Tuesday, November 27, 2007

Jim Simons is my hero

This is long, but worth the read! I just quoted the first part below. The whole thing can be found here.

Simons at Renaissance Cracks Code, Doubling Hedge Fund Assets 2007-11-27 00:13 (New York)

By Richard Teitelbaum
Nov. 27 (Bloomberg) -- On a hot afternoon in September, Renaissance Technologies LLC founder Jim Simons is too busy to take a phone call. It is, he says, from Cumrun Vafa, a preeminent Harvard University professor and expert on string theory, which describes the building blocks of the universe as extended one-dimensional filaments.

``Get another time when I can talk to him,'' Simons tells his assistant.

Then he mentions that the next day, he'll be meeting with Thomas Insel, director of the National Institute of Mental Health, to discuss autism research. And he's slated that Saturday to host a gala honoring Math for America, or MFA, a four-year-old nonprofit he started that provides stipends to New York City math teachers.

``I'm undoubtedly involved in too many things at the same time,'' Simons says in his 35th-floor office in midtown Manhattan. ``But you make your life interesting.''

String theory, autism, math education: It's fair to ask how Simons, 69, manages his day job overseeing the world's biggest hedge fund firm. The answer, judging from the numbers, is very well.

Renaissance is on fire: Its Medallion Fund -- which uses computers and trading algorithms to invest in world markets -- returned more than 50 percent in the first three quarters of 2007. It had about $6 billion in assets as of July 1.

Simons registered that performance as subprime and related markets were collapsing, sending two mortgage-related hedge funds run by Bear Stearns Cos. into bankruptcy. The turmoil pummeled the Goldman Sachs Global Alpha Fund, a rival to Renaissance's funds, which fell more than 25 percent during the same time. Morgan Stanley's computer jockeys lost $390 million in a single day in early August.

Life Story

Medallion's returns are no anomaly. The fund, which trades everything from soybean futures to French government bonds in rapid fire, hasn't had a negative quarter since early 1999. From the end of 1989 through 2006, it returned 38.5 percent annualized, net of fees.

More surprising than those returns is Simons's life story. At an age when hedge fund pioneers such as Michael Steinhardt have long since stopped managing other people's money, Simons is building on Medallion's success. He's adding funds and strategies and accumulating assets, which totaled $35.4 billion as of Sept. 28.

In August 2005, Simons started Renaissance Institutional Equities Fund, or RIEF, which invests in U.S. stocks. Through Sept. 30, it has returned 12.8 percent annualized. Unlike Medallion, which turns over its holdings dozens of times each year, RIEF keeps its positions for months or longer. Simons said at the time of the fund's inception RIEF could theoretically manage as much as $100 billion.

'New Possibilities'

In December 2006, he limited new investments in the fund to $1.5 billion a month. As of Sept. 30, 2007, it had $25.6 billion in assets.

In October, Simons started Renaissance Institutional Futures Fund, or RIFF, to invest in commodities. It's up 5.2 percent for the month. He says Renaissance's research shows the new fund can manage as much as $50 billion. Along with RIEF, it will promote cross-fertilization of ideas inside Renaissance, Simons says.

``Challenge is good,'' he says. ``It opens one's eyes to new possibilities.''

When not in Manhattan, Simons runs his empire from a 15-foot (4.6-meter) by 20-foot office in Renaissance's gated and guarded campus off Route 25A in East Setauket on New York's Long Island, some 50 miles (80 kilometers) east of the Empire State Building. With most of the trading automated, there's little of the hurly-burly of a typical hedge fund firm.

Doubling Assets

Along with routine personnel and marketing tasks, Simons makes time for the researchers and programmers who stop by his office to discuss mathematical and statistical issues they've encountered as they work on new trading strategies.

More than 200 employees, of whom about a third have Ph.D.s, work in East Setauket. Another 100 are based in Manhattan, San Francisco, London and Milan. ``He creates an environment where it's easy to be creative and works hard to keep the bullshit level to a minimum,'' says former managing director Robert Frey, who worked at Renaissance from 1992 to 2004.

Even without the new commodities fund, Renaissance's assets have more than doubled in a year from about $16 billion on Sept. 30, 2006. That growth has catapulted Renaissance past such titans as Daniel Och's Och-Ziff Capital Management Group LLC, Ray Dalio's Bridgewater Associates Inc. and David Shaw's D.E. Shaw & Co. to become the world's largest hedge fund manager, according to data compiled by Hedge Fund Research Inc. and Bloomberg.

Code Cracker

Medallion's 3.9 percent return during August, though that fund too was whipsawed by volatility, bolstered Simons's reputation as the silver-bearded wizard of quantitative investing.

In quant funds, mathematicians and computer scientists mine enormous amounts of data from financial markets looking for correlations among stocks, bonds, derivatives and other instruments. They search for predictive signals that will foretell whether, say, a palladium futures contract is likely to rise or fall.

``There are just a few individuals who have truly changed how we view the markets,'' says Theodore Aronson, principal of Aronson + Johnson + Ortiz LP, a quantitative money management firm in Philadelphia with $29.3 billion in assets. ``John Maynard Keynes is one of the few. Warren Buffett is one of the few. So is Jim Simons.''

Aronson credits Renaissance with validating the entire field of quantitative investing and proving that the freedom accorded to hedge fund managers to short stocks, borrow money and invest in myriad instruments can produce results that far outstrip typical market returns.

`Role Model'

Simons, standing just under 5 feet 10 inches tall and weighing 185 pounds (84 kilograms), has trod an unlikely path. A former code cracker for the U.S. National Security Agency, in 1968 he became chairman of the mathematics department at Stony Brook University, part of the New York state university system. He built the department into what David Eisenbud, former director of the Mathematical Sciences Research Institute in Berkeley, California, calls one of the world's top centers for geometry.

In 1977, frustrated with a math problem and eager for change, he abandoned academia to start what would become Renaissance, hiring professors, code breakers and statistically minded scientists and engineers who'd worked in astrophysics, language recognition theory and computer programming.

``All the quants in the world are trying to follow in Jim's footsteps because what he's built at Renaissance is truly extraordinary,'' says Andrew Lo, director of the Massachusetts Institute of Technology Laboratory for Financial Engineering and chief scientific officer of quant hedge fund firm AlphaSimplex Group LLC. ``I and many others look up to him as a tremendous role model.'' ...


mike s said...

Dr. Hsu, here is my quandary.

What percentage of the world could follow in Jim Simon's footsteps, and design predictive models and all be billionaires.

I'm not asking about what percentage of the population is smart enough...I am asking how many computer jockeys making money by manipulating zeros and ones in a speculative market can the productive capacity of this planet support as billionaires.

reduction ad absurdum...could we all be billionaires?

Yes I know, the planet would not fare well if we were all corn farmers, of if we were all dentists or physicists... etc. But that is not my challenge.

Is anything of utilitarian value being created, that is remotely equvalent to the huge money profits being created.

When a grain dealer, an agricultural investment banker and a farmer write / buy a futures options contract they have "skin" in the game...insurance is being provided.

When a three piece suit broker in New York who wouldn't know "gm early sunglow that is round up ready" from a rodeo pony places a bet in a similar options play, the best you could say is that the wall streeter is helping to provide liquidty to the market. hahaha

But at some point the market is more liquidity and than product and thus lacks substance.

I don't know Jim Simons and won't presume to judge him as a man. I do believe that we are NOW at great risk to suffer the consequences of a society full of hucksterism and consumerism and wonder if hedge fund managers are a significant part of the problem.

Mike S.

Anonymous said...

In Technology Review, The Blow-up:

For Richard Bookstaber, a quant who has managed hedge funds and risk for companies like ­Salomon Brothers and Morgan Stanley, the August downturn proved that concerns he'd long harbored were well founded. ­Bookstaber was on the panel sponsored by the IAFE; in fact, he is everywhere these days. His book A Demon of Our Own Design, which appeared in April, was eight years in the making, and it made some very prescient predictions.

Bookstaber is a quiet, thoughtful man, with sharp brown eyes and an attentive look. He studied with Merton in the 1970s at MIT, where he got his doctorate in economics. Today, he is very worried about the tools and the methods of the quants. In particular, he frets about complexity and what he calls "tight coupling," an engineer's term for systems in which small errors can compound quickly, as they do in nuclear plants. The quants' tools, he feels, have became so complicated that they have escaped their creators. "We have gotten to the point where even professionals may not understand the instruments," he says. This, to Bookstaber, was perfectly demonstrated this summer, when the subprime troubles touched off a reactionary wave of selling in equities that would nominally seem unrelated, or, as Wall Street puts it, "uncorrelated."

mike s. said...

After reading "blow-up" in the MIT technology-review, I can't help but wonder how much the modelers have effected that which they seek to model?

With more and more quants applying more and more algorithms and automated buy/sell programs were they not themselves via their actions adding so much complexity to the market that the modeling itself became increasing less reliable?

Compounding this problem could the quants programs have increased the probability for the occurrence of 3 sigma events ?

Mike S.

Anonymous said...

Mike S.,

There is no need to wonder. That is a major part of what the article is saying.

In short, the quants have created financial instruments, notably CDOs, the trading in which has substantially altered the market's dynamics in ways the models didn't anticipate. In particular, they enabled the housing bubble and set the stage for the subprime mortgage meltdown. Furthermore, this phenomenon started well before the subprime mess, which is merely its latest and most toxic manifestation (at least so far).

Of course, the quants and other people could have seen this coming if they really thought critically about what they were doing, but greed (like lust) tends to make people stupid and reckless.

From this post:

The memorable thing about August was that it was a crisis in long short quant, when the majority of funds in that strategy blew up, wiping out billions and making liars of their marketers. Morgan Stanley dropped $390m in a day in August, smashing through its VAR limits. Goldman’s CEO whined about seeing “25 standard deviation days 6 days in a row” as his Global Alpha Fund dropped 23% and had to cut fees to get bailed out. For the Quants it was a “hundred year storm”.

Quant investing will never be the same again, and I think it is beginning to affect the whole hedge fund industry. US inflows fell sequentially for the 2nd quarter in a row this Q3, a 22% decline on Q2 inflows, in an industry that grew assets globally over 30% in 2006. I would bet (but do not know) that the shortfall is concentrated in the quants.

Anonymous said...

..and this, from here:

Write this down: Black-Scholes works not because it describes some external ontological fact about how pricing relationships between securities and their derivatives have to work; it works because everyone agrees, more or less, that that's how prices should work. It is a convention, not a physical or financial law. This is the central epistemological trap that quants fall into when they conflate the tools, techniques, and ontological assumptions of physics, which attempts to describe that which is (more or less independent of us humans), with those of mathematical finance, which attempts to descibe how human beings trade and value financial instruments and their derivatives.

.... It wasn't arbitrage or Brownian motion at work here. It was panic. Gas molecules in a box don't all rush for the exit at the same time when you open a hatch; people do.

Roddenberry said...

two possibilities:
first:Jim Simons is a crook like Bernie Madoff and his medaillon fund is a ponzi scheme
second: he is a genious and his fund a revolution

Yan Heng said...


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