The Man Who Solved the Market

Until recently, stories about the investment management firm Renaissance Technologies and its flagship Medallion fund were relegated to hedge fund mythology and investor folklore. Unverifiable anecdotes around performance numbers trouncing the S&P 500 left many wondering if the team at Renaissance had managed to “crack” financial markets and whether the rumors were too good to be true. This all changed when Gregory Zuckerman released “The Man Who Solved the Market, which explores the genesis of the most successful hedge fund in history.

Since the launch of the Medallion fund in 1988, the fund has generated over $100 billion in trading profits, amounting to annualized returns of 39.1 percent net of fees, which are exorbitantly high by today’s standards. Medallion now levies a 5 percent management fee with a 44 percent performance fee and is closed to outside investors. While the story of Jim Simons’ career from breaking codes for the Institute for Defense Analyses to investment fund manager is an astounding journey, the final product and the success of Medallion was never inevitable. Not surprisingly, it took the math genius (and his collaborators) numerous iterations with many different partnerships before creating something truly remarkable. In addition to the early challenges inherent in developing the current quantitative model, one of the most notable aspects of the book is how Simons constantly struggled with giving up complete control of the trading strategy to a quantitative model and how he, like many investors, was in a constant battle with behavioural biases. For someone that has managed to develop a model with a mastery of probabilities and optimal position sizing, you would think he would be immune to feeling a need to override the model, yet Simons still deals with the same emotions many other humans do.

However, while Simons was able to build a trading strategy that solved how to interpret randomness and noise in financial markets, the sad reality is that there is no way to control for life’s inherent randomness. Simons tragically lost two of his three sons in separate freak accidents during his career, and it’s not a far stretch to assume that if he could swap his control and mastery of financial markets for that of life he probably would.