ahead of everyone,” is all he’ll reveal. “Our research goes on all the time, trying to find new predictive signals. The more you have that are independent but correlate with each other, the better, but sometimes they lose their power because other people have caught on and you have to discard them. So we keep discovering new ones.”
“Our research goes on all the time, trying to find new predictive signals. The more you have that are independent but correlate with each other, the better, but sometimes they lose their power because other people have caught on and you have to discard them. So we keep discovering new ones” - Jim Simons
While Simons may not know exactly how his computers use that information, he designed them like that – and their ability to make lightning-quick decisions clearly reflects the man himself.
“Don’t dawdle about making a decision,” he told the Into the Impossible podcast during an interview. “I consult with people but I don’t go back and forth for a long time. I make the decision. Sometimes it’s wrong, but most of the time my decisions have been good.”