“There’s no such thing as the goose that lays the golden egg forever” says the “Quant King”, Jim Simons who just has one simple rule of thumb: ‘remove all emotion.’
Simon’s background barely indicates that in the next couple of years he could lead the most successful, if not the most successful, quantitative hedge fund operation in the world.
Born in 1938 to a Jewish family, Simon, at a very young age, discovered his affection towards mathematics and aspired to be a mathematician. He majored in mathematics from MIT and then did his doctorate in mathematics from the University of California at the age of 26. Thereafter he went on to become a professor at Harvard and MIT. After around three years he was recruited by The Institute of Defence Analysis (IDA), where he worked as a code breaker during the Vietnam War. It wasn’t until 1978 that he commenced delving into finance.
Despite having conquered the field of mathematics and code breaking, Simon thought he could even vanquish financial speculation. On this note he launched his new investment company named- ‘ Monemetrics’ , combining the two words ‘money’ and ‘econometrics’ to show he would make use of quants to analyze financial data and thereby excel in trading. He would hire a pool of big brains to identify trends in the market by analysing the market data and then develop several mathematical formulae to earn profits from them.
The Quant King was bewildered and all he knew was that currency markets were indicating profit potentials as it had become unshackled. While at IDA, Simons had worked on certain algorithms, like the Baum-Welch algorithm, along with his peers which could be applied to financial markets and which makes use of data to uncover hidden states in a Markov chain process. He was also worked with a Columbian importing business. Apart from this Simons did not have any background or training whatsoever in finance, business and trading and this astonished his colleagues.
Later on he hired Lenny Baum, a former colleague. Both Simons and Baum worked on to see whether the Baum-Welch algorithm or other mathematical-statistical approaches could be used in financial markets. Initial few years were not propitious. Some efforts flourished while some soured only to leave their investment fund depleted and Simons rather depressed. Not taken aback, Simon had decided to twin his efforts to discover actionable cues in financial data.
Simons went on to rename his company Monemetrics as Renaissance Technologies Corporation, which reflected his inflating interest in upstart companies. Simons began to see himself as a venture capitalist as much as a trader. Spending some time in New York, he tried his hands on dealing in tech companies and interacted with a number of hedge fund investors. Simons hired a few additional staff members, including James Ax, Elwyn Berlekamp, Rene Carmonaand Nick Patterson, just to name a few, to help with his research who developed certain new softwares and techniques that actually worked quite well. Later renamed as ‘ Medallion Fund’, Simons company started growing from $20 million in 1988 to $66 million in 1983.
His colleague, Baum, had bagged enough money trading currencies using his hunch that pursuing a ‘quantitative’ style of trading seemed a waste of time. As Baum’s investment position plummeted nearly 40 percent, it triggered a knee-jerk clause in the contract with Simons where Simons had to unwind their trading affiliation by selling off all Baum’s holding, a sorrowful denouement to a decade-long association between the esteemed mathematicians.
Simons was left in deep scars following his losses in trading fiasco in 1984. Halting his trading, he held the disgruntled investors at bay. So upsetting were the losses that Simons contemplated giving up trading to pay more heed to grow his technology business. Though most of his clients showed faith on him when he gave them an option to withdraw money, but he himself was wracked in self-doubt. Henceforth, he began racking up pricing data, formulating algorithms to foretell the market movements and working on trading models. Though it would take years, he would come up with an investing formula only to be the one who cracked the financial markets.
Tragedy and dismay in Simons life was fuelled by divorce given to him by his wife Barbara Bluestein in 1974, followed by his elder son losing his life in an accident and thereby younger son passing away by drowning while on a trip to Bali, Indonesia. Such dire straits, indeed engraved nothing but deep scars in his mind.
The Quant King’s net worth has grown exponentially since 2005, $2 billion to $22 billion till date. Yes that’s a sizeable amount!
Years of success and enormous returns have positioned him in a class of his own, even ahead of certain legendary investors like Warren Buffett, Ray Dalio and George Soros just to name a few. Beginning of 21st century marked a great success for Renaissance’s flagship Medallion Fund which gave return of almost 66%.
Major part of stock trading is based on quantitative investing, but only a handful of firms do it at par with Renaissance. The journey has not been smooth sailing though. There were times which delivered disappointed returns like in 2007 and currently the fund is involved in lengthy legal dispute with the U.S. Internal Revenue Service (IRS) in the case of unpaid taxes.
Though stock trading is now machine based, algorithmic and algo trading has been blamed for flash crashes and market turbulences. As quant investing gains traction, the SEC Chairman, Jay Clayton said that the government is monitoring computer trading “ to make sure that trading today is as fair and as transparent as it was when it was voice trading.”
Simons believes that liquidity has been infused in the markets because of quantitative trading. In 2016, in an interview he stated, “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.”
Mr. Simons studiously avoids publicity. But that is infact obvious as keeping it’s funds strategies a secret is a big thing for Renaissance’s success. Being “ the man who cracked the market” he is hardly going to give away his edge easily.
Spending more than three decades pioneering and perfecting a new way to invest, Simons stimulated a revolution in the financial world, legitimizing a quantitative approach to trading. By 2018 it seemed as if the people in the finance domains was trying to invest the Renaissance way – “ digesting data, building mathematical models to anticipate the direction of various investments, and employed automated trading systems.”
One way or the other, Simons has had quite a career! A life girded by numerous challenges and failures and frequent personal and organisational turmoil, not by a long shot.
This was the journey of a man who began with saying “I wanted to do mathematics from the time I was 3.Literally. I would think about numbers and shapes,” to being “The Man Who Solved the Market.”