Jim Simons, the lord of quantitative investing

His Life

Profile

Jim Simons is the greatest quantitative investment king of all time. Jim Simon graduated from MIT in 1958 and received his PhD from the University of California, Berkeley in 1962. He has taught at MIT, Harvard University, and the State University of New York at Stony Brook.

Top mathematician

Jim Simons is best known for his research on pattern recognition. He developed the Chern–Simons form with Chern and contributed to the development of string theory by providing a theoretical framework that combines geometry, topology and quantum field theory. The Chen-Simons form is named after Chen Shengshen and him. In 1976, he received the Oswald Veblen Prize of the American Mathematical Society.

Enter the investment industry

In 1978, Simons officially left academia and founded the investment company Monemetrics, the predecessor of the later famous hedge fund Renaissance Technologies.

In 1982, he officially switched to the investment industry. The mathematician and investor created what many in finance consider to be the greatest money-making machine at his secretive company, Renaissance Technologies.

The Lord of Quantitative Investment

Simons moved from academia to the investment world in his forties. Instead of the standard approach of fund managers, he favors quantitative analysis, which looks for paths in data that predict price changes. Due to the great success of this method, he himself became known as the “King of Quantification”.

Pass away

May 10, 2024 Jim Simons died at the age of 86. His charitable foundation released a statement saying he died in New York City. The statement did not provide a reason.

Investment career

Renaissance Tech and Medallion Fund

Simons is the founder of Renaissance Technologies, a quantitative hedge fund based in East Setauket, New York. He and his fund are quantitative investors who use mathematical models and algorithms to derive investment returns from market inefficiencies. Due to the long-term total investment returns of Renaissance Technologies and his Medallion Fund, Simons has been described as Wall Street’s greatest investor and, more specifically, the most successful hedge fund manager of all time.

Trading with mathematical models

Simons’ Renaissance Technologies, whose hedge funds trade in markets around the world, has always used mathematical models to analyze and execute trades, many of them automated. Renaissance Technologies uses computer-based models to predict price changes in financial instruments. These models are based on analyzing as much collected data as possible and then looking for non-random movements to make predictions.

Members of the company

Renaissance Technologies employs experts from non-financial backgrounds, including mathematicians, physicists, signal processing experts and statisticians. Simons avoids hiring Wall Street veterans. Instead, he hires astrophysicists, codebreakers, mathematicians and scientists to mine useful investment information from the data the company collects every day, from sunspots to overseas weather.

Return on investment

Medallion, a major fund closed to outside investors, has made more than $100 billion in trading profits since its founding in 1988. This translates into an average annual total return of 66.1% and an average annual net return of 39.1% between 1988 and 2018.

Funds managed

Renaissance also manages three other funds – Renaissance Organsional Equities Fund (RIEF), Renaissance Organismal Diversified Alpha (RIDA) and Renaissance Insider Diversified Global Equity Fund – which had combined assets of approximately $550 million as of April 2019 billion and is open to outside investors.

Renaissance Technologies’ funds open to outside investment have historically lagged behind the company’s better-known Medallion Fund. The Medallion Fund is a separate fund that contains only the personal funds of the company’s executives.

Invincible achievements

Simons, a one-time U.S. government codebreaker, declined to elaborate on how he managed to get his best-known Medallion Fund to return more than four times the S&P 500 Index.

Jim Simons’ investment returns are unrivaled to this day, the reasons are following:

40% annualized return

In 36 years, even after deducting high expenses, Jim Simons achieved an astonishing annualized return of nearly 40%. This is the best performance of any known investment guru today. For this part, please see my previous post: “The career annualized return on investment of top investment masters“.

Note: Simons’ career investment return rate refers to the “annualized rate of return (IRR)” of 40%, not simple interest. This is basic common sense and algorithm in the financial industry, unless you are an investment novice or someone who is easily fooled. Investors are easily deceived by Internet celebrities, investment and financial management experts, or fund salespeople (to be honest, many of them don’t understand what IRR is). There are many traps in the investment return figures they talk about, and they are all wrong. For example, they will not let you know how long the investment period is, whether it is simple interest or compound interest, and usually omit the period of poor returns, or cut off the beginning and end. In short, it is not credible. Investors should hold the basic It is an attitude that contains more water content to avoid being deceived.

Regarding this part, please see my following two posts for the detail:

Lasted over 36 years

Please note, Jim. Simons’ investment portfolio is worth tens of billions of dollars; and he has been investing continuously for more than 36 years.

Almost impossible achievement

Moreover, Simons’ investment spanned 36 years, and only one year’s return was worse than the S&P 500 Index. No one can question his achievements.

More than 31.8 billion assets

Buffett’s career annualized investment return until the end of 2023 is close to 20%, but this is because Buffett started investing when he was less than 20 years old, and Simons did not start investing until he was 43 years old. This results in Buffett’s current assets of 133.7 billion. Exceeding Simons by $31.8 billion. Jim Simons was the 51st richest person in the world at the time of his death.

Ten trading rules

Simons has the following ten trading rules:

1. Although our strategy will hold the investment target for a long time, we conduct an average of more than 10,000 transactions every day. In fact, the position of each stock in our portfolio will increase or decrease on average every other day. The diversification method we use is to allocate as many types of assets as possible. On average, we will hold There are 2,500 to 3,000 different stocks.

2. Renaissance has a very good working environment and first-class employees, including PhDs in mathematics, statistics, physics, astronomy and computer science. I don’t know how to hire fundamental traders because sometimes they make money and sometimes they lose money, but I do know how to hire scientists because I have some feel for the field.

3. If you do fundamental trading, then when you wake up one day, you may find that you are a genius. Your positions always develop in the direction that is beneficial to you. You feel that you are very smart, and you will also see yourself overnight. Make a lot of money in between. Then the next day, everything goes against you and you feel like a fool.

4. Since we can make models, we might as well follow the models. So, in 1988, I decided to rely 100% on model trading. And we’ve been doing it ever since.

5. Some companies also use models, but their purpose is that they have a model and use the conclusions drawn by this model to provide reference opinions for traders. If they agree with the conclusion, then follow it; if they do not agree, then follow it. Not executed.

6. This is not science. You cannot simulate the feeling you had when you saw market data 13 years ago. Backtesting is very difficult. If you really rely on the model to trade, then do exactly what the model says. No matter how smart or stupid you think the model is, it will later be proven to be a very correct decision. So we established a company that relies 100% on computer models for trading, and its business has gradually developed from foreign exchange and financial instruments to stocks and everything else that can be traded and has high liquidity.

7. We are selling and buying at any time, and we rely on activity to make money. I am Mr. Model and do not want to conduct fundamental analysis. One of the advantages of models is that they can reduce risks. By relying on personal judgment in stock selection, you may get rich overnight or lose everything the next day.

8. Some trading patterns are not random, but are traceable and have predictive effects. Those small trades, even those of just 100 shares, have an impact on this huge market, and thousands of these trades occur every day. In fact, everyone has a black box, which we call a brain.

9. Trading should be like a gecko, which usually lies on the wall motionless. Once a mosquito appears, it will quickly eat it, then return to calm and wait for the next opportunity. We focus on those small opportunities that may be fleeting. After these opportunities arise, we will make predictions and then conduct corresponding transactions. After the transaction, we will track and evaluate the new market conditions, the forecast will be adjusted accordingly, and the investment portfolio will also change accordingly.

10. I’m not the sharpest person in the world, and I wouldn’t do particularly well in a Math Olympiad. But I like to ponder, ponder things in my mind, that is, think about something over and over again. That turned out to be a great approach.

Simons’ biography

“The Man Who Solved the Market“: This book is a quasi-autobiography because it was not written by Jim Simons himself, but by the famous financial writer Gregory Zuckerman through interviews with Jim Simons and people around him. This is the most detailed biography of Jim Simons.
“Interpreting Quantitative Investment: The Story of Simons Using a Formula to Beat the Market (Quant Invest)”: This is a very thin book with only in Chinese and no English edition avaialbe. The content is very simple. Described the secrets of Simons’ quantitative investment, introduce the Medallion Fund, which has an average annual total return of 80% in 20 years, and see how Simons turned 10,000 yuan into 100 million yuan.

Please see my post of “The quant’s must-read book for Jim Simons “The Man Who Solved the Market”” for this book.

Closing words

In a speech at MIT, Simons shared his five pieces of life wisdom:

Do something new and don’t run with the pack;
Surround yourself with the smartest people you can find;
Be guided by beauty;
Don’t give up easily;
Hope for good luck.

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