A woman's derailment directly subverted the financial world for 30 years

Big Cat True Detective Agency

2024-05-11 19:32Posted in Beijing, creator in the field of finance and economics

Author | Cat brother

Source | Big Cat Finance Pro

There are three peaks in investing – philosophical investing in Soros, value investing in Warren Buffett, and quantitative investing Simmons.

Simmons is the least famous of the three, but his medallion fund actually has the highest return, from 1988 to 2018, only a loss of 4% in one year, with an average annualized return of 66%, and the most profitable year is unexpected, with a return of 128% in 2000 and a return of 152% in 2008.

What's more, Soros's method is basically metaphysics for ordinary people, Buffett's method is easy to get started and difficult to master, and Simmons's quantitative investment is more like an easy-to-dig gold mine for people who understand mathematics, physics, and programming, which is also the general trend of future institutions.

This 86-year-old man is now deceased, and today I will tell his story.

Born in 1938, Simmons had two interests: one was mathematics, and the other was making money.

He was gifted in mathematics, graduating from MIT at the age of 20 and earning a Ph.D. in mathematics at Berkeley at the age of 23. When he was in school, he was not idle, he got married and had a baby, and he was three in his life.

In this way, life is very stressful, Simmons thought about making money quickly, first went to Harvard University as a teacher, worked for two years and found it boring, and then went to the Department of Defense, the job was mainly to decipher the Soviet Union's communication code, and there were many people among his colleagues, including the inventor of the implicit Markov chain, and the inventor of the related algorithm, and later became Simmons's subordinates.

The job in the Department of Defense was very appealing to him, the pay was good, the workload was not large, and Simmons was able to publish mathematical papers in his spare time.

But after a long time, he was prone to accidents, and he worked in the Ministry of Defense, but one day he faced reporters and issued a six-page declaration against the Vietnam War, which was unsurprisingly fired on the same day.

He needed to support his family, the Department of Defense was all secret work, and he couldn't write on his resume, but as a result, New York University Stony Brook was preparing to build a mathematics department, and the math papers he had written before were looked at, so he went to Stony Brook to be the head of the mathematics department, at the age of 29.

Don't look young, but Simmons has a set of management, and he knows that professors are the most valuable asset to the school, so he poachs people from various alma maters and does what he likes.

The professor doesn't like to spend time on administrative matters, so he won't delay him for a minute, the professor likes money, so he dares to open double the salary, so he has a lot of cattle, of course, he also has a time when he is distracted, he thinks that the little junior brother Yau Chengtong is good - yes, it was later won the Fields Medal, and in the past two days, Master Qiu, who said that Chinese mathematics is too backward - Yau Chengtong asked for a tenured teaching position, but Simmons did not agree, and later felt that it was a big loss.

Not only did he look for people everywhere, but he didn't delay himself, and later won the Wiblen Prize, which is awarded once every five years and is the highest award in the field of geometry.

Then he also published the "Chen-Simmons theorem" with the geometry god Chern who graduated from Tsinghua University, which is of great significance to theoretical physics and has been widely used in various fields from supergravity to black holes, so that Simmons reached the pinnacle of academics.

But there are gains and losses, at that time the United States was sexually liberated, his wife gave him a green hat, Simmons was very hurt, not only divorced, but also resigned.

But the American math community was shocked, especially when they heard that he was going to make investment, and they all felt that the great god had fallen, and his father was very sad, "I want to introduce my son to others as a mathematician, not a businessman." ”

In fact, he didn't understand his son, because Simmons wanted to develop his second interest at this time and make money.

He wanted to do investment, and the mainstream of the market at that time was subjective investment, mainly based on people's ability, and the quantification was just starting out, which was very immature.

Simmons' company was later known as the "God of Quantification" Renaissance, but at the time he was swinging on both sides.

When he was in the Ministry of Defense, he also did a private job, did 8 quantitative models, and now he tried it, lost a lot of money, not at all, his partner is a subjective investor, pressed the gold track, went all the way, and made a lot of money from more than 200 to more than 800, but the money earned was basically lost in the interest rate market not long after, so the two broke up.

Simmons, who worked alone, thought about it and had to do quantification, so he began to find a coder as a partner and kept trying.

He tried the backtesting strategy, such as the probability of rising for 3 consecutive days and rising on the 4th day, but failed;

He found a code farmer again, engaged in data cleaning, and used pen data to make a model, and later because he smoked three packs of cigarettes a day, the code farmer couldn't stand the endless second-hand smoke every day, and he didn't succeed;

He also used daily data, thinking that the market could be modeled with a Markov chain, for which he invited a bull professor, but the effect was average;

After such a series of attempts, I lost a lot of money, produced a lot of contradictions, and struggled.

Disheartened, Simmons went to his alma mater, Berkeley, to hang out, and met a big bull in the mathematics department, and the two talked for a long time, and the big bull put forward three suggestions:

1. The calculation frequency of your model is too low, it is not good to calculate once every few days, at least once a day;

2. You can't use daily data, you have to use intraday data;

3. The amount of each order should be positively correlated with the probability of profit.

Just these three suggestions hit the nail on the head, listening to Simmons's heart fluttering, the general boss has to say at this time, or you come to my company, high salary plus shares, but Simmons is not an ordinary boss, he said, or you invest in my company, and then we will become bigger and stronger together?

By the way, I raised a sum of money.

To say that Berkeley's bulls are really powerful, after half a year of adjustment, Simmons' company began to make money.

At this time, it was 1988, and after making money, the conflict between the two also came, mainly because Professor Da Niu felt that Simmons only wanted to make money, and there was no discipline that an intellectual should have, so he was very unhappy.

In the end, Simmons took Da Niu's shares at 6 times the price, and Da Niu continued to go back to teach, and Simmons lost his partner again. In fact, he doesn't need to, since 1990, Simmons has not lost a penny, in 1990 the income before fees was 78% (that is, before deducting management fees and revenue sharing), in 1991 it was 54%, in 1992 it was 47%, in 1993 it was 54%, in 1994 it was 94%.

This return is completely against the sky, so the size of his medallion fund continues to expand.

But the bottleneck period was soon reached, and the commodities, foreign exchange, and bonds that Simmons had made money on before seemed to be not working well after 1994.

What to do?

He considered entering the stock market, so he also found a financial master from Da Mo to do stock statistical arbitrage, but the model income of the two of them was really average, and the two of them agreed for a long time:

The model is very good, the backtest is very good, and the program is too poor.

The problem has been found - the lack of code farmers.

Let's solve the problem. Which coder was the best at that time? IBM, so Simmons got two people from there — Robert Mercer and Peter Brown.

If you have read the book written by Kai-Fu Lee, you may be no stranger to this Peter Brown, Kai-Fu Lee endorsed him a long time ago, a bull!

After these two people joined the company, they wrote 500,000 lines of code, and tested it, and the strategy of holding positions for an average of two days was very good, but there was a problem, it would not work as soon as the funds were increased.

If you want to solve this problem, two coders are not enough, so continue to look for people, and it didn't take long for the group when Peter Brown worked at IBM to basically jump ship.

There are a lot of young people here, and one of them shook his head after reading the code written by Robert Mercer and Peter Brown, and said that you guys are programming in the 80s, it's too bad, our new generation uses C++!

In this way, the original mathematicians are like picking up treasures, and these coders bring new hope.

Soon, the problem was solved, and their model began to make money.

But the evil of human nature is also beginning to appear, full of lust, they don't mess around in the office, but corporate politics has not fallen at all.

At that time, there were two classes in the company, mathematicians were high, and code farmers were second-class citizens, who were called and drunk all day long, and their merits were robbed, and they took the blame when they had something.

The young man who brought C++ at the beginning is not a group pet anymore, he is suppressed every day, and he implants the virus into the system in a fit of anger.

But this difference in status is brought about by performance, mathematicians are in charge of the futures business, very profitable, code farmers are in charge of the stock business, the performance is average, and it doesn't take long for them to start losing money.

Originally, Simmons used this business as a supplement, but he thought about it as soon as he lost money, do you want it?

So the code farmers were anxious, their jobs were not guaranteed like this, and they didn't fight anymore, so they began to look for problems, and the C++ guy also deleted the virus, determined to make up for it.

They turned over hundreds of thousands of lines of code and didn't find out where the problem was, and one day the C++ guy stared at the stock for a long time, and suddenly understood that the stock price in the system was not reweighted, and it was not a mess to run.

As soon as this mistake was corrected, Simmons' stock business immediately began to make money.

In fact, the factor development of the Renaissance only followed 3 steps:

1. Find the abnormal law in the price series;

2. Ensure that the whole law is continuous and non-random;

3. See if you can find a reasonable explanation.

But the third step is often overlooked, and Simmons' reasoning is that if a transaction is logical, it is likely to have been discovered by someone else. So the Renaissance was particularly daring to trade things that were illogical but statistically remarkable.

This is probably the reason why their income far exceeds that of other homes, as long as the statistics are good, they will place orders without brains.

In a nutshell: investing doesn't need logic.

This also means that there is no need for subjective participation, and the core depends on the algorithm, so their company does not have to work overtime, and it truly realizes lying and earning.

In 1995, the pre-fee rate of return was 53%, in 1996 it was 44%, in 1997 it was 31%, in 1998 it was 57%, in 1999 it was 36%, and in 2000, under the impact of the Internet bubble, their yield was 128%.

Entering 2001, the main work of the Renaissance changed several times:

1. It is data strengthening, which increases the data of market, financial reports and news;

2. Increase the forecasting ability, and strive to predict price changes 3 seconds, 3 minutes, 3 hours, 3 days, 3 weeks, and 3 months in advance;

3. Stable algorithmic trading, with an average of 15,000 to 30,000 orders per day, and holding positions for 1-2 days;

4. Transaction expanded to Canada, Germany and Hong Kong, China.

5. Use tools such as "basket options" to increase leverage, 5 billion funds, and hold contracts with a value of up to 60 billion.

Simmons first poached from competitors and later discovered that foreigners were particularly easy to use, especially Eastern Europeans who were good at math and programming.

More and more money is being made, and there are more and more people, so they start to do it internally again.

The main contradiction at this time is the contradiction between the old man and the newcomer.

The people Simmons recruited at the beginning were basically forty or fifty years old when they joined the company, and they had been working for ten years, and they were all old and obviously lacking in energy.

But what about the newly recruited people, there are also a lot of problems, those twenty or thirty-year-old mathematics doctors, after a few years of work, the salary can reach 40 million US dollars, but they are still complaining, very dissatisfied with the old employees.

As a result, the old employees feel that the new employees are not satisfied, and the new employees feel that the old employees do not work.

Old employees basically have no ability to change jobs, but some young employees can't stay.

Two Russian math bulls, after looking at the labor contract, found that there was no non-compete clause, and were overjoyed, with millions of lines of code, they switched to the Millennium Fund, the main rival of the Renaissance.

There is also a core of the stock team who leaves directly, and these people just leave their jobs, or go to the opponent's place, or do it themselves, anyway, they have to get a piece of the Renaissance pool.

What did Simmons do? Admit it.

The combat effectiveness of the old employees is not good, and they must not be guilty of young people with combat power, so many old people are gone, and the young people have more bonuses.

But there are internal disagreements, which does not delay them from making money at all.

From 2001 to 2005, the rate of return was around 50%, and everyone in the company became very rich. Because in the past, their fee model was 5% management fee + 20% revenue share, and since 2002, they have changed the fee model to 5% management fee + 44% revenue share, which is almost half, but it still can't stop investors from depositing.

Simmons saw this scene and thought to himself, "Don't get a new pool?"

In the past, their medallion products were short-term, and he wanted to make a long-term one, so he launched a new fund, RIEF, which soon raised $14 billion.

But the attempt failed. Because not long after, in August 2007, the signs of financial crisis had already come out, and RIEF suffered heavy losses, but fortunately, the operation of the medal fund was okay.

But Simmons couldn't sit still because of RIEF's losses, and for the first time in 20 years, he had the idea of whether to trust the model. So in 2008, like other fund managers, he began to stop losses, liquidate stocks, and lose $1 billion.

However, at this time, the system began to slap him in the face, because although there is no money in and out, the model can be simulated, and according to the simulation data, this can still make money.

Employees think the boss is old, but Simmons is a master, the market is already wailing, he has earned a lot, and he has empty positions, isn't it good to watch the show?

But when he looked at the simulation data, he remembered his summary - investment does not need logic, it needs to look at statistics.

Yes! Don't say anything, listen to the system, buy without brains.

Then 2008 became the best year of his 30-year investment career, with a return of 152% before fees, which was completely against the sky.

Over the years, the medallion fund still has a good return of 75%, but Simmons-led RIEF lost 6%, investors have redeemed, the scale is only 5 billion US dollars, and it continued to lose in 2010, at this time Simmons is 72 years old, making a lot of money for a lifetime, I really can't stand this insult, and directly announced that he will retire.

Of course, he is still the big boss of the company, and the income of the medal fund is still amazing, the worst performance after retirement is 57%, and the average return in other years is 76%, so his value is still rising.

Of course, this kind of great god will not rest after retirement, and his energy is mainly spent on mathematics and autism research.

Everyone can guess when studying mathematics, why study autism? That's his pain.

When his wife brought him a green hat, after the divorce, Simmons raised two sons and a daughter alone, and his energy was low, so he hired a nanny, and after a long time, he married the nanny, but his two sons died one after another, and the only daughter left behind still suffered from severe autism, which was the result of his unwillingness.

Except for this unsatisfactory life, everything else about him is going well.

In the 30 years from 1988 to 2018, his medallion fund had an average annualized return of 66.1% before fees, and after Renaissance took away the management fee and revenue share, the average annualized return for investors was still as high as 39.1%.

What is the concept? If you invest 10,000 yuan in 1988, you can get back 199 million by the end of 2018.

Simmons' greater value is to open a door, Buffett and Soros's investment methodology is actually not easy to learn, but the quantitative army is already on the way, and this must be the mainstream in the future.

Of course, looking back on Simmons' life, he must be a great god, but his success is not on his own, you see:

1. He was not very good at the beginning, his company started in 1978, why did the statistical rate of return start from 1988? Because in the first 10 years, he was actually going around in circles;

2. Even if he was very good later, the strategies were also figured out by him and others, and if there were no code farmers, these strategies would be just on paper;

3. Even though he is the father of quantification, he can't help but do it manually in the crisis, and as a result, he is despised by the company's young people......

Of course, people know their mistakes and change, unlike many leaders, desperate for the sake of face, his most worthwhile point to learn is that he is very good, but he is more willing to find some cattle to cooperate, many people have been professors for many years when they enter the company, and this is the real reason for the rise of the Renaissance.

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