The Secret World of Jim Simons
How does this prize-winning mathematician and former code breaker rack up his astonishing returns?
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How does this prize-winning mathematician and former code
breaker rack up his astonishing returns?
By Hal Lux
Institutional Investor Magazine
How does this prize-winning mathematician and former code
breaker rack up his astonishing returns? Try a little luck--
and a firm full of Ph.D.s.
Last April the State University of New York at Stony Brook held
a gala reception at the Waldorf-Astoria Hotel in midtown
Manhattan to celebrate raising a record $1 million -- a tidy
sum for a state school. After cocktails a balding, white-haired
man rose from his seat on the dais to thank the sellout crowd,
which included such celebrities as Oscar-winning movie director
Martin Scorsese, for its generosity.
"I told my wife, 'We raised $1 million for Stony Brook,'" said
the speaker, hedge fund manager James Simons. "She said, 'Gross
Chances are you haven't heard of Jim Simons, which is just fine
by him. Nor are you alone. Many on Wall Street, including
competitors in his specialty, quantitative trading, haven't
heard of Simons or of his operation, Renaissance Technologies
Corp., either. And that's simply extraordinary -- because,
gross or net, Simons may very well be the best money manager on
An extreme judgment? Perhaps. Certainly, there has been no end
of claimants to the title. And one after another, over the past
few years, these celebrated managers have either blown up or
folded their tents. After big reverses, Julian Robertson closed
down Tiger Management, and George Soros scaled back the
activities of his Quantum Fund this year. John Meriwether's
Long-Term Capital Management nearly took down the financial
world in 1998.
Simons, by contrast, just keeps getting better. Consider his
performance over the past decade. Since its inception in March
1988, Simons' flagship $3.3 billion Medallion fund, has amassed
annual returns of 35.6 percent, compared with 17.9 percent for
the Standard & Poor's 500 index. For the 11 full years
ended December 1999, Medallion's cumulative returns are an
eye-popping 2,478.6 percent (see graph, page 58). Among all
offshore funds over that same period, according to the database
run by veteran hedge fund observer Antoine Bernheim, the
next-best performer was Soros' Quantum Fund, with a 1,710.1
percent return (see table, page 54).
"Simons is No. 1," says Bernheim. "Ahead of George Soros. Ahead
of Mark Kingdon. Ahead of Bruce Kovner. Ahead of Monroe
And Bernheim's numbers don't include Medallion's 2000
performance. In a year of exceptional volatility and market
dislocations, the fund is up 64 percent through September. Over
the years, Simons' consistency has been exceptional. Apart from
his second year, 1989, his fund has not had a losing year (it
was down 4.1 percent that year). In fact, in the past decade,
it's never returned less than 21 percent.
"Ten years ago I put a small amount of money into Medallion,"
says one pleased investor, Richard Gelfond, the co-CEO of Imax
Corp., the Canadian giant-screen film company. "Today it's a
big amount of money."
Medallion, which closed to new investors in 1993, is focused
chiefly on commodities and futures trading. Recently, Simons
has expanded his equity business. Last year he launched
Equimetrics, a $500 million U.S. fund with a market-neutral
trading strategy for institutional investors. Despite market
ructions, and the first declining U.S. stock prices in years,
Equimetrics this year has returned 24.1 percent through
September, compared with 2.23 for the S&P 500 with two
thirds the volatility.
And these are all, it should be noted, net numbers. The price
of Simons' success is high for investors. He charges a
management fee of a stunning 5 percent of assets, in addition
to the normal hedge fund rake-in of 20 percent of
To be sure, some investors have had even higher returns in
recent years. Hedge fund manager Jeffrey Vinik closed his fund
last month after compiling average annual returns of 53 percent
since November 1996. And Steven Cohen of SAC Capital
Management, reportedly posted returns of 70 percent last year
and 49 percent the previous year. Simons, however, has made
steady profits over 11 years, compared with just seven for
Cohen and four for Vinik.
Simons' risk-adjusted returns are even more impressive. Paul
Wick, manager of Seligman Communications and Information Fund,
leads all U.S. mutual fund managers, according to Morningstar,
with annual returns of 31 percent since 1990. But his Sharpe
ratio over the past three years is 0.42; for the same period,
Legg Mason's celebrated William Miller III boasts average
annual returns of 24 percent -- and a Sharpe ratio of 0.64.
Simons wracked up a ten-year Sharpe ratio of 1.89 throughout
the 1990s, with a 2.52 ratio for the last five years of the
decade. Sharpe ratios are a measure of risk-adjusted returns.
The higher the number, the better.
How does Simons do it? Start with a world-class mathematical
mind. In 1976, at 38, Simons won the American Mathematics
Society's Veblen Prize -- awarded every five years, it is the
geometry world's highest honor -- for his work in the
excruciatingly esoteric field of differential geometry. His
signature work -- a 26-year-old theorem crafted with renowned
geometrician Shiing-Shen Chern that is known as the
Chern-Simons theory -- has recently emerged as a critical tool
for theoretical physicists searching for fundamental laws of
the universe. "Chern-Simons pervades a whole class of theories
that underlie our fundamental view of the observable world,"
says Brandeis University physicist Stanley Deser, an expert on
supergravity, a discipline of quantum theory that studies
elementary particles and their interaction.
"Jim Simons is without question one of the really brilliant
people working in this business," says quantitative trading
star David Shaw, chairman of D.E. Shaw, which boasts returns
above 50 percent this year. "He is a first-rate scholar, with a
genuinely scientific approach to trading. There are very few
people like him."
Simons surrounds himself with like minds. The headquarters of
Renaissance, in the quaint town of East Setauket on New York's
Long Island, 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, founded in 1982, has 140 employees, one third of
whom hold Ph.D.s in hard sciences. Many have studied or taught
in Stony Brook's math department, which Simons chaired from
1968 to 1976. Among their ranks: practitioners in the fields of
astrophysics, number theory, computer science and computational
linguistics. In notably short supply are finance types. Just
two employees, including the head of trading, are Wall Street
"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," says Simons. "We hire people who have done good
Confident and witty but intensely secretive about his
business's inner workings, Simons shuns publicity. He agreed to
talk with Institutional Investor only after much pestering (see
box, page 56). And some of what he said was, frankly,
unintelligible. We made the mistake of asking him to explain
Chern-Simons. After half an hour he allowed, "I can't." He
meant, of course, to us.
Simons rarely speaks at financial forums, preferring math
conferences. He celebrated his 60th birthday with a geometry
symposium at Stony Brook that included such lectures as
"Generalized Chern-Simons Invariants as a Generalized
Lagrangian Field Theory." That's one reason he is little known
on Wall Street. Two years ago Renaissance invited Andrew Lo,
whose financial engineering program at the Massachusetts
Institute of Technology is the prime recruiting ground for
quantitative traders, to speak at its headquarters on options
replication. "I had heard of Jim Simons the mathematician, but
I had never heard of Renaissance until they called me up," says
Lo. "I said, 'Jim Simons runs a hedge fund?'"
When he does open up, Simons can seem exasperatingly coy in
describing his success. "Luck," he told a gathering of
potential investors last spring in Greenwich, Connecticut, "is
largely responsible for my reputation for genius. I don't walk
into the office in the morning and say, 'Am I smart today?' I
walk in and wonder, 'Am I lucky today?'"
In fact, Simons is being straightforward. Luck may be the
residue of design to baseball minds, but to a mathematician
it's the twin of probability, which can be approached through
statistical studies. Renaissance's researchers construct
statistical models and proprietary algorithms from exhaustive
scrutiny of market data.
Like all quantitative money managers, Renaissance aims to find
small market anomalies and inefficiencies that can support
profitable trading on billions of dollars of capital. Though
all quant shops are alike in their dedication to models -- Let
the best algorithm win! -- Renaissance's approach differs from
the "convergence trading" popularized by John Meriwether's
Long-Term Capital Management and similar arbitrage shops.
Convergence traders price financial instruments based on
complex mathematical models, find two different instruments
that are cheap and expensive on a relative basis and then buy
one and sell the other, betting that the prices will, at some
point, have to return to their proper level. The Renaissance
approach requires that trades pay off in a limited, specified
time frame. And Renaissance traders never override the
Guided by these models, Medallion's 20 traders conduct
rapid-fire buying and selling of a multitude of U.S. and
overseas futures contracts, including all major physical
commodities, financial instruments and important currencies, in
addition to trading equities and mortgage derivatives. This
year Medallion made a killing in the volatile oil futures
To be sure, Simons' track record is not unblemished. In 1997 he
folded a middling market-neutral fund into Medallion after just
three years. And a mortgage-backed-derivatives fund he backed
in 1995 swooned after enjoying two fine years.