The world’s greatest investors: James Simons

Who is he?

James Simons was born in Massachusetts in 1938. He studied mathematics at MIT and University of California, Berkeley, then worked at the National Security Agency. He left that role in 1968 after publishing a letter criticising the Vietnam War, then became the head of mathematics at Stony Brook University. He started the hedge fund Monemetrics in 1978, initially to trade currencies. In 1982 he renamed the fund Renaissance Technologies and focused on quantitative models.

What was his strategy?

Renaissance employs a huge number of mathematicians who aim to spot anomalies in the stockmarket and devise computer programs that will execute a large number of trades very quickly to take advantage of them. It has been extremely secretive about its exact strategies, refusing to disclose them even to regulators, arguing that this would destroy its competitive advantage. However, there has been speculation that Medallion, the flagship fund, may make much of its money from high-frequency strategies that predict when a big institutional share order is about to push up the price of a stock.

Did this work?

Between 1989 and 2016 Medallion, which is now only open to Renaissance employees, has returned just under 40% a year after fees (and 98% during the crisis of 2008). One thousand dollars invested in the fund at inception would have been worth $13,781,000 in 2016. Renaissance’s other funds haven’t had such spectacular success, but Renaissance has built up around $65bn of assets under management. Simons, who retired from the firm in 2009, has a personal fortune estimated at $18bn.

What were his biggest successes?

Simons has revealed that one model that the firm used successfully was based on a correlation between weather data and daily stockmarket returns. The market did very slightly better on sunny days, especially in Paris. By using leverage (borrowed money), Renaissance was able to produce large profits from this. The 15-minute difference between the closing time for S&P 500 futures and options trading was the source of another profitable anomaly.

What lessons are there for investors?

There are still many stockmarket anomalies – although you may need a large amount of computer power and expertise to exploit them. However, the difference in returns between Medallion and the other Renaissance funds shows how top fund managers restrict access to their best opportunities