Friday, July 01, 2005

The real smart guys

Jim Simons and Renaissance want to raise a $100B fund! And why not, they're the best in the hedge fund business. In an earlier post I compared them to Long Term Capital Management. Let's see, two economics Nobelists (Merton and Scholes) who invented options pricing and a bunch of overconfident Salomon traders, versus a bunch of physics and math PhDs. I know who I'd bet on!


Renaissance's Man: James Simons Does The Math on Fund
July 1, 2005; Page C1

It is getting harder for hedge-fund managers to generate above-average returns when their funds grow too big, right?

Tell that to James Simons.

Mr. Simons, a world-class mathematician who runs Renaissance Technologies Corp., is creating a buzz in the hedge-fund world because he is about to launch a fund that he claims could handle $100 billion -- about 10% of all assets managed by hedge funds today. It will have a minimum investment of $20 million, and is aimed at institutional investors, according to early marketing materials.

Mr. Simons, whose net worth has been estimated at $2.5 billion, has seen Renaissance's $5 billion flagship Medallion hedge fund earn an average of 34% annually since it began in 1988, making it the most successful fund during the period. These returns, which are audited, come even after fees that now are -- get this -- 5% of assets and 44% of all investment gains. That is more than double what other hedge funds typically charge.

So far this year, Medallion is up about 12%, amid losses for the overall market. Mr. Simons has done it with computer-driven, short-term trading in various markets. The firm won't divulge details of its strategy, even to its own investors. Other funds use the same strategy but are far less successful.

The new fund will take a different approach: focusing on the U.S. stock market and holding investments for more than a year.

Medallion hasn't been open to new investors for 12 years, and Mr. Simons, 67 years old, has been returning money to existing investors, convinced that returns would suffer if the fund got too big. In fact, the firm is expected to return outside investors' remaining money at year's end, leaving Mr. Simons and his employees as Medallion's sole investors and the fund about as large as it is now. Dealing with few investors has helped the publicity-shy Mr. Simons stay below the radar screen.

Mr. Simons declined requests for comment. A Renaissance spokesman wouldn't comment on the new fund, which will be called the Renaissance Institutional Equities Fund.

The latest effort -- even if it never reaches the $100 billion mark -- would seem to run up against Renaissance's instincts to keep a lid on assets. Indeed, many managers have found that more money under management can put a crimp on results. Investors briefed on the new fund say it will differ from the existing Medallion hedge fund by aiming for tamer returns that would enable it to handle the greater sums.

The new fund marks the latest encroachment of hedge funds into the lucrative market of investing money for pension plans and other institutional investors, turf that traditional money-management firms like mutual funds have clung to. The fund will use complex quantitative models, developed by the 60 or so mathematics and physics Ph.D.s on staff. The fund will aim to beat the returns of the Standard & Poor's 500-stock index but with lower volatility.

Though Mr. Simons isn't well known, even on Wall Street, his track record likely will spur strong interest in the fund, investors say. Renaissance's 34% annual average returns since 1988 top every other hedge fund in that time period, according to Antoine Bernheim, who publishes the U.S. Offshore Funds Directory, which tracks over 1,000 hedge funds. By comparison, George Soros's Quantum Fund has climbed about 22% annually since 1988, while the Standard & Poor's 500 rose 9.6% annually.

Medallion, which hasn't had a down month in the past two years, according to one investor, has distributed so much money to its investors over the years that they haven't been able to reinvest these gains to take advantage of the big returns -- likely whetting investor appetite for the new fund.

Though prior performance doesn't guarantee the new fund's success, it will share Medallion's scientific approach, and is based on Medallion's "technology," according to the marketing materials.

"Renaissance's returns are 10 percentage points higher than legendary investors such as [Bruce] Kovner, Soros, Paul Tudor Jones, [Louis] Bacon and [Mark] Kingdon," Mr. Bernheim says. "He's in a different class from everyone else."

But while Mr. Simons will levy lower fees, such as about 2% of assets, to attract interest in his new fund, he also may have to disclose more details about trades than he is accustomed to. That is because pension plans, and their consultants, usually require a full briefing about strategies of firms they invest with.

"It's pretty much a black box. People that work there are sworn to secrecy; it's a proprietary trading strategy," says Jeffrey Tarrant, president and chief investment officer of Protege Partners LLC, based in New York, an investor in Renaissance.

Mr. Simons began his career as a professor of mathematics, teaching at the Massachusetts Institute of Technology and Harvard University. He helped develop a geometry theorem, called Chern-Simons, that is a critical tool for theoretical physics.

"It's startling to see such a highly successful mathematician achieve success in another field," says Edward Witten, professor of physics at the Institute for Advanced Study in Princeton, N.J., and considered by many of his peers to be the most accomplished theoretical physicist alive.

After breaking military codes for the government during the Vietnam War, Mr. Simons turned to money management. He hires specialists in applied math, quantum physics and linguistics for Renaissance's office in East Setauket on New York's Long Island. Hardly any have a Wall Street background. The firm relies on a system to make thousands of rapid-fire, short-term trades daily to take advantage of small, fleeting anomalies in various markets.


Murray said...

Oh please, this guy's just laundering money.

jy said...

The big guys have been known to make embarassing mistakes. Besides with all the $ in the market, strategies tend to converge after some time - uniqueness and creativity aren't exactly words associated with the trade!

Anonymous said...

Crap, now I'll be directly competing with the co-developer of Chern-Simons theory.

Anonymous said...

Hey Steve, ran across your site fishing for this article that a friend told me about. Interesting stuff - they are sort of a quiet legend in the HF community and an investor of ours. Drop me a line sometime and we can catch up. -David Avraamides (da AT

Anonymous said...

A mini AHS reunion going on here! 5% and 44%, nice!

-Jeff Francis
jpjf hotmail

Anonymous said...

Kind of deja vu all over again. It wasn't that long ago that we had a couple of really smart guys with Nobel prizes and stuff who almost smashed the economy.

Anonymous said...

"black box" - could it be that it isnt?.

what would you do if you heard a story that the closely guarded secrets ,the "details of its strategy" had infact been past on to another now very succesful HF (a HF that is also headed by clever math phd's, though appear lazier than their peers as prefer to borrow other phd's hard work, All the while still joining in poker games and sharing rare single malt evenings with the heads of the HF mentioned in Greg's writings, keep your enemies closer springs to mind) or is it simply a case of what Feynman would say that its "the pleasure of finding things out" . That the person who shared this information has since returned to the HF mentioned in original post from "retirement" - a "retirement" that was spent incorporating stratagies into now very succesful HF. All very hush, hush and I believe he was quite careful to lay low in Europe for a time.
And funnily enough just as "So far this year, Medallion is up about 12%, amid losses for the overall market". So is the other HF that shares the "twin" stratagy.
But of course, all this couldnt possibly be true, this is just a story.

Anonymous said...

I used to work at Renaissance, in fact as part of the technical staff for Medallion in the mid-90's, and can state that the WSJ article is essentically correct, to my knowledge (I have had intermittent contact with them, as recently as last month, in fact).

Simons' net worth figures and the annualized performance appear correct as well, given the numbers they held in the late 90s and the consistency of the funds' performance over the past decade+. I don't recall a single down quarter during the years I was there.

Anyway, there's no black magic going on, simply a large collection of really bright people obsessed with analyzing and continually upgrading their methods, trading on very low margins, and always concerned that their signal is being picked up by someone else. I have a lot of respect for every single person I worked with there.

(On the topic of margins, when LTCM blew up the head of the desk for Medallion commented that LTCM should have been making 10 times as much as they were given the leverage they were using. Medallion was using easily a 50th (probably less) the margin LTCM was using in its trades). Dr. Simons runs a low-risk operation that generates consistent returns. With diligence they may maintain that sort of performance.

Anonymous said...

A major deviaton from their core philosophy? Medallion caps out at 5 bil, for a reason. A new venture, new strategy could be risky, and they won't be able to "fly under the radar" as with Medallion.
Also, will Simons be there to run this puppy? He is the processor chip to this hard drive.

Matt M. said...

Renaissance closes Medallion fund to outsiders... (

Keeping it all in the family now. Rentec always strikes up an interesting conversation.


Anonymous said...

I know Renaissance from my visit in 2001
and like the anon who worked there, I can assure you of a couple of things:
(i) they are more secretive than the articles suggest, and more obsessed with it, esp. Simons
(that's why they don't trust anybody with wall street experience). If you don't believe, try googling them up -GOOD LUCK!!!
(ii) they are bright, they have people on staff which wrote such things as awk in unix (for those who know what that is)
(iii) they "produce" a lot of money in their "factory" (their joking term) but they are very cautious and are aware of risks.
(iv) they deliberately mislead journalists. Simons told me this personally. You know, there was this
article in 2000 in Instit. Investor.
So... well, neither I nor you know any of the essential details, and neither will the future inverstors in a new fund!

Way to go Rentec. I believe they can do it, even after Simons retires.


Anonymous said...

I've heard they have 4 fee structures, one of which is 50bps and 10% of profits, another is perhaps a straight plain vanilla % of AUM (200bps?), and a 3rd is perhaps some percentage excess off the S&P. Does anyone have any information on this?

Ashlyine Brooke said...

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