Every now and again a book comes along that demands attention, says Bloomberg. The Man Who Solved the Market by Wall Street Journal reporter Greg Zuckerman is one such. It's the closest thing we may ever get to a definitive account of how mathematics prodigy Jim Simons built hedge fund Renaissance Technologies "into the greatest money-making machine in Wall Street history".
Renaissance's flagship Medallion fund has generated more than $100bn in trading profits since 1988, "more than any other hedge fund in history making millionaires of many of its employees, and several billionaires". Forbes puts Simons' own fortune at above $21bn. When Renaissance notched up its first $1m profit in 1990, Simons handed out Champagne but $1m one-day gains quickly "became so frequent that the drinking got a bit out of hand".
Spotting patterns is the key to success
The best investors' strategies often sound simple, says The Economist. Warren Buffett goes for "quality merchandise when it's marked down"; George Soros bets big on the fallout from epoch-making events. "Jim Simons spots patterns." When he began investing in 1978, Simons started by looking for patterns in currencies. He had early successes with simple "reversion to mean" strategies buying when a currency fell far enough below its recent average.
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But things really took off ten years later when a fellow mathematician, Ren Carmona, "convinced him that, rather than searching for such patterns themselves, they should hand over to an algorithm and trade even when the logic was unclear to human minders". In the 1990s, colleagues Robert Mercer and Peter Brown, formerly of IBM, developed a "self-correcting" version of this trading approach that could "double down on successful strategies and cut losing ones". These techniques, now called "machine learning", quickly became widespread.
Born in 1938 in Boston, the son of a shoe-factory owner, Simons knew as a boy that he loved maths and logic, says The New York Times. But his genius wasn't obvious to those around him. As a teenager working for a garden supply store he was demoted to floor-sweeping duties for being so inept in the stockroom. "His bosses were incredulous when he told them he wanted to study maths at MIT."
A mind-boggling advance
Fellow mathematicians describe Simons' subsequent academic career as "mind-boggling". He received his doctorate at 23 and, at 26, his skills in cryptography saw him hired as a code-breaker for the National Security Agency. By 1967, though, Simons was in open conflict with his boss, the retired four-star army general, Maxwell Taylor, over Vietnam. After his dismissal, he returned to academia, winning geometry's top prize in 1975, before "restlessness" pulled him into business. In 1978 Simons founded the predecessor to Renaissance Technologies.
There were several missteps along the way to Simons' eventual riches, says The Economist. When Renaissance's first foray into bond markets turned into big losses, for example, he admitted to a colleague that he sometimes felt "I'm just some guy who doesn't really know what he was doing". Yet Renaissance has enjoyed a golden run. "I like to ponder," says Simons. "And pondering things turns out to be a pretty good approach."
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