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Lessons From the Man who Solved the Stock Market

Date: 13/08/2020

This post was originally posted on

The most successful money manager in the world

Source: Michael on Unsplash.

Jim Simons is a man of mystery. He has mathematician written all over him, from his undergraduate days at MIT to his doctoral days at Berkeley.

His past lives include being a code-breaker for the government, a pioneer of early topological quantum field theory, a recipient of the 1976 AMS Oswald Veblen Prize in Geometry, a researcher for communications and defense, and a teacher, ultimately heading the faculty for mathematics at Stony Brook University.

On Numberphile, he said that he owed some of his success to luck. But his background and his rise seem everything except lucky. For 30 years, the Medallion Fund has annualized 70% returns amassing over $100 billion in market gains at Renaissance Technologies.

Here are some of the best take-aways from the most successful market participant ever.

100% model-driven.

Simons has stated that a system driven off of manual decision-making is gut-wrenching and bad.

The machine learning at Renaissance has no manual trading for their Medallion Fund. Everything is based on the black box that they continuously develop and evolve.

When asked about the growing number of quantitative hedge funds and their impact on the competitive edge in the markets, he replied that he didn’t believe most, if any, quantitative hedge funds are actually quantitative.

To think that a system is capable of thinking and trading successful on $10 billion in equity each year is phenomenal. To think that it is doing so for over 30 years now is even more awesome.

Knowing science and mathematics and programming trumps having a background in finance.

Nobody at Renaissance Technologies has a background in finance. In fact, it seems like the one thing absent at the company. That’s intentional, and it’s something that has held since Simons was leading Renaissance.

The New York Times states that they “employ those with non-financial backgrounds for quantitative finance research like mathematicians, statisticians, pure and experimental physicists, astronomers, and computer scientists. Wall Street experience is frowned on and a flair for science is prized.”

This leads to an important point.

The best math and physics department in the world.

Simons began managing a successful company by hiring the brightest he could. It’s no coincidence that the brightest people for the job ended up being the best researchers and the most wide-eyed scientists. These were, by nature and definition, the most curious about solving difficult problems.

Sarfraz Manzoor of The Telegraph called Renaissance the “best physics and mathematics department in the world”.

It’s a testament that the best recognizes the best. Talent sees talent. While other trading shops struggle to keep up with the S&P 500, Renaissance regularly dusts it with billions of dollars in assets.

Renaissance is the best example of how little the financial world actually understands finance. All while mathematics and statistics seems to wipe the floor with it, without any formal experience or coaching.

They’ve been destroying everybody else acting in the market for over three decades. The people at Renaissance have stayed, and their trading shop has gotten better since.

There is a singular reason for this.

Keeping the best people happy.

The Medallion Fund was started in 1988. It has had 70% returns annualized since. In 1993 it was closed off to new investment from outsiders. By 2002, they began buying out the outsiders altogether. By 2005, the Medallion Fund was wholly owned by the employees of the company.

In Simons’s mind, to keep his employees happy they need to be partners. They work on a project together, and they make a lot of money doing it. They should get paid in proportion to whatever their hard work makes.

If you believe you have the best people working on the job, they should get paid a proportion of the total profit.

Open atmosphere, profit-sharing, and common goals.

The people working at Renaissance today choose to work there because they’re working together.

The environment is open, people share their ideas, they share the profit, and they’re chasing a common end-goal.

They have an incentive to work together and to work well because that end-goal is incentivized: Total profit. You want your co-workers to do very well because that means you are going to do very well.

Success in one spot translates into success across the field.

When your best people feel like they’re being cheated, they begin to leave. What generally follows is brain drain. At Renaissance, that has never seemed to be the case. Each year, the firm has, without fail, generated massive gains.

Usually, you’d note that past data doesn’t predict future performance. In Renaissance’s case, that seems to always be the case. And they don’t seem to be slowing down anytime soon.

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