Very few hedge funds consistently outperform the broader stock indices in both bull markets and bear markets. One of the most exclusive hedge funds; Renaissance Technologies has had their best year for the legendary Medallion Fund so far. Renaissance’s $10 Billion Medallion Fund gained 24% this year.
In my holiday post, on How to Avoid the Challenge of Deprivation in Pursuit of Financial Freedom I had mentioned a gift for myself; the book titled The Man Who Solved The Markets.
Given the fact that most of our social activities outside the house are curtailed, this was the perfect time to catch-up on some reading. The book is the only one written about Jim Simons and the inner workings of Renaissance Technologies. It reads like a thriller and gives great insight into the minds of one of the most successful investors of all times.
The fund is exclusive due to the fact that it is only open to current and former employees. The SEC filings indicates the number of participants. For a $10B fund it has less than 2,000 members.
The fund has higher fees; 5 and 44, compared to average hedge funds who typically charge 2 and 20 (2% management fees and 20% performance fees). The high hedge fund fees usually mean that an average investor after paying the fees; struggles to beat a simple index fund.
But Renaissance Technologies has outperformed all other funds even after charging an outlandish fees.
Incidentally, 2020 is not the first year when it has outperformed even in a volatile market. The fund had similar out sized performances in 2000 and 2008.
Since 1988, Renaissance’s flagship Medallion hedge fund has generated average annual returns of 66%, racking up trading profits of more than $100 billion. No one in the investment world comes close. Warren Buffett, George Soros, Peter Lynch, Steve Cohen, and Ray Dalio all fall short.
The entire firm is based purely on the basis of using analytics to find patterns in data. While Data Science is now a buzzword and every firm on the planet including hedge funds use data to find patters; Jim Simons had the first mover advantage. He made a decision to dig through mountains of data, employ advanced mathematics, and develop cutting- edge computer models to make predictions.
Simons inspired a revolution that has since swept the investing world. The signals used by Renaissance Technologies are mind boggling. It finds individual patterns in data and exploits each pattern just enough to turn a small profit. Carrying out several such transactions at scale ensures that you generate a fortune by adding up all of those small profits.
Renaissance Technologies has employees from multiple disciplines such as string theory, astronomy, mathematics who all work on developing predictive patterns and identifying mis-priced assets.
The book does not give the secret sauce but rather chronicles how they started with trading commodities and then finally entered equities. The models initially were not functioning as expected and they were so close to pulling the plug before they had the breakthrough. Unlike High Frequency Trading; their average hold period is from a few days to few months.The Man Who Solved The Markets book is a fascinating read of the intersection between financial markets, politics and data analytics. Click To Tweet
Robert Mercer and Trump
This was the most interesting piece of the book. It talks about Robert Mercer and his involvement with the firm. In the 2016 presidential race, Rebecca Mercer (the daughter of Robert Mercer) had backed Ted Cruz. After his campaign failed; they backed Donald Trump. The Mercers were responsible for setting up the meeting between Donald Trump and Steve Bannon.
And the course of history was forever altered.
It is not know if Mercer’s focus on data analytics was responsible for the usage of Cambridge Analytica; but the involvement of the firm as part of Ted Cruz and later Trump’s campaign is well known. Robert Mercer was the principal investor in Cambridge Analytica.
The book also mentions how Jim Simons who leans left in terms of political ideologies still worked with Mercer who leans right. Ultimately Mercer stepped down from his post as co-CEO of Renaissance Technologies since most of the scientists who work on the models did not approve of his political activism. Incidentally, Mercer also played a key role in the campaign for the United Kingdom to leave the European Union by donating data analytics services to Nigel Farage
To say that Jim Simons is recluse would be an understatement. He and his employees avoid all industry conferences and media appearances. Iron clad non disclosures prevent most employees from talking about the firm or any of their work at Renaissance Technologies.
God gave me a tail to keep off the flies. But I’d rather have had no tail and no flies. That’s kind of the way I feel about publicity.– Jim Simmons quoting Benjamin, the donkey in Animal Farm
A former mathematician, he was named in 2019 as one of the highest earning hedge fund managers and traders by Forbes.
I found the book fascinating due to the intersection of financial markets, politics, data analytics and the broader applications of such models to other aspects of our lives.
The book also highlights how difficult it is to trade the markets successfully. For every buyer there is a seller. And often we would have hedge funds such as the Medallion fund on the other side of our trade.
That is why I follow a simplistic approach of dollar cost averaging into my positions using automated M1 Finance investment. Unfortunately, while M1 Finance has a number of hedge fund portfolios listed based on their SEC filings; the Medallion fund is not available.
Having read the book review, do you believe any other hedge fund manager can beat Jim Simon’s record?
Given the current shelter in place situation; any interesting books you have been reading?
John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
Here are his recommended tools
M1 Finance: John compared M1 Finance against Vanguard, Schwab, Fidelity, Wealthfront and Betterment to find the perfect investment platform. He uses it due to zero fees, very low minimums, automated investment with automatic rebalancing. The pre-built asset allocations and fractional shares helps one get started right away.
Personal Capital: This is a free tool John uses to track his net worth on a regular basis and as a retirement planner. It also alerts him wrt hidden fees and has a budget tracker included.
Fundrise: One of the top real estate crowdfunding platforms for non-accredited investors. Sign up for free and look at passive real estate investment opportunities with low minimum (only $10).
DiversyFund: is an excellent choice for non-accredited real estate investors with low minimum (only $500) offering automatically reinvested dividends.
Streitwise is available for accredited and non-accredited investors. They have one of the lowest fees and high “skin in the game,” with over $5M of capital invested by founders in the deals. It is also open to foreign/non-USA investor. Minimum investment is $5,000.
PeerStreet has a low $1,000 minimum, which allows for better diversification for real estate accredited investors. You can define the criteria based on rate, LTV, duration, etc., and use their automated investing feature to place you into investments that match your criteria. Or manually select the investments.
Credible: If you have been paying high interest on credit cards, car financing, etc.; check out personal loan rates from up to 10 vetted lenders in 2 minutes for options to lower interest cost.