High Math & Markets

The “best money manager on earth” is a mathematician.

"T"he advantage scientists bring into the game is less their mathematical or computational skills than their ability to think scientifically. They are less likely to accept an apparent winning strategy that might be a mere statistical fluke” - Jim Simons, President, Renaissance Technologies

Can somebody who holds seminars on topics like “Generalized Chern-Simons Invariant's as a Generalized Lagrangian Field Theory” on his 60th birthday, be the best market player in the world?

In the previous information, we had mentioned that there are at least two great investors (I use the term loosely to include traders), who have very successfully used quantitative tools to record stunning market performances over a long period. One of them is Jim Simons, about whom the Indian media is totally unaware. That is not their fault. Few even in Wall Street, including his fellow-travelers in quantitative trading, know the full dimensions of Renaissance Technologies Corp. that Simons heads.

Over more than two decades, Simons has been the leading light in marrying math and markets. Simons is supposed to be a cryptanalyst, mathematical physicist, academic - and a billionaire investor. Simons graduated from Massachussets Institute of Technology at 20 and completed his Ph.D. in Mathematics from the University of California at Berkeley, barely three years later. By 23, he was in the MIT faculty. From 1961 to 1964 he taught mathematics at MIT and Harvard University. In 1968, he became the chairman of Stony Brook’s math department and was beginning to be famous in academia. Simons did breakthrough discovery and application of certain geometric measurements that resulted in the Chern-Simons form (also known as Chern-Simons invariants, or Chern-Simons theory). In 1974, his theory was published in Characteristic Forms and Geometric Invariants, co-authored with the differential geometry expert Shiing-Shen Chern. The theory has a wide use in theoretical physics, particularly the famous string theory, used to explain the birth of the universe, black holes and super gravity.

In 1976, at 38, Simons won the American Mathematics Society’s Veblen Prize that is awarded every five years, for his work on differential geometry. It is the highest honour in the world of geometry.

Simons got interested in trading only in the early 1970s. In 1973, a tile company that he had invested in got sold and Simons gave his money to a mathematician who was trading in commodities. In eight months, Simons saw his money go up 10 times. Intrigued, Simons began trading in currencies. In 1978 he left academics, to form a private investment fund called Limroy. In 1982, he founded Renaissance Technologies Corporation, a private investment firm based in New York. Simons is still at the helm, as president, of what is probably the world’s most successful hedge fund.

In 1988 Simons decided to launch a fund that concentrated on pure trading. He launched Medallion in March 1988. The fund earned 8.8% in 1988 but lost money steadily thereafter until Simons stopped trading. For six months Simons and Princeton mathematician Henry Laufer (still Renaissance’s research chief), rebuilt Medallion’s trading strategy, shifting from fundamental analysis to a mathematical approach and rapid-fire trading strategy.

According to Institutional Investor magazine, Simons earned $1.5 billion in 2005 and $670 million in 2004. The only major article about him published by the Institutional Investor magazine in 2000, said that “Simons may very well be the best money manager on earth.” In March 1988 Simons started his flagship $3.3 billion Medallion fund. By 2000, the fund had notched returns of 35.6%, compared with 17.9% for the Standard & Poor’s 500 index. For 11 full years ending December 1999, Medallion’s cumulative returns were 2,478.6%. Quantum fund of George Soros was the next-best with a 1,710.1%. Want to invest in his fund? Sorry, it has been closed to new investors since 1993. How did Simons manage to do it?

How a mathematician runs the word’s most successful hedge fund

In our above issue we profiled Jim Simons, one of the most successful traders of the world, who remains virtually unknown even in his own country. His firm, Renaissance Technologies, is intensely secretive even though it manages $12 billion. It had a website showcasing basic facts about the firm. The site no longer exists. How has it run up a 35% return per annum since 1989? Renaissance is like a college campus. The headquarters has a gym, lighted tennis courts, a library with a fireplace and large private offices for every employee. The centerpiece is an auditorium with exposed beams that seats 100 and features biweekly science lectures.

Among fund’s key professionals are Henry Laufer, the fund’s Vice President for research, who has been with Renaissance since 1989. He was a professor of mathematics at the State University of New York (SUNY) at Stony Brook for 20 years. He has also taught at the Massachusetts Institute of Technology and at Princeton University. Another key executive Robert Frey has a Ph.D. in Applied Mathematics and Statistics from Stony Brook. He researches on systems for stocks.

Peter Weinberger has a Ph.D. in Number Theory from Berkeley. He has taught mathematics at the University of Michigan, and then spent most of his career in systems and software research at Bell Labs. He heads Technology. Paul Broder runs the 20-member trading group which trades 24-hours a day across three time zones. He came to Renaissance via JP Morgan and Chase Bank and looks for people with an appetite for risk and a keen sense of survival. Peter Brown earned his Ph.D. in Computer Science from Carnegie-Mellon University. Before joining Renaissance in 1993, he worked for 10 years at IBM Research on speech recognition and automatic language translation. These are the kind of people who run Renaissance.

The only publicly available piece of detailed information about the firm is a 2000 article in Institutional Investor magazine. According to it, the Renaissance office “resembles nothing so much as a high-powered think tank or graduate school in math and science. Operating out of a one-story wood-and-glass compound near SUNY Stony Brook, Renaissance has 140 employees, one third of who hold Ph.D.s in hard sciences. Among their ranks: practitioners in the fields of astrophysics, number theory, computer science, mathematics, physics and statistics from Japan to Cuba. In notably short supply are finance types. Just two employees, including the head of trading, are Wall Street veterans.” Simons was quoted as saying: “I have one guy who has a Ph.D. in finance. We don’t hire people from business schools. We don’t hire people from Wall Street. We hire people who have done good science.” Renaissance has been recruiting experts in computational linguists who have worked on speech-recognition systems. This is because investing and speech recognition are similar in a sense. In both, one is trying to guess the next thing that happens.

Renaissance builds statistical models that can predict the future movements of traded products. When trading starts, the models rule, specifying that trades pay off within a defined time. Guided by these models, its traders execute rapid-fire trading. The traders never override the models. Simons, estimated to be worth $2.6 billion, donates generously. He has given away $7 million to MIT, $2 million to Institute des Hautes Etudes Scientifique in Bures-Sur-Yvette, France, $1.5 million to the Institute for Advanced Study in Princeton, New Jersey, $1.7 million to the Mathematics Science Research Institute in Berkeley, California. In early 2006, he led a group of directors of Renaissance and of Brookhaven Science Associates in donating $13 million to fund a budget shortfall of the Brookhaven National Laboratory that would have shut down the Relativistic Heavy Ion Collider. Simons plans to spend $100 million on autism research after his daughter Aubrey was diagnosed as autistic.