How Did Jim Simons’s Firm Make $100 Billion? He Told His Secrets to Our Reporter
The huge gains came both from groundbreaking insights and lots of small innovations. Being way out on Long Island didn’t hurt either.
How did Jim Simons do it?
I spent two years researching a book about Simons and his firm, Renaissance Technologies. I had long conversations with Simons—enduring his chain-smoking for hours at a time. I talked to dozens of his executives, researchers and friends. The response to the book was positive, but the question kept coming: What was really behind perhaps the most successful investment firm of all time?
How did Simons and the crew of academics who ran Renaissance’s Medallion Fund produce more than $100 billion in gains and average annual returns of 39% between 1988 and 2018? Those numbers came after the firm’s enormous investor fees. They dwarf the returns of Warren Buffett, George Soros, Stan Druckenmiller, Steve Cohen and most everyone else.
What was his secret?
Simons, who died Friday at age 86, was a pioneering quantitative trader. He and his team relied on artificial intelligence back in the 1980s. But there wasn’t a single algorithm powering Medallion’s gains. Instead, Simons built a series of advantages that put his firm in a dominant position over its competitors.
“People say, ‘What is the secret sauce?’” Simons once said. “It’s a lot of little secrets.”
Here are some of them:
1- Data Dominance—Renaissance began collecting stock, gold and other pricing data in the early 1980s. Some of it goes back to the 1700s. It was “cleaned,” meaning Simons’s team made sure it was accurate, well before others realized this kind of reliable information could power automated trading algorithms. Rivals have data libraries; Renaissance has the Library of Congress.
2- Management Marvel—Simons was a rare breed, a world-class mathematician who could identify, recruit, manage and motivate brilliant and often quirky scientists and mathematicians. “It’s not his genius,” Robert Frey, a former senior executive, told me. “It’s his ability to manage genius.”
3- Top Talent—Because of its track record, deep contacts in academia, and enduring mystique, Renaissance enjoyed a steady pipeline of talent. Most every firm employs Ph.D.s; Renaissance hires the heads of math and science departments of top universities. Its only rival for top talent: giant tech companies.
4 - Rare Recruits—Renaissance rarely hired employees to meet a need or fill an opening. Instead, Simons recruited star mathematicians and scientists and figured they would discover ways to improve his trading system, a unique approach to hiring.
5- Defections Deficit—Medallion’s performance was so good that few staffers were tempted to bolt for competitors. It helped that the firm was way out on Long Island and filled with former academics with limited contacts in the financial world.
6 - Collaborative Culture—Simons built a flat organization, and employees shared projects, made group presentations and worked closely together. There were no silos, which are popular on Wall Street. Even junior employees could view its top-secret trading code. “The most important thing we did is have an open atmosphere,” Simons told an audience at the Massachusetts Institute of Technology in 2010. “Everybody knows what everybody else is doing.”
7 - Pay Practices—Renaissance compensated employees based on Medallion’s results and placed less of an emphasis than rivals on individual or group achievement. The message: Staffers needed to work together to earn bigger bonuses. Simons also shared the wealth with his team. “By Wall Street standards, Jim wasn’t greedy,” says Nick Patterson, a former executive. “So senior guys were mostly very happy and didn’t fight with each other.”
8 - Trading Costs and Impact—Early on, employees developed sophisticated models that told Renaissance how its trading would affect the market. These models were perfected, helping the firm determine when and how to make its moves. Renaissance didn’t trade in a lightning-fast fashion like others and never acquired the raw processing power of some rivals, but that didn’t prove an impediment. “I’m not sure we’re the best at trading,” Simons once told a colleague. “But we’re the best at estimating the cost of our trades.”
9 - Fund Cap—Medallion’s size was limited to $10 billion for many years, even as other hedge funds swelled. That reduced the need to invest in less-promising trades, a mistake that felled rival firms.
10 - Trading Tactics—Simons’s trading system focused on relationships among investments. It discovered patterns in prices, even when they couldn’t be readily explained by fundamentals. And it specialized in “hedged trading,” with minimal exposure to the overall market or other factors. That allowed it to score big profits (and avoid deep pain) in volatile markets.
11 - No Hubris—Simons realized that his models were fallible and that markets change. His team worked to discover new trading “signals,” and he sometimes reduced risk in difficult periods. One of Renaissance’s early rivals, Long-Term Capital Management, collapsed in one of those times. A popular quip at Renaissance: “The only perfect hedge is a Japanese garden.”
12 - Leveraging Up—Simons’s trading system is accurate just over half the time. But because returns were steady and strong, the fund could borrow more money at better terms than most rivals to amplify gains from its best trades.
13 - Limited Competition—The universe of quantitative investors is enormous, but relatively few do the so-called medium frequency trades. That meant holding periods of “moments to months,” according to one staffer. Few rivals had the resources to compete in this corner of the market.