Source: Wall Street News

On May 11, Jim Simons (Jim Simons), the founder of hedge fund Renaissance Technologies (Renaissance Technologies) and a legendary quantitative investment master, passed away at the age of 86.

Morgan Hauser, the author of the book “The Psychology of Money” and a famous columnist, once said:

There is such a person in every field, and his competitive advantage is that he is smarter than everyone else. In the financial field, this person has been Simmons for the past 20 to 30 years.

According to Hauser, Simmons was not only a mathematical genius, but also a true master of aesthetics. For him, driving the entire system to operate in an orderly, accurate and efficient manner, handling complex problems and finding elegant solutions is itself a supreme beauty. It was this pursuit of beauty that gave birth to the rise of Renaissance technology.

Quantify the pioneer's unbridled life

Simmons was born into an ordinary family in Massachusetts, USA, and has shown outstanding mathematical talents since childhood. At age 20, Simmons graduated from the Massachusetts Institute of Technology with a bachelor's degree in mathematics. Just three years later, he received his doctorate in mathematics from the University of California, Berkeley. At the age of 38, he had already received the highest award in the field of geometry — the Vibron Prize.

Although the first half of his life was almost entirely dedicated to math, Simmons has always been interested in making money. He hopes that he will have enough financial freedom to pursue the career he is interested in. “The New Yorker” magazine once wrote an interesting anecdote in an exclusive interview:

Simmons always smokes nonstop, even in a closed conference room... He said he could pay no matter how much he was fined for doing so.

Simmons began participating in commodity trading in the 1970s when he was the head of the Department of Mathematics at the State University of New York at Stony Brook. Simmons' investment side business was very successful, so he decided to leave academia and set up his own investment company, later Renaissance Technology, in 1978.

The Renaissance's flagship fund Medallion was launched in 1988 (ten years after Simmons began investing). Over the next 30 years, the Medallion Fund generated more than 100 billion US dollars in profits, with a total annual return of 66% (39% after deducting fees). If you invest $1 in the Medallion Fund in 1988, you could reap a return of $14 million in 2018. The Medallion Fund has also been called a “one-of-a-kind money-making machine” by Bloomberg.

The Secret of the Medallion Fund: Using Statistics to Find Market Patterns

In the seventies and eighties, the investment industry had two mainstream research methods: 1) fundamental research (understanding and predicting asset trends based on key drivers); 2) technical analysis (studying price charts).

Simmons' strategy is to carry out a “fundamental perspective” (such as tracking supply and demand). Despite some success, Simmons sees the mood swings in intraday trading as “shocking.” He wanted a more systematic approach, so he began creating a third method: using complex mathematical models to determine price movements.

As a code-breaker who has worked for the US National Security Agency for a short time, Simmons believes “there are models in the market” and that he can find them. What is required for this job is not a business student, but a doctor of mathematics and an astronomer. His first employees were his former colleagues while teaching at the university.

Over the years, Renaissance Tech created a three-step process to find “statistically significant money-making strategies”:

1. Unusual patterns are discovered from historical pricing data;

2. It is statistically significant, non-random, and consistent over time;

3. It is somewhat explainable.

These signals are known as “tradable effects.” Although many signals are common in quantitative funds today, the Renaissance did this first, and it did a better job.

Some famous trading topics include:

Average reversal: Prices tend to pull back higher or lower (a Renaissance employee once said, “We make money from other people's reactions to prices”).

Trends: The Renaissance can accurately predict how long an investment trend, whether rising or falling, will last.

Data release: The prices of some assets fell before economic data was released (such as labor statistics) and rose after the release.

Seasonal: The price movement on Monday was similar to Friday, but on Tuesday it returned to the previous trend.

Trading habits: Commodity traders sell positions on Fridays so they don't hold assets in the event of an accident over the weekend.

What can we learn from Simmons' legendary life? Unless you're a quantification expert, the valuable experience is about how (and why) Simmons did what he did, not what exactly he did. Although a book containing the secret algorithms of the Renaissance would instantly become a bestseller, its value would also immediately disappear — a well-known trading strategy that is meaningless.

Simmons' life experience, on the other hand, is timeless.

In a 2022 speech, Simmons outlined five principles throughout his life:

Beauty-oriented

Simmons lives his own way. This math genius was a code-breaker for the US National Security Agency before becoming head of the math department at Stony Brook University. After that, he gave up his academic career to set up a hedge fund. Simmons' life unfolds in an unpredictable and extraordinary way, as he follows his curiosity to solve interesting problems.

But can a hedge fund or any business be Midea? Simmons believes yes, and he thinks his work has an “aesthetic component”:

Find the right people, handle problems well, do things right... Doing things right is a beautiful thing.

The nature of aesthetics is to find elegant solutions to difficult problems — such as having a group of super smart and self-respecting people work together to overcome the market.

Simmons' answer to market complexity isn't math, just as Buffett's answer isn't “value investing.” Simmons is a system builder, and the Renaissance Fund owes its prosperity to his pooled talent and creative culture. The mathematician Simmons is engaged in the “human” business.

Team up with the smartest and best people

At Renaissance and Stony Brook, Simmons' success depends on finding talent, that is, finding people “smarter than you” and persuading them to join. In his book “How to Invest,” he once recalled to David Rubinstein:

I love recruiting soldiers and buying horses. My secret to success is finding great talent.

In the Renaissance, Simmons' most important job was to find excellent talent and create the right conditions and incentives to promote collaboration:

My algorithm has always been to bring smart people together and give them a lot of freedom. Create an atmosphere where everyone can talk to other people, where they don't hide in a corner to do their little things, but talk to other people. Providing the best infrastructure, the best computers, and more. Let everyone be a partner. This is the model we used in the Renaissance.

How many founders and managers hire people smarter than them and then “let them do their thing”? Insecurity, bureaucracy, and short-term thinking will soon hinder their development.

Don't go with the flow

In the early days of the Renaissance, Simmons also traded based on fundamentals

He recalled that what his Renaissance colleagues did at the time was “read newspapers, stock codes, news telegrams, and then draw conclusions.”

But at the same time, he believes that if everyone comes up with the exact same idea to solve the problem, then they should not continue doing it; they should do something original.

Simmons believes that statistical anomalies can be exploited, and hopes to create a “model that can make money while sleeping.” However, it took him ten years to find a successful combination of strategy, talent, and technology.

Don't give up lightly

Along the way, Simmons also had doubts:

Sometimes I watch it all and feel like I'm just someone who doesn't know what I'm doing.

Gregory Zuckerman (Gregory Zuckerman)'s biography “The Man Who Solved The Market” (The Man Who Solved The Market) mentioned that Simmons' early partners were often lost. Researchers and traders came and went, while Simmons remained focused on his business, unaffected.

How many people have this kind of patience, perseverance, and confidence?

Simmons is focused on building a system that connects talent, strategy, and capital. The so-called “you don't know what you don't know”, small things that seem insignificant can be a key factor in career breakthroughs. Simmons never suppresses the team's curiosity and desire to experiment, but rather gives them great freedom to go for it. This is probably an essential gene for the success of the Renaissance.

After years of learning, experimentation, and networking, Simmons mastered Wall Street's most valuable secret recipe. This secret recipe is not just a collection of “statistical anomalies,” but a combination of talent, data, and technology.

While Sandor Straus was obsessed with gathering more detailed historical pricing information, Simmons didn't let him spend his time on more direct and obvious returns. He immersed Straus in his own curiosity.

Straus and his colleagues created and discovered more historical pricing data to help Ax develop new predictive models. Some of the weekly stock trading data they later discovered dates back to the 19th century, and this reliable information was almost unrivaled by anyone.

At the time, the team wasn't able to do anything with this data, but this precious historical data enabled Renaissance to understand how the market reacted to the Black Swan incident. Later, it helped Simmons's team establish a model to profit from market crashes and other emergencies, and helped the company overcome the desperate times when other institutions lost money.

Stick to optimism

Simmons' last principle was “expect good luck,” which he called “the most important principle.” Simmons is certainly very lucky at work, and he always keeps the role of luck in mind.

He once said in an interview:

People underestimate the importance of luck; when things go smoothly, they feel that success is their own; when things go bad, they always tend to blame it on bad luck.

We must recognize that luck plays a meaningful role in everyone's life. If your parents are decent people and were born in a nice place in the world, you'll be far ahead in the game. For my part, I'm very lucky to work with some really good people while studying math. I was also very lucky to have the partner I chose during the Renaissance.

While Simmons was born lucky, he also worked hard to find and implement the life algorithm that made him successful, which we can all emulate.

Summarizing his life, he said:

I did a lot of research and made a lot of money, and I donated almost all of my money. This is my whole life.

Editor/jayden