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Jim Simons recently stepped back as the chairman of Renaissance Technologies, the asset management group that manages the most profitable fund ever: The Medallion Fund. What are the secrets and trading lessons of the Medallion Fund’s trading strategies? How has Jim Simons gotten a whopping 66% return on average for over 30 years? What kind of trading or investment strategies has the Medallion Fund and Jim Simons employed?
The magic behind Jim Simons’ trading strategies consists of collecting an enormous amount of data and analyzing the data to find statistical patterns and non-random events in a wide range of markets. Furthermore, Jim Simons and Renaissance Technologies have put together a hard-working and secretive team that generates plenty of testable strategies. The employees have skin in the game, and unfortunately for us outsiders, few of Medallion’s strategies end up outside their offices. However, most of the annual gain is a result of leverage.
Who is Jim Simons? “The greatest trader on Wall Street”
Jim Simons was born in 1938, and thus Jim Simons’ age was 84 in 2022. Simons studied mathematics at MIT, and later, he got his Ph.D. and used his math abilities to break codes for the US National Security Agency (NSA – this was during the Cold War) and teach at MIT.
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For his contribution to math and finance, he was elected to the National Academy of Sciences of the USA in 2014.
However, Jim Simons is not known for his mathematical contributions but for his track record as a hedge fund manager. During his working career, Simons spent considerable time trying to use quantitative models to predict the markets. Jim Simons’ fund has an excellent track record (more about that later).
In 1978 he quit his job/academia and founded Monemetrics, a hedge fund. At that time, quant was an unknown word, and Simons’ fund employed fundamental and technical approaches. He was moderately successful but felt “gut-wrenched” by the emotional swings in the market.
Jim Simons is teaching math. Simons spent years teaching and working with data before becoming a successful hedge fund manager. His Medallion fund is probably the world’s most successful hedge fund. Jim Simons’ trading strategies are a secret, though.Simons decided to use a purely systematic approach instead to avoid the emotional rollercoasters. Like most traders, he was liable to the most common trading biases. He didn’t really succeed until the early 80s when he managed to put together a decent team of so-called quants. He needed math geniuses and “quants”, not MBAs, and his first employees were from universities or NSA.
To our knowledge, Renaissance Technologies manages four funds: Renaissance Institutional Equities Fund, Renaissance Institutional Diversified Alpha, Renaissance Institutional Diversified Global Equity Fund, and the one most famous of them all: The Medallion Fund. All funds are open to outside investors, except for the Medallion Fund, which was closed to outsiders years ago (1993?).
The fund which is closed to outside investors, the Medallion Fund, performs the best. This reminds us of the famous quote that Benjamin Graham made:
People who invest make money for themselves; people who speculate make money for their brokers.
The Medallion Fund has outside investors, but for the most part, it manages money for the insiders. Do they keep the best strategies for themselves?
Perhaps, but the main reason for the lower returns for the other funds is different strategies and time frames. The mandate is quite simply different.
Renaissance Technologies is about quantitative investing over various asset classes: equities, futures, commodities, forex, and perhaps even crypto. Only quants are employed: mathematicians and physicists are the principal scientists behind the exceptional performance of the group.
The managers use math and statistical models to predict and execute trades – all automatic – looking for what the models say are non-random events and not likely caused by chance.
Simons is the founder, biggest shareholder, and manager of the group, even though he most likely did (or do) very little about the strategies’ hands-on development.
Unfortunately, for us outsiders, it’s hard to find any specific trading strategies that are or have been used by Renaissance Technologies or the Medallion Fund (see below). Jim Simons shuns the spotlight and keeps a very low profile, and the employees must sign strict non-disclosure agreements.
We can only make educated guesses but we know for sure they only use quantitative strategies with no discretionary interference.
The best-performing fund in Renaissance Technologies is the Medallion Fund – probably the most profitable fund ever. Presumably, it has made over 100 billion dollars for its owners from 1988 until 2018.
Using quantified trading strategies, the Medallion Fund returned on average 66.1% gross before fees from 1988 until 2018. Because it’s such a profitable fund, it charges enormous fees on the unit owners: the net returns are “only” 39%. This is a remarkable track record, significantly better than Warren Buffet’s, the only difference being Buffett has grown exponentially (compounded) over a longer time frame.
Unfortunately, we don’t know for sure. The only thing we know for certain is that The Medallion Fund (and all of Renaissance Technologies) uses 100% quantitative strategies to reap profits in the markets. Simons and his team use historical data and look for anomalies and inefficiencies in the markets that have been repeated many times.
We know they use this process when they started:
Jim Simons has said numerous times that the secret sauce is to have a bunch of bright people throwing ideas around. Add computer power and skin in the game into the mix, and you have some potent variables. Trading is all about backtesting trading ideas all the time.
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Simons and the Medallion Fund also employ the same tactics and strategies we recommend on this website which is to don’t override your signals and make sure you diversify and trade uncorrelated trading strategies:
The Medallion Fund’s holding time is short, on average, probably just a few days, to allow for many trading signals to be sure they are not trading random models. Certain Twitter feeds state Medallion makes more than 150 000 trades per day. The fund is not investing – they are trading. And they don’t override their models. (Further below in the article, some hints are revealed.)
Because of short-term trading, Simons decided early on to cap the fund to avoid becoming too big. The main goal is good returns, not assets under management.
Furthermore, they most likely use a lot of pairs trading and market-neutral strategies. They recruited most of the pairs trading desk in Morgan Stanley when pairs trading was still in its birth (the 80s?).
Manpower and datapower are needed to find all the patterns and anomalies the managers are looking for. The fund has gradually employed more and more people but only accepted employees with a math or physics background – most of them with PhDs. Anecdotal evidence is not used and God forbid discretionary trading.
Because the Medallion Fund only can turn around a certain amount of money before their strategies deteriorate, a lot of cash has been handed back to the unitholders. If they had not returned cash to the owners, 100 000 invested in 1988 would now be worth an unbelievable 4 010 907 000 000 USD (not considering the management fees)!
This is the magic of compounding, but it only works up to a certain point where it becomes impossible to compound because of the size, hence the return of funds to the owners.
Gregory Zuckerman has written the bestseller The Man Who Solved The Market – How Jim Simons Launched The Quant Revolution. The book is mainly about Jim Simons, but it’s also the history of the Medallion Fund.
Unfortunately, the book reveals very little about Jim Simons’ strategies, and we can only extract ideas by reading between the lines. This is not Zuckerman’s fault but due to the secrecy of the managers.
Jim Simons has held a pretty low profile. Is this the reason he has not chosen to publish a book? It was just in the latter years, when he stepped down from the day-to-day business, that he held a lot of talks all over the world. He has, of course, published science papers about math, but to our knowledge, nothing about trading. We suspect part of the reason is that he wants to keep as much as possible a secret.
I just finished reading Zuckerman’s book, and below I summarize my main takeaways from the book:
When James Simons started in the 70s, Simons was not very successful. Jim Simons’ early strategies, mainly in commodity futures, showed some promise, but they (Simons, Ax, and Baum) lacked practical experience and nearly cornered one market (potatoes?). They were fantastic at math and statistics, but they lacked hands-on practice and understanding of the markets. Jim Simons’ strategy was much more book smart than street smart, and Jim Simons’ portfolio was heavily exposed to futures – not stocks.
Ironically, one of the main problems initially was that they didn’t have 100% trust in their strategies. Simons several times interfered and overruled the systems and strategies, usually to the detriment of the strategy.
The breakthrough wasn’t until 1988 when Simons established a new fund: The Medallion Fund. So far, they had only traded futures reasonably successfully, but Simons believed big money was in the stock market.
The idea behind the fund was to employ vast amounts of data to construct strategies in any market and time frame that generated a lot of observations. The reason why they wanted to have many different markets and time frames is because of diversification.
After failing to develop stable equity strategies, the breakthrough came in the early 90s when Bob Mercer and Peter Brown were hired from IBM.
However, big money didn’t come until the turn of the millennium when equity trading became the best cash generator. Bob Mercer is the most known of these two, mainly because he supported Donald Trump for the presidency in 2016, which later led to his departure from the firm in 2017.
In Appendix 1 of Gregory Zuckerman’s The Man Who Solved The Market, Zuckerman has been so kind to assemble the annual returns for the Medallion fund:
Most of the owners and investors in the fund are its employees. Jim Simons’s wealth is estimated at 20-30 billion. Likewise, the “lieutenants”, Peter Brown and Bob Mercer, are most likely billionaires as well.
No one knows Medallion Fund’s exact strategies except the extremely secretive managers and owners. The only thing we know is that they use zillion-bytes of data to find correlations and relationships in their search for statistical anomalies. However, Gregory Zuckerman indicates that their first trading strategies were mainly mean-reverting. We also suspect the Medallion Fund uses a lot of seasonal trading strategies.
Moreover, the Medallion Fund’s strategies had short time frames, lasting from day trades to no more than a couple of weeks. Why did the Medallion Fund focus on developing mainly short-term quantitative investment/trading strategies?
The logic was simple: if they based their strategies on, for example, annual data, they only have 100 observations over 100 years. This is too little to make any meaningful models, and thus they looked for short-term patterns involving massive datasets. To get statistical significance, they needed huge data samples.
The Medallion Fund is not a high-frequency fund but likes to think of itself as a casino. As we all know, the casino has a pretty stable income because of the statistical advantage. But for this advantage to work, the casino needs a high turnover.
The same logic is behind the Medallion Fund. To have any meaningful statistical advantage, they need a lot of observations to make a significant prediction. This is the main reason for Medallion’s goal of developing short-term and not long-term investment strategies.
The Medallion Fund makes only a tiny profit per trade. They use leverage to boost returns and this explains much of the fantastic returns of the Medallion Fund. If we strip out the leverage, the return most likely would not be that fantastic:
The Medallion fund has at all times used leverage, probably substantial leverage many times the equity. On the internet, we have seen numbers indicating their gearing is on average 10, even going up to 20 at times. This explains a lot of the returns. In 2007 the fund was in serious problems but somehow narrowly escaped. The quote below is taken from pages 257-258:
On Wednesday, things got scary. Simons, Brown, Mercer, and about six others hustled into a central conference room…. One basket of stocks had already plunged so far that Renaissance had to come up with additional collateral to forestall a sale…. If losses grew, and they couldn’t come up with anough collateral, the banks would sell Medallion’s positions and suffer their own huge losses.
The book indicates the fund was just hours from margin calls. Perhaps it was just a coincidence that Medallion didn’t end up as LTCM – the geniuses who failed?
Who knows, if the market had continued against them, Medallion perhaps would have been on the graveyard. They were lucky to escape “tail-risk” – the markets turned around at the last moment. Some lenders would have suffered alongside Medallion, creating rip-on effects through the financial system.
What can quant traders learn from the book? As mentioned, there are no hands-on specifics about James Simons’ trading strategies, but a few of their principles are worth mentioning.
My lessons and takeaways, in just keywords, are these:
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