Renowned investors are frequently distinguished by their unique approaches. Warren Buffett achieved success by investing in undervalued companies and maintaining long-term positions. George Soros, known for his macroeconomic bets, famously challenged the Bank of England. Jim Simons, who passed away on May 10th, 2024, at 86, had a more enigmatic strategy, delving into quantitative intricacies in seemingly inexplicable manners.
He truly stood out as the cream of the crop. “There’s only one ultimate GOAT. His name? Jim Simons,” proclaimed Clifford Asness, the co-founder of AQR, a hedge fund, to the Wall Street Journal. The illustrious Medallion fund of Renaissance Technologies, Mr. Simons’s company, raked in a staggering $100 billion in trading profits over the three decades leading to 2018. Its extraordinary 66% average annual return remained unrivaled among all major funds.
Mr. Simons achieved all this as a mathematician at heart rather than an investor. He departed the University of California, Berkeley, at 23 with a Ph.D. in the field, subsequently earning the esteemed Oswald Veblen Prize in Geometry. After working as a codebreaker at the National Security Agency, he was fired for speaking out against the Vietnam War. He later led the mathematics department at Stony Brook University, which quickly became one of the top departments in the country.
Mr. Simons founded RenTech in 1978, raiding not only this department but others nationwide. In a rare 2000 interview with Institutional Investor, he stated, “We don’t recruit from Wall Street; we seek those with a strong scientific background.” While this approach is now standard practice in hedge funds, Mr. Simons pioneered it.
Mr. Simons left a significant mark in various aspects. Typically, investors develop theories on asset prices based on real-world financial and economic relationships, rigorously testing their ideas. However, Mr. Simons took a unique approach. Initially, he struggled with a traditional fundamentals-first strategy in his finance career, leading him to delve into vast data pools in search of trading signals, even obscure ones. While he initially emphasized finding explanations before investing, he eventually became open to investing capital without clear rationales. The precise methods he used remain undisclosed; some believe RenTech may have been the pioneering fund in adopting modern machine-learning techniques.
Today, “quant funds” hold a significant portion of Wall Street’s capital, yet only a few rival RenTech’s exceptional returns. The question lingers: Can Mr. Simons’s trading powerhouse sustain its outperformance? Conducting hundreds of thousands of short-term trades daily comes with limitations. Sizeable investments can influence markets, potentially diminishing profitability when scaling up. Consequently, in 2003, the Medallion fund bid farewell to external investors, now exclusively managing funds for employees and alumni. The newer funds crafted for external investors have, to date, failed to meet expectations.
The Medallion fund, despite its modest size, holds significant advantages. In contrast to typical trading firms with competing factions, Medallion, portrayed by Gregory Zuckerman in his biography of RenTech’s founder, Mr. Simons, operates on a unified model with a collaborative team approach reminiscent of academic mathematics departments.
While Medallion lacks external investors, it maintains a traditional fee structure of 5% for management and 44% for performance. This setup facilitates the redistribution of wealth from senior to junior staff members.
Such a framework contributes to the impressive 14-year average tenure at RenTech, surpassing that of many Wall Street counterparts. Moreover, the appeal of being associated with an individual who has attracted brilliance over a lifetime also plays a pivotal role in retaining employees.
