How codebreaker James Simons cracked the mystery of creating alpha

James Simons is an inquisitive man. He is “eager to explore what he calls the mysteries of the universe”, says William Broad in The New York Times. This drive to investigate the world helped him become a highly successful hedge-fund manager and before that, a prize-winning mathematician.

At the age of 26, he was conducting advanced code-breaking for the US government. By the time he turned 30 he was running a university maths department; at 37 he won geometry’s top prize, and then aged 44 he founded Renaissance Technologies, “one of the world’s most successful hedge funds”.

In the early 1960s, Simons was a successful mathematician teaching at America’s top universities. Then, in 1964, while still ostensibly an academic, he was recruited “into the shadowy world of government spying”, says Broad. His cryptography helped break codes and track potential military threats, but his spying career ended badly.

In 1967 his boss, Maxwell Taylor, defended the Vietnam War in The New York Times magazine. Simons disagreed and published a response in the same magazine, urging America to pull out of Vietnam. He was fired shortly afterwards.

Simons returned to teaching at Stony Brook University, a school to which he has donated more than $210m. In 1976, he won the Oswald Veblen Prize of the American Mathematical Society – geometry’s highest honour. Then he decided it was time for a change and in 1982 he set up Renaissance Technologies.

Maths is at the heart of Renaissance’s success. Recruitment focuses on mathematicians and scientists. “We look for people who have demonstrated the ability to do first-class research,” Simons told an interviewer for Seed magazine.

“We hire people to make mathematical models of the markets in which we invest.” These models helped to make Renaissance’s Medallion Fund one of the most successful hedge funds in the world.

The fund hasn’t seen a negative return since the 1990s and it has helped make Simons a $12.5bn fortune. However, the fund is only open to current and former Renaissance employees and their families.

“I wasn’t the fastest guy in the world,” Simons tells The New York Times. “I wouldn’t have done well in an Olympiad or a math contest. But 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.”

Simons retired in 2010, but through the Simons Foundation “now runs a tidy universe of science endeavours, financing not only math teachers, but hundreds of the world’s best investigators”, says The New York Times. He is also among the world’s most generous philanthropists.

In 2010, he and his wife were among the first billionaires to sign ‘The Giving Pledge’, a campaign driven by Warren Buffett and Bill Gates to encourage the very wealthy to give most of their money away to good causes.

Most recently, Simons has given $50m to enlarge the Simons Centre for Quantitative Biology, a medical centre that will use algorithms to analyse biological data. Simons firmly believes that the introduction of mathemetical methods to biology will revolutionise the field – “just as it revolutionised physics in the days of Isaac Newton”, he tells The Wall Street Journal.

How Renaissance changed Wall Street

When James Simons founded Renaissance, he wanted to apply his mathematical knowledge to investment. He surrounded himself with experts and, unlike other Wall Street institutions of the time, he shunned trading experience when he was recruiting.

Instead, he sought out programmers, physicists, cryptographers and mathematicians. These boffins gathered financial data and used complex formulas to predict how financial markets would move in the future.

It was a strategy that worked, rewarding investors with double-digit growth and changing the way investment companies around the world looked at the financial markets. “It marked an early triumph of the ‘quants’ – quantitative analysts who use advanced math to guide investments – and foreshadowed the ascendency of Big Data,” says Broad.

Research by Insider Monkey reveals that Renaissance’s main fund has an annual alpha of 34%. In other words, it’s delivered an outstanding risk-adjusted return year after year.
“We have never seen a hedge fund achieve such a high alpha,” says Insider Monkey.

“Jim Simons’ alpha is even better than Warren Buffett’s was when he was much younger.
If Jim Simons started investing 20 years earlier than he did, he would have been the richest man on the planet.”