Being centered on mathematicians, this book was not exciting, but it was interesting. James Harris “Jim” Simons (1938-2024) earned his doctorate at Berkeley, and worked for the NSA and the Institute for Defense Analysis, before teaching at Harvard and MIT. (Wikipedia: https://en.wikipedia.org/wiki/Jim_Simons). And that is in this story, of course. The focus, however, is on Renaissance Technologies and their hedge funds (Medallion and others), the most successful trading firm in history. Simons’s background in language recognition—pattern recognition; pattern prediction—allowed him the insight to expect that correlations must exist across markets, even if causal factors ultimately remain hidden. Therefore, it should be possible to profit from trading on trends that are unexpected and unperceived by everyone else. He was right.
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| The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman (Penguin RandomHouse, 2019) |
The method was easy to explain: mine the data. Look at all the numbers from all the markets and seek out trends and patterns and correlations. Some turned out to be causative. Regression to the mean predicts that after some market has a remarkably bad day, prices will rebound. The prediction applies to hugely profitable days: the market reverts toward its previous level. That much is easy to understand. The rest never gets explained.
For one thing, no one associated with Renaissance Technologies was willing to talk to Gregory Zuckerman because they were bound by deep long-term non-disclosure agreements. Aside from that, the powerhouse of the company was driven by its staff of Ph.D. mathematicians. It would have to be understood at their level before it could be explained to the rest of us.
What can be understood is that on average, employees who invested with the firm earned about $50 million each. “Since 1988, Renaissance's flagship Medallion hedge fund has generated average annual returns of 66 percent, racking up trading profits of more than $100 billion…” (Introduction). With that money came power, of course. Robert Mercer put his ideology to work when he found Steve Bannon for the Donald Trump presidential campaign in 2016. However, Jim Simons was a Democrat. And he was not alone in that. Many of the academics in the firm were liberals and they contributed to political campaigns, naturally, and also to special foundations (some of their own creation) supporting education, medical research, and other social initiatives.
Jim Simons’s methodology was a long time coming. Computers were rare and costly. Ten years later, they acquired the first desktop computers, which were woefully underppowered by today's standards. Although he launched the firm specifically to mine data so that profits could be harvested from trends, Renaissance Technologies also employed traditional traders. The two teams often collided, with Jim Simons himself significantly abandoning the algorithms for what would be too easily called “gut instinct.” Sometimes, we just know. Also, with that mountain of cash, and with their frequent intra-day trades, they did not need to be often right. At the peak, in Jim Simons’s last decade, with the models and algorithms and supercomputers all generating money, Renaissance Technologies was right only 51% of the time.
One aspect of the story which I believe explains as much of their success as their mathematical models, is that Renaissance Technologies adhered to the ideal academic organizational culture. Workspaces were open. Visiting around the office was common. Sharing ideas was habitual. Discussion and disagreement were encouraged. (Pages 199-203). (See also "Team of Teams" on this blog.) It was not always easy and some people never forgave others for their complete lack of social grace. Neither time nor money heals all wounds.
But we all enjoy the profits. Zuckerman presents this as a zero-sum game. For Renaissance Technologies to have profited, many other brokerages, whose clients were stereotypically “dentists” (and other middle class professionals), had to lose. It is true that every trading position requires two people with opposite expectations. Ultimately, conservation of energy (charge; spin) means that everything must be accounted for with nothing magically lost or gained. And yet here we are: 10 billion people, 50% of us in cities of over 1 million; flying around 10 kilometers above the ground or cruising on the ground at 100 kph. We could not have hunted and gathered enough to make this possible. If not for Jim Simons and Renaissance Technologies, we would each of us be poorer by unperceived small fractions that did not become the comforts we enjoy.
PREVIOUSLY ON NECESSARY FACTS
Two Books About Fermat’s Last Theorem
Coins Without Realms (Digital Currency)
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