pinballfrvr| Earning $100 billion in 30 years--the secret of the "King of Quantification" and his most legendary fund, the "Medallion"

From: Wall Street

Jim Simons, founder of the Renaissance hedge fund and founder of quantitative trading, died on May 10th at the age of 86.

The Renaissance is one of the most successful and mysterious institutions on Wall Street. In the 30 years from 1988 to 2018, the Grand Medal, the Renaissance's flagship fund open only to internal employees, generated more than $100 billion in cumulative revenue, with an average annual return of 39 per cent. For comparison, Buffett, the "god of stocks", has an average annual return of 20% over the same period.Pinballfrvr.5%.

And even in a bear market that has frustrated many investors, Simmons can reap excess returns against the market. In the "bond holocaust" in 1994, the medallion generated a return of 70%, while in the dotcom bubble at the beginning of the century and the global financial tsunami in 2008, the medallion earned a return of 98%. Simmons is recognized as the "king of quantification" because of his brilliant record.

Despite its great success, the Grand Medal Fund remains secret and the market knows little about its investment strategy. How on earth did Simmons, the talented mathematician who won the Wiebrunn Award, the highest award in geometry, make amazing returns in the field of investment across borders?

How does the Renaissance flagship fund make money?

Many of the people who joined the Renaissance were former colleagues of Simmons-mathematicians with no financial background. These include Lenibaum, one of the founders of the Baum-Welch algorithm. With the help of Baum, the Renaissance input the historical trend of interest rates, the current closing price of various currencies, news and other data into the database to create a model that can predict the market.

However, in the early days of the company, the development was not very smooth. When the Renaissance launched the Grand Medal Fund in 1988, the return that year was only 9%, which outperformed the S & P 500 by 16%. The following year, when the S & P market rose by more than 30%, the Grand Medal Fund also lost 4% (this is the only loss year for the Grand Medal Fund), and relations within the company are increasingly strained.

This time, Simmons hired famous game theorist Erwin Bellerkamp (Elwyn Berlekamp) to redesign the company's trading system from scratch, and the Grand Medal Fund had a net return of 55 per cent in 1990.

But because of the different ideas,PinballfrvrHe and Belle Camp soon parted ways. Simmons began to rehire elite mathematicians and optimize models to achieve his dream of a "system made entirely by machines".

According to information revealed by Simmons and Renaissance employees in past interviews, the Grand Medal Fund relies on finding individual patterns in the data and using each model to make small profits, which add up. You can make a lot of money.

Although it sounds simple, in fact, the success of the Grand Medal Fund can not be separated from the Renaissance quite meticulous from data collection to talent management to teamwork and other processes and institutional arrangements.

The first is the data, as mentioned earlier, as early as the early 1980s, before the birth of the Internet, the Renaissance began to collect a large number of pricing data on stocks, commodities and other assets and electronically, many of which can be traced back to 1700. After carefully sifting through Simmons' team to make sure it is accurate, the data can serve as a guide for the program to trade. The sensitivity of mathematicians makes Simmons mine data much earlier than other investment institutions, which is also the key to his success.

Secondly, it is in talent management. A former Renaissance executive once told the media that many of the members of the renaissance were "talented and eccentric scientists and mathematicians". Simmons has "the ability to manage genius". Moreover, his deep academic connections have given the Renaissance a stable talent channel, and other institutions may be able to recruit doctoral students, but Simmons can directly recruit professors and even department heads from top universities. The team of star mathematicians is the secret of the Renaissance to improve the trading system.

Moreover, the management of the Renaissance was highly flattened and employees worked closely together. Unlike other highly hierarchical Wall Street investment banks, in the Renaissance, even the most junior employees could check highly confidential trading codes.

Simmons said in a speech at the Massachusetts Institute of Technology in 2010:

The most important thing we do is to create an open atmosphere. Everyone knows what other people are doing.

Former executive Nick Patterson also said in an interview that Simmons is happy to share wealth with the team and does not emphasize individual or group achievements as his competitors do:

By Wall Street standards, Jim is not greedy. As a result, most of the senior staff are happy and will not fight each other.

In addition, the Grand Medal Fund has been limited to $10 billion and is good at hedging to minimise the impact on the market as a whole in order to make huge profits and reduce losses in a volatile environment.

A staff member also told the media in an interview that the medallion mainly adopts the strategy of "intermediate frequency trading", which means that few competitors have enough resources to compete in this market area during the holding period of "moments to months".

The perplexity and controversy of other years

The performance of the Grand Medal is so good that professionals can't believe it.

Bra Bradford Cornell, a professor of finance at the University of California, Los Angeles, was shocked by the fund's amazing performance over the past three decades. Professor Cornell believes that the performance of the "Grand Medal" fund is a strong rebuttal to the market efficiency hypothesis. "so far, there is no reasonable explanation in the market to fully explain its performance."

Through a comprehensive analysis of fund performance, comparison of stock market performance and expert advice, Cornell and other scholars tried to uncover the secret of Madarian's success, but failed to draw a definite conclusion.

However, while flagship funds have performed well, other Renaissance funds that are open to outside investors have not performed well.

In the bear market for US stocks following the 2020 outbreak, for example, the Grand Medal Fund rose a staggering 24 per cent from January to April, while other funds such as RIEF and RIDA fell 7 to 9 per cent over the same period.

Bradford Cornell, an emeritus professor at the University of California, Los Angeles, called the difference in performance "surprising". Compared with the Grand Medal Fund, which is open only to internal employees, the Renaissance fund's performance is "mediocre" and is not comparable to the Grand Medal Fund.

According to the fund document, the Grand Medal Fund uses short-term quantitative trading strategies in a number of asset classes. These assets are understood to include global equities, futures, commodities and currencies, and the fund also tends to have high turnover rates and high leverage.

By contrast, according to the fund registration documents, RIEF funds only trade stocks and hold shares for a long time. RIDA funds trade stocks, derivatives and various financial instruments on global futures and forward markets. Like RIEF, RIDA funds hold a large number of stock positions, usually for a long time.

Risk reminder and exemption clause

There are risks in the market, so you need to be careful when investing. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any comments, opinions or conclusions in this article are in line with their specific circumstances. If you invest accordingly, you will be held responsible.