Veteran Wall Street Journal reporter Gregory Zuckerman has come up with another gem of a book in The Man Who Solved The Market: How Jim Simons Launched The Quant Revolution. I read one of Zuckerman's previous works, The Greatest Trade Ever, about John Paulson and the fortune he amassed during the financial crisis of 2008-2009. The Greatest Trade Ever is equally as good, if not better than Michael Lewis' book The Big Short, which primarily covers the same topic. Zuckerman's an outstanding storyteller. A non-fiction piece that reads like a novel, The Man Who Solved The Market is a page turner from cover to cover unearthing the tale of Jim Simons and the hedge fund he founded, Renaissance Technologies [RenTech].
A trailblazing quant firm, RenTech is renown on Wall Street for its flagship investment product the Renaissance Medallion fund. Although closed to outside investors, the Medallion fund is revered in financial circles. "By the summer of 2019, Renaissance's Medallion fund had racked up average annual gains, before investor fees, of about 66 percent since 1988, and a return after fees of approximately 39 percent.". That betters George Soros' Quantum Fund, Steven Cohen's SAC, Peter Lynch and the Magellan Fund, Warren Buffett's Berkshire Hathaway, and Ray Dalio's Pure Alpha; all in their heydays. As The Economist put it in 2010, "There's Renaissance Technologies, and then there's everyone else.". They discovered the secret sauce.
Jim Simons didn't get into the investment business until he was in his 40's. Before launching his hedge fund, he was an award winning mathematician, a code-breaker during the Cold War, and built a world-class mathematics department at Stony Brook University. He could have stopped there, but wanted to conquer the world of investing, too. "Simons didn't have a clue how to estimate cash flows, identify new products, or forecast interest rates. He dug through reams of price information.". Not just opening and closing prices, but the upticks and downticks of currencies, commodities and bonds. Securities would come later, but were more vexing. He and his team utilized the stockpiles of information competitors weren't interested in. RenTech was mining "big data" before there was such a thing which is why they were probably given the moniker of 'rocket scientists' by the established Wall Street firms. Like Vanguard founder John Bogle, they were ostracized but got the last laugh.
Working for the Institute of Defense Analyses in the early 1960's, Simons learned how to "develop mathematical models to discern and interpret patterns in seemingly meaningless data. He began using statistical analysis and probability theory, mathematical tools that would influence his work.". Simons concluded that "markets don't always react in explainable or rational ways to news or other events, making it difficult to rely on traditional research, savvy and insight.". As a result, he didn't hire economists or experienced traders for his fledgling firm. Instead he employed not only PhD's in mathematics, but award winning mathematicians. Some having had influential algorithms named after their discoveries. The cream of the crop. They also hired top-of-the-line astronomers to glean their research techniques.
"Just as astronomers set up powerful machines to continuously scan the galaxy for unusual phenomena, Renaissance's scientists programmed their computers to monitor financial markets, grinding away until they discovered overlooked patterns and anomalies."
With the aid of ever increasing computing power, Simons and crew bucked the old financial convictions that the markets are efficient and investing is a "random walk". RenTech continues to have a leg up on the field gathering as much data as they can. Everything from earnings reports, press releases and the aforementioned tick data. "IBM has estimated that 90 percent of the world's data sets have been created in 2018-2019 alone, and that forty zettabytes - or forty-four trillion gigabytes - of data will be created by 2020, a three-hundred-fold increase from 2005.".
RenTech's approach is to carve up the trading day into five minute segments or bars, and compare small slices of historic data. For instance, "Perhaps bar 50 in the gold market saw strong buying on days investors worried about inflation but bar 63 showed weakness.". Then they would bet accordingly. It's a dynamic system that adapted to the real-time analysis, "then adjust the fund's mix of holdings given the probabilities of future market moves - an early form of machine learning.". And this was decades ago. Simons and his colleagues were way ahead of the curve. They bought and sold on the most desirable days of the week and at the ideal moments of the day. One employee is quoted, "The name of the game is not to be always right, but to be right often enough.". Former CEO Robert Mercer succinctly stated: "We're right 50.75 percent of the time...but we're 100 percent right 50.75 percent of the time. You can make billions that way.". Which they did and still do. They programmed the software like a gambling casino where the house always wins.
RenTech invented and developed many strategies that are copied by competitors to this day. As an example, "profitable trade ideas are only half the game; the act of buying and selling investments can itself affect prices to such a degree that gains can be whittled away.". To combat this, they made more frequent trades, with larger amounts of money, dispersed throughout many trading platforms. A no brainer in today's world, but RenTech pioneered it twentysomething years ago. Almost like high-frequency trading in some respects. Throughout his life, "Simons has been driven by two ever-present motivations: proving he could solve big problems, and making lots and lots of money.". Staying a mile ahead of rivals, he accomplished both - exponentially.
So how much money is a lot of money? In the 2016 presidential campaign, Jim Simons was one of the biggest supporters of Hillary Clinton. Conversely, then RenTech CEO Bob Mercer was one of Donald Trump's largest financiers. Mercer accumulated so much money at RenTech, he purchased nearly 50 percent of Breitbart News in 2010. If you aren't familiar with Breitbart News, it's the voice of the alt-right. That must have made for interesting water-cooler conversation at the office. Mercer eventually sold his share in the news company to his daughters. As the author asserts: "Money is seductive, even to scientists and mathematicians.".
Although the book keeps your interest from page one, it begins to really start cooking around page one hundred because it's established in a more modern setting, and discusses computerized trading in practice. There's also a section about market history. Those that have tried and failed going back to Babylonian times to the present. This is especially true for technical analysis which, according to the author, is best utilized for short term trading. If you are an investor looking to place your assets with a quant fund, Zuckerman sums it up best near the end of the story: "For all the advantages quant firms have, the investment returns of most of these trading firms haven't been that much better than those of traditional firms doing old-fashioned research, with Renaissance and a few others the obvious exceptions.".
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