The Secret World of Jim Simons How does this prize-winning mathematician and former code breaker rack up his astonishing returns? Last April the State University of New York at Stony Brook held a gala reception at the Waldorf- Astoria Hotel in midtown Manhattan to celebrate raising a record $1 million — a tidy sum for a state school. After cocktails a balding, white-haired man rose from his seat on the dais to thank the sellout crowd, which included such celebrities as Oscar-winning movie director Martin Scorsese, for its generosity. I told my wife, ‘We raised $1 million for Stony Brook,’ said the speaker, hedge fund manager James Simons. She said, ‘Gross or net?’ Chances are you haven’t heard of Jim Simons, which is just fine by him. Nor are you alone. Many on Wall Street, including competitors in his specialty, quantitative trading, haven’t heard of Simons or of his operation, Renaissance Technologies Corp., either. And that’s simply extraordinary— because, gross or net, Simons may very well be the best money manager on earth. An extreme judgment? Perhaps. Certainly, there has been no end of claimants to the title. And one after another, over the past few years, these celebrated managers have either blown up or folded their tents. After big reverses, Julian Robertson closed down Tiger Management, and George Soros scaled back the activities of his Quantum Fund this year. John Meriwether’s Long- Term Capital Management nearly took down the financial world in 1998. Since its inception in March 1988, Simons’ flagship $3.3 billion Medallion fund, has amassed annual returns of 35.6 percent, compared with 17.9 percent for the Standard & Poor’s 500 index. For the 11 full years ended December 1999, Medallion’s cumulative returns are an eye-popping 2,478.6 percent (see graph, page 47). Among all offshore funds over that same period, according to the database run by veteran hedge fund observer Antoine Bernheim, the next-best performer was Soros’ Quantum Fund, with a 1,710.1 percent return (see table, page 44). Simons is No. 1, says Bernheim. Ahead of George Soros. Ahead of Mark Kingdon. Ahead of Bruce Kovner. Ahead of Monroe Trout. And Bernheim’s numbers don’t include Medallion’s 2000 performance. In a year of exceptional volatility and market dislocations, the fund is up 64 percent through September. Over the years, Simons’ consistency has been exceptional. Apart from his second year, 1989, his fund has not had a losing year (it was down 4.1 percent that year). In fact, in the past decade, it’s never returned less than 21 percent. In 1976, at 38, Simons won the American Mathematics Society’s Veblen Prize — awarded every five years, it is the geometry world’s highest honor — for his work in the excruciatingly esoteric field of differential geometry. His signature work — a 26-year-old theorem crafted with renowned geometrician Shiing-Shen Chern that is known as the Chern-Simons theory— has recently emerged as a critical tool for theoretical physicists searching for fundamental laws of the universe. Chern-Simons pervades a whole class of theories that underlie our fundamental view of the observable world, says Brandeis University physicist Stanley Deser, an expert on supergravity, a discipline of quantum theory that studies elementary particles and their interaction. Simons surrounds himself with like minds. The headquarters of Renaissance, in the quaint town of East Setauket on New York’s Long Island, resembles nothing so much as a high-powered think tank or graduate school in math and science. Operating out of a one-story wood-and-glass compound near SUNY Stony Brook, Renaissance, founded in 1982, has 140 employees, one third of whom hold Ph.D.s in hard sciences. Many have studied or taught in Stony Brook’s math department, which Simons chaired from 1968 to 1976. Among their ranks: practitioners in the fields of astrophysics, number theory, computer science and computational linguistics. In notably short supply are finance types. Just two employees, including the head of trading, are Wall Street veterans. 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, says Simons. We hire people who have done good science. Simons rarely speaks at financial forums, preferring math conferences. He celebrated his 60th birthday with a geometry symposium at Stony Brook that included such lectures as Generalized Chern-Simons Invariants as a Generalized Lagrangian Field Theory. Simons’ most famous work is his 1974 paper Characteristic Forms and Geometric Invariants, which he coauthored with the renowned Berkeley geometer Chern. It represented an important breakthrough in geometry that would become known as the Chern-Simons theory. Differential geometry, Simons’ specialty, is the study of curved surfaces and spaces. We are all familiar with spheres; we live on a very big one, after all. But it turns out that, for mathematicians, they are fiendishly complicated. Geometers establish the properties that separate one type of object from another. Although they have been able to determine the properties of what to laymen are such incomprehensible objects as spheres with ten dimensions, they have not been able to do this with spheres in the third dimension. Simons has long had an affinity for business. In 1961, he and a few MIT classmates invested in a Colombian floor tile and pipe company. At Berkeley he tried his hand at trading, looking to invest about $5,000 in wedding gifts from his first marriage. He found that stocks bored him. I went to a Merrill Lynch broker, recalls Simons. He said, ‘Try soybeans.’ In 1988 Simons decided to launch a fund that concentrated on pure trading. Simons steadily recruited top-tier scientists. They focused on speeding up systems, studying how to optimize risk allocation and determining trading strategies. By 1994 Renaissance, which had started with 12 employees, had 36 on staff, and Medallion was trading 40 types of securities, up from 12. Renaissance essentially attempts to predict the future movement of financial instruments, within a specific time frame, using statistical models. The firm searches for something that might be producing anomalies in price movements that can be exploited. At Renaissance they’re called signals. The firm builds trading models that fit the data. When the trading starts, the models run the show. Renaissance has 20 traders who execute at the lowest cost and without moving markets, crucial requirements for quant investors trading on narrow margins. But the models decide what to buy and sell. Only in cases of extreme volatility, or if the signals appear to be weakening, does the firm sometimes manually cut back. Says Simons, We don’t override the models. What is not known are the secrets of the algorithms that can pick stocks smartly enough to beat the market with a portfolio that’s short and long and trade efficiently enough to hold down costs to a bare minimum. Simons explains his firm’s approach as the financial econometrics equivalent of blocking and tackling. 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, says Simons. 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?’ By Hal Lux Published on November 1, 2000 https://faculty.fuqua.duke.edu/~charvey/Teaching/BA453_2005/II_On_Jim_.pdf
Posted on: Wed, 10 Sep 2014 23:08:08 +0000
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