The Man Who Solved The Market Book Review: How Jim Simons Launched The Quant Revolution By Gregory Zuckerman

  Three-time winner of the Gerald Loeb award, author Gregory Zuckerman has just released his latest book, The Man Who Solved The Market: How Jim Simons Launched The Quant Revolution. 

Before diving in, let's take a second to acknowledge that it's amazing such a book exists in the first place.  The subject of the book, Jim Simons and his firm Renaissance Technologies ('Rentec'), have always been shrouded in secrecy.  Most on Wall Street have at least heard of their mysterious Medallion Fund and heard rumors of the insane returns it generates.  But little was actually known about the firm and how it made money.

For those unfamiliar with Rentec, a quote from the book jacket sums up why you should care (emphasis ours): "No other investor - Warren Buffett, George Soros, Peter Lynch, Steve Cohen, or Ray Dalio - can touch the track record of Renaissance Technologies founder Jim Simons.  Since 1988, Renaissance's signature Medallion fund has generated average annual returns of 66 percent.  The firm has recorded trading gains of more than one hundred billion dollars.  Simons himself is worth twenty-three billion dollars." (The book also has a yearly performance breakdown in the Appendix.)

While value investors look up to Warren Buffett and Seth Klarman, and traders look up to Stan Druckenmiller and George Soros, in the quant world Medallion is quite literally the gold standard.  And while many hedge funds charge 2 and 20 (percentage management fee and performance fee), Medallion charges an audacious 5 and 44.

Over the years, we've talked to a few former employees of the firm and even then they would be very vague about their work, never giving specifics, and certainly wouldn't go on the record about anything.  'Googling' the founder and his firm yields only a handful of rare interviews with Simons (mostly about mathematics) and some performance numbers, but that's about as in-depth as it gets.

So the fact that Zuckerman was able to interview more than 40 current and former employees, Simons's friends and family, as well as Simons himself, says a lot.  It's safe to say that doesn't happen without Zuckerman's excellent work in the past as a journalist and author.  His previous book, The Greatest Trade Ever about John Paulson is one of our favorite financial reads and no doubt laid the groundwork for him to be able to write this new book on Simons.

The Man Who Solved The Market profiles Simons's journey from mathematician and Soviet code breaker to quant pioneer in a Long Island strip mall.  It highlights how he hired physicists, mathematicians, and computer scientists to blaze an entirely new path on Wall Street, one dominated by fundamental analysis and human traders at the time.

Some of the biggest takeaways from the book were the lessons on culture, management, and alignment of interests.  For a firm so reliant on computers, the human aspect was perhaps the most intriguing, from managing people to building models around human behavior in order to exploit it.

Interlaced throughout the story are also interesting anecdotes, like when Rentec once had a 'fat-finger' trade buying 5x more wheat contracts than they were supposed to and the next day the media blamed a 'poor harvest' for the price move.

One unanticipated turn the book takes is by examining some of the inner turmoil at the firm and in particular the effects of all the wealth Rentec partners and employees wound up with, like how Rentec senior executive Robert Mercer is basically responsible for Donald Trump's presidency.

Normally, we end each book review outlining who should read the book or might benefit from it.  But honestly, we think everyone would enjoy it.  Even if you're not a quant or have zero interest in quants, there's still lessons to be gleaned and it's a very entertaining read.  After all, we're big believers in learning from all types of investors or traders, regardless of which strategy you follow. 

Obviously, the book isn't going to just give away Rentec's secrets and outline the blueprint to market success.  More than anything, The Man Who Solved The Market gives you a peek behind the curtain of a notoriously secretive firm and tells a previously untold story.  We highly recommend Zuckerman's profile of the 'modern-day Midas' and it's the perfect gift this holiday season for anyone interested in markets.

Jim Simons Rare Interview: TED Talk With the Mathematician Who Cracked Wall Street

Jim Simons, founder of quantitative investment firm Renaissance Technologies (commonly referred to as Rentec) this year made a rare appearance at one of the TED talks.  The conversation was entitled "A rare interview with the mathematician who cracked Wall Street."

As we've highlighted in the past, Rentec's internal Medallion Fund has generated outstanding performance numbers.  While many hedge funds charge 2% management and 20% performance fees, Medallion was said to charge 5% and 44% at one time.  While this fund is only available internally, Rentec also runs two other funds available to outside investors, known as RIFF and RIEF.

His talk touches on topics of mathematics, code breaking, and patterns in the world of finance.

He attributes his success to assembling a great team.  Rentec famously employs scientists, mathematicians, astronomers, and physicists.  Their approach focuses on assembling a lot of data and looking at patterns.

Simons said that, "We take in terabytes of data a day and store it away and massage it and get it ready for analysis and you're looking for anomalies."

He also noted that hedge funds as a whole have not fared that well over the last 3-4 years.

Embedded below is the video of Jim Simons' TED talk:



For more from this legend, we've also previously posted Jim Simons on mathematics, common sense, good luck & his career.

Top 10 Highest Paid Hedge Fund Managers of 2012

Institutional Investor's Alpha is out with their annual ranking of top earning hedge fund managers.  Here's the list:

Top 10 Highest-Paid Hedge Fund Managers of 2012

1. David Tepper (Appaloosa Management): $2.2 billion
2. Ray Dalio (Bridgewater Associates): $1.7 b
3. Steven Cohen (SAC Capital): $1.4 b
4. Jim Simons (Renaissance Technologies): $1.1 b
5. Ken Griffin (Citadel): $900 million
6. Eddie Lampert (ESL Investments): $750 m
7. Stephen Mandel (Lone Pine Capital): $580 m
8. Leon Cooperman (Omega Advisors): $560 m
9. David Shaw (D.E. Shaw): $530 m
10. Dan Loeb (Third Point): $380 m


Tepper finds himself atop the list after a solid 2012, returning around 30% after fees.  Lee Cooperman's firm also turned in great numbers last year (up around 28%) as did Ken Griffin, whose Citadel returned over 25%.

Of the managers listed, over half make a solid portion of their investments via equity strategies (though Appaloosa also focuses on distressed and Third Point also dabbles in mortgages).  Two managers listed are primarily quant funds (RenTec, D.E. Shaw).  Eddie Lampert's earnings are largely tied to Sears (which his hedge fund owns a large stake in) and shares rallied in 2012.

II Alpha ranks all the way up to the top 25 managers and you can view the full list here.

Top 25 Highest Earning Hedge Fund Managers of 2011

AR Magazine has revealed a list of the top 25 highest earning hedge fund managers from 2011. This is their 11th year of doing the rankings and they found that the upper echelon earned an average of $576 million and a combined total of $14.4 billion. Here's the top five:

1. Ray Dalio (Bridgewater Associates): $3.9 billion. You can view Ray Dalio on deleveragings, his newly released research paper

2. Carl Icahn (Icahn Capital Management): $2.5 billion. One of his holdings was featured as a previous stock of the week: what Carl Icahn sees in WebMD.

3. James Simons (Renaissance Technologies): $2.1 billion. We just recently posted up Jim Simons' presentation at MIT. Simons is one of the top earners on this list despite having retired.

4. Ken Griffin (Citadel): $700 million. You can view some of Citadel's latest moves here.

5. Steven Cohen (SAC Capital): $585 million. We've posted up recent portfolio activity from SAC Capital as well.


It's interesting to compare the above individual earner list to the list of the top 10 hedge funds by net gains since inception as there is no doubt some overlap.


Other Notable Earners: Chase Coleman from Tiger Global slides in at the sixth position. Recall that his fund saw big gains from private investments that IPO'd during last year. Andreas Halvorsen of Viking Global earned $300 million and Paul Tudor Jones (Tudor Investment Corp) earned $175 million.

New Additions to the List: 2011 saw plenty of new faces on AR's list including: Philippe Laffont of Coatue Management, Boaz Weinstein of Saba Capital, Jeffrey Ubben of ValueAct Capital, Paul Singer of Elliott Management, Renaissance's Robert Mercer and Peter Brown, as well as Bridgewater's Greg Jensen and Robert Prince.

Notably Absent: AR mentions that the most notable absentee from the list is John Paulson. He fell off after a weak 2011 performance wise after he was the top hedge fund earner the year prior. George Soros misses the list after he returned outside investor money and converted his hedge fund into a family office.

You can view the rest of the top 25 earners list here.

RenTec's Jim Simons on Mathematics, Common Sense, Good Luck & His Career

Jim Simons is the legendary founder of quantitative hedge fund Renaissance Technologies, commonly referred to as RenTec. The mathematician graduated from the Massachusetts Institute of Technology (MIT), and took what he learned and applied it to financial markets.

At age 38 he founded RenTec and he's been wildly successful (just see his Medallion Fund returns here). Simons retired from RenTec in 2009, but the firm full of scientists lives on.

Simons gave a lecture at MIT in 2010 about mathematics, common sense, good luck, and his various careers. Given that he rarely gives interviews, this lecture is well worth a view.

Embedded below is the full video of Jim Simons' lecture (email readers click to come read). He begins at the 10-minute mark and talks investment management at the 28-minute mark:

You can also view another rare interview with Jim Simons here.

Renaissance Technologies' Medallion Fund: Performance Numbers Illustrated

Few investment managers garner the label 'hedge fund royalty'. Jim Simons and Renaissance Technologies' Medallion Fund certainly do. While founder and CEO Jim Simons retired at the end of last year, the fund and his legacy certainly live on. It's a known fact that almost all things about this secretive hedge fund are, of course, secret. However, despite not knowing the specific trading methodologies or algorithms, it's common knowledge that the fund is successful. Very successful according to Rachel E.S. Ziemba and William T. Ziemba's book, Scenarios for Risk Management and Global Investment Strategies which reveals Medallion's performance numbers.

Renaissance Technologies (commonly referred to as Rentec) houses one of the most prominent hedge funds in the world under their roof. Yet, practically no one knows anything about it due to the high levels of secrecy. What we do know, though, is that the fund's investor base is limited to employees of the firm and is closed to outside investors (except for around six people apparently). Medallion charges an obscenely high 5% management fee and 44% performance fee. But, when you're generating the kind of returns Rentec's Medallion is, you can get away with that.

For a closer look at Medallion's performance numbers, we reference Ziemba's Scenarios for Risk Management and Global Investment Strategies. Astonishingly, out of the 148 months that elapsed between January 1993 and April 2005, Medallion only had 17 monthly losses. Out of 49 quarters in the same time period, Medallion only posted three quarterly losses. Additionally, it has seen a yearly Sharpe ratio of 1.68. In twelve plus years of trading, Rentec's Medallion Fund has never had a down year.

Embedded below is an excerpt from Scenarios for Risk Management that illustrates Rentec's Medallion Fund returns:



You can download a .pdf copy here.

And that's not all. Medallion's magnificent march upward has continued in recent years. As we detailed previously, Medallion returned 80% in 2008 in a year where many hedge funds stumbled and some completely crumbled. Additionally according to Barron's, Medallion returned 39% in 2009 and has a 3 year annual compound return of 62.8%. While it's cheesy to say, Medallion certainly holds the gold medal in the land of hedge fund lore. For more on Medallion's performance and an in-depth look at hedge fund strategies, be sure to check out Ziemba's Scenarios for Risk Management and Global Investment Strategies.

RenTec's Jim Simons Retiring At End Of Year

If you haven't already heard, Jim Simons, founder and CEO of legendary quant hedge fund Renaissance Technologies, will be stepping down at the end of the year to retire. Dealbreaker reported earlier that current co-presidents Robert Mercer and Peter Brown will assume the role of co-CEO's at the start of the new year. They also report that Simons will stay on as a non-executive chairman and will "keep sizable investments in RIEF and RIFF."

His actions will undoubtedly unleash a wave of speculation as to "why". But we ask, can't a guy just retire because he's ready to? Nonetheless, questions will be raised as to whether he has lost his passion for 'the game' or whether the poor performance of RIEF this past year has frustrated him (head here for explanation on their performance woes - the fund was down almost 9.5% through September). Back in August, we revealed that RenTec landed on a list of best & worst performers for 2009. And unfortunately for them, they weren't on the 'best' list. It will certainly be interesting to see if Simons' departure leads to redemption requests from investors. While the fund is obviously not just one man, the exit of the man in charge could potentially leave some investors wary.

Jim Simons is quite the accomplished fellow as his returns from his hedge fund's Medallion fund have been astonishing over the years. They have landed him on the list of the top 25 highest paid hedge fund managers of 2008. Additionally, he has graced Forbes' billionaire list. Simons is a secretive man and as such resources on him are a bit scarce. However, we did manage to stumble upon a lengthier interview he has done in the past.

We'll definitely keep tabs on any potential aftershock experienced at RenTec following his departure.

*Update: Here's the letter, courtesy of Dealbook.

The Letter From Mr. Simons:

Oct. 8, 2009

Dear Renaissance Investor,

As many of you know, for the past several years I have gradually stepped back from day-to-day operations of Renaissance. Six years ago, Bob Mercer and Peter Brown became co-executive vice presidents, with all research and production reporting to them, and two years ago, they became co-presidents, assuming a broader set of responsibilities. The time has now come for me to take one further step back.

As of Jan. 1, 2010, Bob and Peter will become co-C.E.O.’s of Renaissance, with all areas of the firm reporting to them. I will remain the company’s principal shareholder and chair of the board. As such I will regularly attend monthly meetings of the executive committee and meetings of the board whenever scheduled, participating in all major corporate decisions. Consistent with best practices, Paul Broder, our chief risk officer, and Mark Silber, our chief financial officer, will report to the board on a dotted-line basis.

I am confident that this transition is best for the firm. I have led the organization and its predecessor for 31 years, and it is definitely time to pass the torch. We are very fortunate to have such able people as Bob and Peter to take the reins. Behind them and Paul and Mark is an outstanding cadre of senior management in all areas of the company, and behind them is a wonderful group of knowledgeable and hard-working individuals. Renaissance is a marvelous firm, dedicated to its investors and its employees. I have every expectation that under the new leadership this tradition will brilliantly carry on.

Sincerely,

Jim Simons

Jim Simons Rentec Interview

Great interview with Jim Simons of Renaissance Technologies by Bill Zimmerman. For a man who is generally secretive and likes to avoid the press, this is a lengthier piece (1 hour) for those curious. The interview also features physicist C.N. Yang. RSS/Email readers will need to come to the blog to view the embedded video. Hat tip to Zero Hedge for alerting us to this excellent piece.

Jim Simons Renaissance Technologies (Rentec) 13F Filing: Q4 2008

This is the 4th Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the Hedge Fund 13F filings preface.

Next up is Jim Simons' Renaissance Technologies, ranked 4th in Alpha's 2008 hedge fund rankings. Rentec, as they are commonly known, was started by Simons in 1982 and has around $25 billion in assets total. They employ mathematical and statistical methods to execute their investments and trades. Their flagship $7 billion Medallion fund has averaged annual returns around 35%. Unlike most hedge funds which charge a flat 2% management fee on assets and then a 20% performance fee, Medallion charges a 5% management fee and a performance fee > 40%. The fees are high, but after seeing their returns, one could argue it is easily worth it. Medallion finished up 80% for 2008, as noted in our hedge fund year end performance post. The bad news to anyone reading is that the fund is pretty much limited to only former and current Renaissance employees. Simons other funds, which are open to other investors, were both down in '08. In terms of recent performance, we saw that their Institutional Equities Fund was -4.61% for February and -8.84% for 2009 at that time, as mentioned in our January & February hedge fund performance post. Rentec is noted to be the most successful hedge fund in the industry, with returns eclipsing other legendary investors including Paul Tudor Jones, Bruce Kovner, and George Soros.

Jim Simons was recently listed on both Forbes' billionaire list and the list of the top 25 highest paid hedge fund managers of 2008. Obviously, he is a very accomplished man and his fund has put up impressive numbers. Mr. Simons previously testified before Congress with numerous other hedge fund managers and discouraged the SEC from making funds' short positions available to the public. For more on Simons & Renaissance, check out our post on hedge fund manager interviews.

Disclaimer: Do note that tracking Rentec through 13F filings is not beneficial due to the quant nature of their firm. We are tracking them because they are a popular, prominent fund with solid returns and many readers continually request it. While the majority of funds we cover are appropriate for tracking given their strategy and research methods, there is no way for us to know why Rentec holds a certain position. So, we are simply posting this up for fun. Use this information for entertainment purposes only. Again, they are mainly a quant firm and they trade every asset class under the sun. The majority of equity holdings you will see in their portfolio are most likely from their Institutional Equities Fund. Please keep this info in mind when viewing below.

The following were their long equity, note, and options holdings as of December 31st, 2008 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.


Some New Positions (Brand new positions that they initiated in the last quarter):
Monsanto (MON), General Electric (GE), Transocean (RIG), Conoco Phillips (COP), Altria (MO), Lorillard (LO), Kimberly Clark (KMB), Merrill Lynch (MER), BP (BP), Abbott Labs (ABT), Norfolk Southern (NSC), Verizon (VZ), Google (GOOG), General Mills (GIS), Texas Instruments (TXN), US Bancorp (USB), Intuitive Surgical (ISRG), Duke Energy (DUK), Dow Chemical (DOW), Dupont (DD), Panasonic (PC), American Express (AXP), Covidien (COV), Devon (DVN), Wachovia (WB), Public Storage (PSA), Joy Global (JOYG), Kellogg (K), L3 Communications (LLL)


Some Increased Positions (A few positions they already owned but added shares to)
Citigroup (C): Increased by 10,046%
McDonald's (MCD): Increased by 2,072%
Coca Cola (KO): Increased by 1,536%
Pfizer (PFE): Increased by 1,378%
Philip Morris (PM): Increased by 1,109%
Pepsico (PEP): Increased by 995%
HSBC (HBC): Increased by 722%
CSX Corp (CSX): Increased by 641%
Research in Motion (RIMM): Increased by 289%
AT&T (T): Increased by 218%
Family Dollar (FDO): Increased by 118%
Baxter (BAX): Increased by 111%
Union Pacific (UNP): Increased by 91%


Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)
Amgen (AMGN): Reduced by 41%
Forest Labs (FRX): Reduced by 36%
Walmart (WMT): Reduced by 35%
Glaxosmithkline (GSK): Reduced by 29%
Linear (LLTC): Reduced by 26%
UST (UST): Reduced by 20%
Humana (HUM): Reduced by 19%


Removed Positions (Positions they sold out of completely)
Noble Energy (NBL), Polo Ralph Lauren (RL), SPX Corp (SPW), BJ Services (BJS), ITT Corp (ITT), Limited Brands (LTD), Travelers (TRV), Philadelphia Consolidated (PHLY), Chesapeake Energy (CHK), Baker Hughes (BHI), Covance (CVD), Metlife (MET), Alcoa (AA), Assurant (AIZ), Tyco Electronics (TEL), Grey Wolf (GW), Equitable Resources (EQT), Halliburton (HAL), Avon (AVP), Praxair (PX), Honeywell (HON), Freeport McMoran (FCX). Inactives: Northwest Airlines, Activision (old shares), Ace, Matsushita, Applera, & Wrigley.


Top 15 Holdings (by % of portfolio)

1. UST (UST): 1.31% of portfolio
2. McDonalds (MCD): 0.91% of portfolio
3. Coca Cola (KO): 0.8% of portfolio
4. Monsanto (MON): 0.8% of portfolio
5. Walmart (WMT): 0.7% of portfolio
6. General Electric (GE): 0.7% of portfolio
7. Amgen (AMGN): 0.66% of portfolio
8. Baxter (BAX): 0.66% of portfolio
9. Transocean (RIG): 0.64% of portfolio
10. Research in Motion (RIMM): 0.63% of portfolio
11. Linear (LLTC): 0.61% of portfolio
12. Chunghwa Telecom (CHT): 0.58% of portfolio
13. Eli Lilly (LLY): 0.57% of portfolio
14. Philippine Long Distance (PHI): 0.57% of portfolio
15. Pfizer (PFE): 0.56% of portfolio

Like we mentioned earlier, there is practically zero explanation for the rhyme or reason of any of their moves due to Rentec's quantitative nature. As you can see in the "increased" category, Renaissance ratcheted up their positions big time, many a time by over 500%. But, you also have to keep in mind that since they hold so many equities, those positions still aren't even over 0.75% of their overall portfolio. The only names that really rocketed up to the top of the portfolio were McDonald's, Coca Cola, Transocean, General Electric, and Monsanto. While many typical long/short equity funds we follow will have 4-8% of their portfolio in their top holding, Renaissance's top equity holding is only 1.3% of their overall portfolio. Assets from the collective long US equity, options, and note holdings were $38.1 billion last quarter and were $27.6 billion this quarter. This is just one of many funds in our hedge fund portfolio tracking series in which we're tracking 35+ prominent funds. We've already covered:

• Well known gurus such as: Carl Icahn, Warren Buffett, & George Soros
• 'Tiger Cub' portfolios: Stephen Mandel's Lone Pine Capital, Andreas Halvorsen's Viking Global, Lee Ainslie's Maverick Capital, Chase Coleman's Tiger Global, Chris Shumway's Shumway Capital Partners, Touradji Capital Management (Paul Touradji), and John Griffin's Blue Ridge Capital
• Global macro giants: Bruce Kovner's Caxton Associates, Louis Bacon's Moore Capital Management, Peter Thiel's Clarium Capital, & Paul Tudor Jones' Tudor Investment Corp
  
• Value & Activist players like: Bill Ackman's Pershing Square, Seth Klarman's Baupost Group, Art Samberg's Pequot Capital, & David Einhorn's Greenlight Capital
• Concentrated portfolios like: Bret Barakett's Tremblant Capital, & Timothy Barakett's Atticus Capital
• Some solid names: Paulson & Co (John Paulson), Thomas Steyer's Farallon Capital Management, and Eric Mindich's Eton Park Capital
• Newer funds on the scene: James Pallotta's Raptor Capital Management, Anand Parekh's Alyeska Investment Group, & David Stemerman's Conatus Capital
• Troubled funds: Jeffrey Gendell's Tontine Associates

We cover a new hedge fund each day and you can see the complete list of hedge fund portfolios here.