To be an Investment Master, one must be innovative, humble, open to learning, and, above all, have an outstanding track record of success.
And when it comes to investment track records, few, if any, come close to those of Jim Simons.
Unlike most of the investors we’ve covered in the The Investment Masters Class, Jim is an anomaly. He’s a Quant, in fact I’d go so far to call him the undisputed King of the Quants. His firm, Renaissance Technologies, is also an outlier. Instead of hiring business or finance graduates, they recruit scientists, programmers, physicists, cryptographers, computational linguists, and mathematicians. These critical thinkers are tasked with sifting through vast amounts of data to profit from the world’s financial markets.
These atypical investors focus on developing algorithms that exploit market inefficiencies, uncovering profitable patterns to trade across the globe.
Jim’s story of how he came to investing is unconventional, to say the least. He’s a math genius who worked as a codebreaker for the U.S. government and only dabbled in the stock market on the side. It doesn’t get more unconventional than that. He then left codebreaking to start an investment fund, initially adopting a fundamental investment approach. When this failed, Jim decided to use his math skills to apply quantitative processes to exploit inefficiencies in the market, and when he did, the results were remarkable.
‘Dr. Simons received his doctorate at 23; advanced code breaking for the National Security Agency at 26; led a university math department at 30; won geometry’s top prize at 37; founded Renaissance Technologies, one of the world’s most successful hedge funds, at 44; and began setting up charitable foundations at 56.’ William Broad, NYT
Over the years, I’ve always enjoyed reading about Jim’s firm, Renaissance Technologies. The firm’s methods are shrouded in secrecy, and employees sign a lifetime non-disclosure agreement. I recently enjoyed listening to an interview with Jim, part of a three-lecture series on ‘Maths, Money and Making a Difference’, where the second lecture focused on his experience in the markets. While Jim was careful not to reveal Renaissance’s methods, he did share a few valuable investment insights. Needless to say, it seems the scientists at Renaissance have built an amazing money-making machine.
‘There are times that go by where we don’t make money in a month. It’s very rare we don’t make money in a month. But once in a while that happens. But it’s always come back.’ Jim Simons
I’ve included some highlights from the interview below:
Continuous Change
‘In a business like this you have to just keep making things better. Improving the system. Because other parts of the system will wear out after a while. People will catch onto it. Like any business you’ve got to try and make things better and better and better, because that’s what everyone else is trying to do. We try and hire the best scientists we can.’
‘You have to keep running. People will discover some of the things you’ve discovered and they’ll get traded out so you just have to keep coming up with more and more things.’
Change Causes Inefficiencies
‘Efficiencies eventually do get traded out if they get discovered. But the market is not static, it’s dynamic; things change. Therefore I think there’s room for new inefficiencies to materialise. I think it’s never going to be that all inefficiencies are out with nothing new to discover. So far our returns have been more or less stable for a long time. We keep finding new things and throwing out things that are no longer working.’
Hire Smart People & Work Collaboratively
‘The model has been, first hire the smartest people you can. Work collaboratively. Let everyone know what everyone else is doing. We have one system and once a week there is a research meeting. If someone has something new it gets presented. It gets chewed up and looked at. The code is there, everyone can look at the code and see what they think, does this really work? It is a very collaborative enterprise and I think that’s the best way to accelerate science.’
‘Just hire great young people into the business, it’s the best thing you can do.’
Fees & Size Limitations
After years of very high returns, the management decided to close the firm to outside capital and return any external capital to outside partners. The firm’s Medallion fund continues to manage only the staff’s capital. The original fee card was likely one of, if not, the highest in the world.
‘First we raised fees to 5 and 36 and the investors complained but wanted more exposure. And then we raised them to 5 and 44 and it was still a good return at 5 and 44. We realised there was a limit to how much we could manage. The system could manage a certain amount but not huge, huge amounts, not hundreds of millions or trillions. So we decided first no new investing from outsiders and then we decided to buy in the outsiders in 2003. By 2005 we had bought in all the outsiders.’
Madoff Experience & Understanding
Interestingly, Jim explained how he had invested in Madoff’s ponzi scheme. He also explained how he got out of it because he did not understand it. After Madoff’s fund blew up, the SEC investigated Renaissance’s fund, given the firm’s secrecy and consistent, exceptional track record. As Jim noted, at this time they were only running internal capital in the fund. External capital was the missing input for a ponzi scheme.
‘We had had money invested with Madoff for a very long time: Not the firm, but relatives of mine, and our foundation had an investment with Madoff, and I knew him a little bit. He was really amazing. He kept coming up with these very very steady returns, come rain or shine. At a certain point I said ‘this guy has to know something that we don’t know’. I had all the trade confirmations going back years so I asked one of the guys to analyse these trades he was doing and tell me what you learn, what’s his secret. So this guy went to work and here was his conclusion: ‘when they put on a position and are buying something they generally get a very good price, maybe the low of the day if they are buying or the high of the day if they are selling. He said, ‘that accounts for maybe ten percent of their profit’. They claim they have T-bills sometimes so there was also interest, but eighty percent of the profits were a complete mystery.
They would put on a big position according to the tickets, with stock that would approximate the S&P index, and then buy a put or call to protect themselves from outside moves. From what we understood they had huge amount of money under management so you would think when they put on the puts or calls it would actually move the market. But we could see no evidence of that. I thought, let’s get out of this.
Even Medallion [Fund] had a little bit. We sold it and nothing happened. Several years went by and my relative called and said ‘do you still like Madoff?’ I said, ‘I can’t tell you to take your money out because he’s been going for a long time and he keeps on going. He must know something’. I said ‘I took my money out’. I couldn’t advise someone to take their money out. It never dawned on me it was a Ponzi scheme. I didn’t know what the heck he was doing, I just didn’t like the looks of it. That’s why we got out. Five years later the crap hit the fan and he was outed. It was the craziest thing in the world.’
Fundamental Investing
‘[Fundamental investing] is a perfectly legitimate way to invest. Look at Warren Buffett, I don’t think he has a computer on the premises, except maybe to count his money.’
‘I think there is a world of difference between being a good fundamental investor and a good quant. A good fundamental investor wants to evaluate the management, have a sense of the human beings running it, a sense of where the market might be going. It’s a set of skills. And some people are very good at it. Quantitative stuff is a different set of skills.’
Source: Bloomberg
Luck Helps
‘Luck plays quite a role in life; we’ve been lucky.’
Work Hard
‘Work hard, hire good people.’
Summary
Jim Simons doesn’t practice fundamental investing, which makes him stand apart from most of the other masters we’ve reviewed. As Jim notes, Buffett prefers to assess a company’s management, culture, and market position before making an investment. In contrast, quants rely on computer algorithms to identify inefficiencies first, then base their investment decisions on that data. Despite these differences, both approaches can deliver impressive track records.
While many investors favor the fundamental approach, Jim is not as isolated in his quantitative style as one might think. Like Ed Thorp, he recognized that his unique skill set was best suited for a quant strategy and pursued it relentlessly. Interestingly, despite their different methods, quants and the other Investment Masters share a common trait—they all apply deep, analytical thinking to achieve exceptional returns.
‘I like to ponder. And pondering things, just sort of thinking about it and thinking about it, turns out to be a pretty good approach.’ Jim Simons
It’s clear there are multiple paths to success in investing. Whether fundamental or quant, both strategies have their place in the market. Jim’s remarkable success is a testament to that truth.
Source:
“Maths, Money and Making a Difference” S. Donald Sussman Fellowship Award Fireside Chat Series. MIT Management Sloan.
Further reading:
“The Secret World of Jim Simons” by Hal Lux
”Jim Simons, the Numbers King” by DT Max. The New Yorker.
“Inside a Moneymaking Machine Like No Other” by Katherine Burton. Bloomberg.
“The Mathematician Who Cracked Wall Street” TED Talk.
“Seeker, Doer, Giver, Ponderer - A Billionaire Mathematician’s Life of Ferocious Curiosity” by William Broad. New York Times.
“James H. Simons, PhD: Using Mathematics to Make Money,” Journal of Investment Consulting, Vol. 22, 2023.
“A conversation with Renaissance Technologies CEO Peter Brown,” Goldman Sachs Exchanges: Great Investors, 2023
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