Warren Buffett may be known as the Oracle of Omaha, and his return rate may be astonishingly consistent (20.5% annualized returns since 1965). But when it comes to investing, he’s no Jim Simons.
Simons, the mathematician who launched hedge fund Renaissance Technologies back in 1982, has amassed billions thanks to his quantitative approach to investing. His returns since then? A whopping 39%. Simons has confounded Wall Street insiders due to his secretive nature — he rarely speaks to reporters and doesn’t let employees attend industry conferences.
Though there’s a lot left to the imagination regarding Simons and his methods, veteran Wall Street Journal writer Gregory Zuckerman has shed some light on the man in his new book, “The Man Who Solved the Market: How Jim Simons Launched a Quant Revolution,” a New York Times and Wall Street Journal bestseller.
Last week, Zuckerman spoke about Simons as part of a Thinknum Alternative Data webinar series hosted by Thinknum’s chief growth officer, Marta Lopata. Watch a replay of the webinar here.
Thinknum: When you started talking about why you wrote the book in the first place, you talk about this merger of human and machine. Do you think that like that’s a step forward from what RenTech is doing? Or a step backwards?
Zuckerman: I think it’s a step forward for the industry. One thing I’ve also concluded from my research is the importance of systems. So if you look at all the most successful businesses today, Tencent, Facebook, et cetera, they’re all built on predictive algorithms, they’re all built on models. If you look at decisions that are made by important members of society, pilots, surgeons, they all have a checklist. They have a system. It’s been written how pilots and surgeons are both more successful because of these systems. Even a veteran surgeon has done this a million times as well. They still have to go through a checklist. It’s about having it in an organized way of thinking and approaching problems. It’s not to say that everyone has to be a quant today, but I think everyone has to use data and everyone has to embrace a systematic approach and the scientific method to some extent.
To me as a citizen, it’s scary that businesses are embracing this approach which is a much more efficient and logical approach. And yet the most important systems in our lives are not made with systems. You take a look at the government, you look at that or if you look at the White House. I mean, President Trump is proud of making decisions using his instinct, using his gut, and that scares me as a citizen. I come away with my research and writing this book much more, and I’m a storyteller.
But the biggest mistakes as investors in recent years, have been people that have succumbed to stories. If you look at WeWork, you look at Theranos, you look at Nikola, these are our storytellers — if you meet an executive, you think you can read them pretty well. And I’m just as guilty as anybody else. And it’s not to say that everything has to be 100% quant. I do believe that machine plus man or man plus machine is the best approach. And that is what Renaissance does.
Let’s talk about Mercer, and him being the one coming from IBM and building this incredible system to get with the rest of the team, and him being also the one that is investing with the least systematic political instructor we’ve seen. I think that’s interesting to see.
Yeah. At the office, he relied on science and data and outside the office, not so much. Yeah. We’re all human. I guess he is, too.
“It’s not to say that everything has to be 100% quant. I do believe that machine plus man or man plus machine is the best approach. And that is what Renaissance does” – Zuckerman
Many analysts these days are told to learn programming skills, and to be the merger of both the coder and the mathematician and the analysts. Is it more about divide and conquer or learning it all? I think some firms are trying to make their analysts learn and be both things. And everybody’s trying to find a way to have the best of two worlds. Do you see them as just hiring very niche specialists in this space or expecting people to know it all?
That’s a good question. I don’t expect people to know it all. No, they hire people who’ve got some expertise and they like to hire physicists. They like to hire astronomers, they love astronomers. They don’t hire astrologers, though. So if you’re an astrologer on this call, do not send a resume to Renaissance. So they like people with a scientific background and accomplishments.
I’ll just give you a sense of the people internally: they don’t see their competitive advantage as having the best, highest powered computers. They almost are self-mocking to some extent. They spend a lot of money on their infrastructure, don’t get me wrong, but they don’t think it’s the best out there. There are other firms that have a little bit better advantage there. And even their data — for a while, they had an advantage in terms of better data, older data than others.
But today, they acknowledge that everybody can get their hands on their data. When you talk to people who are there today, they’re not 100% sure why they’re so much better than everybody else. I don’t think they’re being quiet. They don’t go for drinks with somebody on Wall Street or another hedge fund. They don’t have any interaction with other firms. They don’t see themselves as competing really for talent with hedge funds and Wall Street, they see themselves competing with Facebook and Google, not DE Shaw, Two Sigma, or that kind of stuff. So it’s a unique organization. And they’re out on Long Island. So they’re almost like an academic organization unto themselves.
Most firms have silos, and you understand why they evolve. When someone does really well, so they’re rewarded. If the firm’s not doing so well, they give this person or this man or woman a group and employees. They don’t necessarily want to share their advances, these employees, but that’s just not how it works at Renaissance. There are presentations made by groups to groups. If one group has a problem, they shut their computers. The other groups can see the work they’ve done and they pick up on it and they improve on it. It’s just a unique organization.
Their hypothesis is that’s one of the big reasons why they’re bigger than everybody else. And they also have incentive to work with each other. So the way Jim Simons pays them is based on the Medallion fund. The way it was described to me by somebody who used to be there, he said, “Greg, I don’t mind getting a cup of coffee for somebody if it means helping Medallion improve.” It’s returned by a few basis points. And that’s sort of what happens to a lot of the people that get there. It’s not clear how they’re going to improve the system, and they have to figure it out. But it’s a very unique organization.
“The way it was described to me by somebody who used to be [at Rentech], he said, ‘Greg, I don’t mind getting a cup of coffee for somebody if it means helping Medallion improve'” – Zuckerman
So, I have a question from David Magerman. He’s asking about Peter Brown. He’s the genius of Renaissance that made it successful. Do you have any comments about Peter Brown specifically?
Yeah. So Peter wouldn’t talk to me for the book. And then I went to a speech he gave, I think it was probably in January. So he’s a very secretive guy. He didn’t want to talk to me back then, he didn’t want to talk to me today. But I do agree when he talked to people within the firm, they were worried. So what happened was Bob Mercer had to step down and he was co-CEO with Peter Brown. And Mercer is an odd individual, doesn’t talk that much. Not who you would think of as a great manager, but they work really well together, a yin and yang kind of thing which you’ll read in the book. So people were worried within the firm that Bob Mercer’s stepping down. And yeah, he’s still at the firm, but he’s not really running things like he used to. That move would really hurt the firm.
To Peter Brown’s credit, he’s actually much more outgoing than I had expected. He can be funny. People like working for him. He realized he needed help, and he deferred. My understanding from people there is he deferred a little bit more than they had expected. So he’s done an unbelievable job both in terms of equities breakthrough, but I’m also in terms of managing. And you wouldn’t think a quant would be a great manager, but in his own way, he’s good at managing other clients.
In your book, you mentioned the way RenTech specifically has relied on using very vast, large data sources. He also mentioned alternative data as one of the types of data that are being leveraged. Do you have any insights on how unique and how much data they’re using? What type of unique sources are there? I’m curious if you ever came across interesting examples of data sets that were being leveraged by them.
So the data that I did come across was the kind of stuff that back then — we’re talking a decade or two ago — was cutting edge or unusual, unexpected. And today, I think everybody else who’s doing it has caught up in that regard. By the way, it was described to me by someone there, “just assume we’ve tested everything.” All the stuff, we call it alternative data, but it’s all data.
They were just technical analysts to some extent, and they believed in the technical approach. It was all pricing data and that’s what they were collecting. They went to the Federal Reserve and were jotting down gold prices and other kinds of prices going back decades and cleaning it and improving on it. That was until I think the mid-90s, early 2000s. From that point on, it became more than pricing data, it became everything else. So today, I’m not aware of what it is that’s better or different than others. I just know that it’s everything.
During your research, what were the main messages you got from talking to RenTech competitors, like DE Shaw, Two Sigma, et cetera?
I’ve talked to some of those people about the organizations and they said to me, “We wish we could be organized like Renaissance, in terms of no silos, in terms of rewarding people based on the one fund.” You’ve got other funds now with Renaissance, but the Medallion is still key. It could be one of those things that once you’ve started it’s hard to change. And they say, “well Greg, we’ve evolved this way and we’ve got the silos for a reason, and we all know that’s not ideal.”
It’s also important to remember that there are other really successful trading quant firms like Two Sigma. They’ve got this partners fund which is more comparable to Medallion. Pete Muller, tremendously successful. And that’s also what Pete Muller does, that’s what Two Sigma does to some extent. And we’re talking medium frequency, not high frequency, and yet not long-term. And it’s distinguishing that from AQR and other firms like that who manage a lot of money and are successful organizations, but their returns aren’t nearly the same and they just aren’t the same. It’s not the same approach. So those that have the best returns seem to have this similar approach.
One of the most important reasons why Medallion does so well is because Simons has kicked people out, and he only capped it at $10 million. One of the lessons I learned from reporting on all these firms over the years is when you get too big, returns suffer. I mean, John Paulson today is just as smart as he was back in 2007 when he pulled off the greatest trade ever. But what was the problem? You let that fund go to close to $40 billion.
They all say, “We’re going to be the exceptions. We are going to be the ones who manage all this AUM and still have great returns,” but they’ve never been able to. They start focusing on the management fee rather than the returns. Even if not consciously, you do so. So Simons has kept the fund at $10 million. Now, let’s be clear. He leverages it up. So they’re still managing a lot of money, but he gives back all the returns each year. So that’s been a big advantage for them, that other firms haven’t really done except in their own sort of partners fund. Shaw’s gotten really big, Two Sigma’s big, and Renaissance themselves and their public funds have gotten too big, and the returns have gotten hurt as a result.
“One of the lessons I learned from reporting on all these firms over the years is when you get too big, returns suffer” – Zuckerman
The common thread is the unique management that you’ve mentioned from both what the competitors are talking about, and from your own research. Do they claim that their models are remaining the same or do they claim that they’re constantly tweaking them? Did they have a specific methodology?
So they have some core approaches, signals that have worked for years, but many others, if not most others, are adjusting, and are new. The market is changing. Or at least until recently it had been changing, where you have fewer individual investors, if you were a dentist trading the market. And to some extent you want to go overboard. Medallion, Renaissance have made money off of those behavioral mistakes made by individual investors, and by hedge fund managers, and by traditional active managers. To some extent, Renaissance does make money off of those people.
As the market shifts to have more passive investing, more ETFs and such, that doesn’t mean that the market is changing for fewer people, they can’t take advantage of it. And the markets are evolving in a different way. And the patterns are changing so much in the way of ETFs. And maybe with Robinhood and avid Robinhood investors, that’s been some kind of help to Medallion. I posed that question internally and the response was, “Well, yeah, Greg, that would be a concern if that was happening overnight.” In other words, if the market was evolving to be more dominated by ETFs and passive investing overnight then we’d be in trouble. But it’s not overnight. It’s happening slowly. So we can still find these patterns and take advantage of them.
How much of the alpha is based on the speed and liquidity provision versus the predictive models?
Yeah, I don’t think it’s the speed. It’s not to say speed isn’t important, but the people internally don’t think that’s where the most alpha comes from.