Earn $100 billion in 30 years - the secret of the "King of Quantitude" and his most legendary fund "Medallion".

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

The Renaissance is one of Wall Street's most successful and mysterious institutions. In the 30 years from 1988 to 2018, Renaissance's flagship fund, Medallion, which is only open to internal employees, has accumulated more than $100 billion in returns, with an average annual return of 39%. As a comparison, Warren Buffett, the "god of stocks", returned an average of 20.5% per year over the same period.

And, even in the Great Bear Market, which has left many investors in check, Simmons has been able to buck the market and make excess returns. In the 1994 "Bond Massacre", the Medal generated a 70% return, and in the dot-com bubble at the beginning of the century and the global financial tsunami in 2008, the Medal achieved a 98% return. Simmons' stellar record has earned him the nickname "King of Quantitation."

Despite its great success, the Medallion Fund remains under wraps, and the market knows little about its investment strategy. Simmons, the genius mathematician who won the Wiblen Prize, the highest award in the field of geometry, how did he cross over to create amazing returns in the field of investment?

How does the Renaissance flagship fund make money?

Many of the people who joined the Renaissance were Simmons's former colleagues, mathematicians with no financial background. Among them is Lenny Baum, one of the founders of the "Baum-Welch algorithm". With Baum's help, Renaissance fed data from the then-unelectronic history of interest rates, the current closing of currencies, and the Wall Street Journal news into a database to create a model that could predict the market.

However, in the early days of the company's establishment, the development was not too smooth, and in 1988, when Renaissance launched the Medallion Fund, the return that year was only 9%, underperforming the S&P 500 index by 16%; The following year, while the S&P market rose more than 30%, the Medallion Fund lost 4% (the only time the Medallion Fund has lost money so far), and tensions within the company grew.

This time, Simmons brought in renowned game theorist Elwyn Berlekamp to redesign the company's trading system from the ground up, and in 1990, the Medallion Fund achieved a net return of 55%.

However, due to a disagreement in philosophy, he and Berekamp soon parted ways. Simmons began to rehire elite mathematicians and optimize models to achieve his dream of a "system entirely made by machines."

According to Simmons and Renaissance employees in past interviews, the Medallion Fund relies on discovering individual patterns in the data and using each model to make small profits, which add up to make a lot of money.

Although it sounds simple, in fact, the success of the Medallion Fund is inseparable from Renaissance's rather meticulous process and institutional arrangements, from data collection to talent management to team collaboration.

First of all, data, as mentioned earlier, as early as the early 80s, before the birth of the Internet, the Renaissance began to collect a large number of pricing data on stocks, commodities and other assets, and digitized it, many of which can even be traced back to 1700. Once the Simmons team has carefully screened it to ensure it is accurate, the data can be used as a guide for the program to make transactions. The sensitivity of a mathematician has made 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 has told the media that many of the members who joined the Renaissance were "brilliant and eccentric scientists and mathematicians." And Simmons has the "ability to manage geniuses." Moreover, his deep connections in academia also gave Renaissance a steady pipeline of talent, and other institutions may be able to recruit doctoral students, but Simmons can directly recruit professors and even department chairs at top universities. The team of star mathematicians is the secret of the Renaissance to improve the trading system.

Moreover, Renaissance's management is highly flat, and the employees work closely together. Unlike other hierarchical Wall Street investment banks, in the Renaissance, even the most senior employees could view highly classified trading codes.

Speaking at the Massachusetts Institute of Technology in 2010, Simmons said:

The most important thing we do is create an open atmosphere. Everyone knows what everyone else is doing.

Former executive Nick Patterson has also said in an interview that Simmons is happy to share his wealth with the team, unlike competitors who emphasize individual or group achievements:

By Wall Street standards, Jim is not greedy. Therefore, the top people are mostly happy and do not fight each other.

In addition, the size of the Medallion Fund has been limited to $10 billion, and it is good at hedging transactions to minimize the impact on the overall market in order to make good profits and reduce losses in a volatile environment.

A staff member also revealed to the media in an interview that the medallion mainly adopts a "mid-frequency trading" strategy, which means a "moment to a few months" holding period, and few competitors have enough resources to compete in this market segment.

Confusion and controversy outside the session

The performance of the "Medallion" is so good that even professionals are unbelievable.

Bradford Cornell, a professor of finance at UCLA, expressed his shock at the fund's phenomenal performance over the past three decades. Professor Cornell argues that the performance of the Medallion fund is a powerful refutation of the assumption of market efficiency, and that "to date, there is no plausible explanation in the market that can fully account for its performance." ”

Through a comprehensive analysis of fund performance, comparing stock market performance and expert opinions, Cornell and other scholars have tried to unravel the secret of Medarian's success, but have failed to draw firm conclusions.

However, despite the impressive performance of the flagship fund, the other funds under the Renaissance that are open to external investors have not performed well.

For example, in the US stock bear market after the outbreak of the epidemic in 2020, the medallion fund rose by a staggering 24% from January to April, but other funds such as RIEF and RIDA fell by 7% to 9% over the same period.

Bradford Cornell, a professor emeritus at the University of California, Los Angeles, said the difference in performance between the two was "striking." Compared with the medal fund, which is only open to internal employees, the performance of the Renaissance open to the outside world is "mediocre", and there is no comparison with the medal fund.

According to the fund filings, the Medallion Fund employs a short-term quantitative trading strategy across multiple asset classes. These assets are reported to include global equities, futures, commodities and currencies, and the fund also tends to have high turnover and high leverage.

In contrast, according to the fund's registration documents, the RIEF fund only trades in shares and holds shares for a long time. RIDA funds trade stocks, derivatives and various financial instruments in the global futures and forward markets. Like RIEF, RIDA funds also hold large individual stock positions, usually for the long term.

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