Jim Simons: The man who solved the market

Gregory Zuckerman, author of The Greatest Trade Ever, has published a new book highlighting the life and work of Jim Simons, who, at the age of 40, walked away from a very successful career as a research mathematician and cryptologist to try his hand at the financial markets, and ultimately revolutionized the field. Zuckerman’s new book is titled The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution.

Upbringing and academic career

Simons’ background hardly suggested that he would one day lead one of the most successful, if not the most successful, quantitative hedge fund operation in the world.

Born in 1938 to a Jewish family that operated a small shoe factory, Simons aspired very early to be a mathematician, ultimately receiving a B.S. degree from the Massachusetts Institute of Technology at the age of 20, and a Ph.D. from the University of California, Berkeley at the age of 23. His doctoral thesis presented a new proof of Berger’s classification of the holonomy groups of Riemannian manifolds. Later, in collaboration with Shing-Shen Chern, he discovered and proved what is now known as the Chern-Simons theorem (and associated theory), which deals with 3-dimensional quantum field theory and also has applications in string theory and quantum computing. For this and some related work, in 1976 he received the Oswald Veblen Prize in Geometry.

IDA and Stony Brook University

Not satisfied with being an accomplished academic mathematician, in 1964 he joined the Communication Research Division of the Institute for Defense Analyses (IDA), near Princeton, New Jersey, to work on cryptographic problems for the U.S. government. He did excellent work, but was fired after writing a letter to the New York Times expressing opposition to the Vietnam War. He then accepted the position of Chair of the Department of Mathematics at Stony Brook University, a public university on Long Island about 60 miles east of New York City, where he served for nearly 12 years.

Renaissance Technologies and the Medallion Fund

Still not satisfied, in 1978, at the age of 40, Simons resigned from his position at Stony Brook and embarked on a quixotic stab at financial markets, founding a company named Monemetrics (later renamed Renaissance Technologies).

While at IDA, Simons had briefly investigated applying an algorithm developed by Lenny Baum and Lloyd Welch to financial markets (the Baum-Welch algorithm uses data to uncover hidden states in a Markov chain process). He had also been briefly involved with a Columbian floor tile importing business. But other than that, Simons was utterly unqualified for a financial venture — he had no training or background whatsoever in business, finance or market trading. The reaction of Simons’ mathematical colleagues was a combination of astonishment and outrage.

Simons and Lenny Baum, whom he soon hired, explored whether the Baum-Welch algorithm or other mathematical-statistical approaches could be applied to financial markets. The first few years were not promising. While some efforts succeeded, others soured, leaving their investment fund nearly depleted and Simons rather depressed. But instead of giving up, he redoubled his efforts to find actionable signals in financial data.

Simons, either directly or through spin-offs that he oversaw, subsequently hired several additional staff members, including James Ax, a prominent number theorist; Elwyn Berlekamp, a prominent expert in coding theory, game theory and computer science; Rene Carmona, an expert in stochastic differential equations; and Nick Patterson, whom Simons had known at IDA. Together these researchers developed some new techniques and software that appeared to work quite well. Although there were setbacks, their investment fund, later renamed the “Medallion Fund” (reportedly a nod to the awards that Simons, Ax and others had received) started growing, from $20 million in 1988 to $66 million in 1993.

At this point, Simons concluded that he needed some additional high-powered expertise in computer science and machine learning. So he hired IBM researchers Robert Mercer and Peter Brown, who had been developing speech recognition techniques at IBM’s Yorktown Heights Research Laboratory. Mercer and Brown further improved the fund’s algorithms, data processing facilities and trading software, resulting in significant new gains. Simons then hired additional mathematicians and computer scientists, together with an eclectic group of physicists, astronomers and signal processing experts, hardly any of whom had training in business or finance.

The Medallion fund grew from $66 million in 1993 to $2.4 billion in 2000, and to $10 billion in 2010, when Simons finally resigned as Renaissance CEO, turning operation of the fund over to Mercer and Brown (although he remains Chairman of the Board). Although the fund’s total assets are now fixed at $10 billion, it continues to generate enormous profits for those fortunate enough to be investors (the fund is now closed to outside investors). From 2011 to 2018 the fund’s annual returns averaged a whopping 74% before fees, and 39% after fees, returns that are easily and consistently the best in the industry. Renaissance also now offers three funds for outside investors, namely the Renaissance Institutional Equities Fund (RIEF), the Renaissance Institutional Diversified Equities Funds (RIDGE) and the Renaissance Institutional Diversified Alpha (RIDA).

The Simons Foundation

In 1994, Simons and his wife established the Simons Foundation, a New York philanthropic organization (with an annual budget currently set at $450 million) that funds research in mathematics, computer science, physics, cosmology, biology, autism and education. Among other things, the foundation operates the Quanta Magazine, which is one of the world’s best news sources in mathematics, computer science, physics and biology. Simons has also founded Math for America, which among other things grants stipends of $18,000 per year for five years to selected outstanding high school teachers.


In addition to chronicling Simons’ success, Zuckerman also recounts the numerous setbacks, failures and other incidents that nearly ruined his operation, particularly in the early days. For example, in 1989, after Berlekamp’s programmed trading in Canadian currency improbably yielded no profits, Simons called a trader at the Chicago Board of Trade, who alerted him that fraud might be involved, and that the trading firm they were using might go under. Simons quickly closed his fund’s account with that trading firm, narrowly escaping potentially disastrous losses.

In addition, Simons’ personal life has often been marked by disappointment and tragedy. In 1974, his wife Barbara Bluestein divorced him (he subsequently married Marilyn Hawrys). Then in 1996, his 34-year-old son Paul was killed while riding a bicycle, followed in 2003 when his 24-year-old son Nicholas drowned while on a trip to Bali, Indonesia. According to those who know Simons personally, these tragedies left deep scars.

Managing his team of researchers has also been very trying. Several of the original employees, including Baum, Ax and Berlekamp, subsequently left, for various reasons, ranging from health problems and a desire to live elsewhere (e.g., the West Coast) to deep dissatisfaction with how the firm was being managed.

Controversy has beset the firm at several junctures. In 2014, Simons and Renaissance Technologies, along with several other large hedge funds, came under fire for using sophisticated “barrier options” to reduce taxes. Then in 2016, Mercer’s right-wing political activism came to light. In the 2016 election, for instance, Robert Mercer and his daughter Rebekah were major donors and promoters for the Trump campaign. Recalling his own history, Simons was determined not to fire anyone because of their political beliefs, but eventually, in the wake of the controversy and organizational morale problems that ensued, Simons convinced Mercer to step down as co-CEO, although he remains as a researcher.

In general, the tale that Zuckerman tells is one of huge challenges, numerous failures and frequent personal and organizational turmoil. Simon’s success has not come easily, not by a long shot.


So what can one say of Simon’s career? Zuckerman summarizes it as follows (from the Introduction):

Since 1988, Renaissance’s flagship Medallion hedge fund has generated average annual returns of 66 percent, racking up trading profits of more than $100 billion … No one in the investment world comes close. Warren Buffet, George Soros, Peter Lynch, Steve Cohen, and Ray Dalio all fall short. …

More than the trading successes intrigued me. Early on, Simons made a decision to dig through mountains of data, employ advanced mathematics, and develop cutting-edge computer models, while others were still relying on intuition, instinct, and old-fashioned research for their own predictions. Simons inspired a revolution that has since swept the investing world. By early 2019, hedge funds and other quantitative, or quant, investors had emerged as the market’s largest players, controlling about 30 percent of stock trading, topping the activity of both individual investors and traditional investing firms. MBAs once scoffed at the thought of relying on a scientific and systematic approach to investing, confident they could hire coders if they were ever needed. Today, coders say the same about MBAs, if they think about them at all.

Simons’s pioneering methods have been embraced in almost every industry, and reach nearly every corner of everyday life. He and his team were crunching statistics more than three decades ago — long before these tactics were embraced in Silicon Valley, the halls of government, sports stadiums, doctors’ offices, military command centers, and pretty much everywhere else forecasting is required.

Simons developed strategies to corral and manage talent, turning raw brainpower and mathematical aptitude into astonishing wealth. He made money from math, and a lot of money, at that. A few decades ago, it wasn’t remotely possible.

Lately, Simons has emerged as a modern-day Medici, subsidizing the salaries of thousands of public-school math and science teachers, developing autism treatments, and expanding our understanding of the origins of life. …

I was most fascinated by a striking paradox: Simons and his team shouldn’t have been the ones to master the market. Simons never took a single finance class, didn’t care very much for business, and, until he turned forty, only dabbled in trading. A decade later, he still hadn’t made much headway. Heck, Simons didn’t even do applied mathematics, he did theoretical math, the most impractical kind. His firm, located in a sleepy town on the North Shore of Long Island, hires mathematicians and scientists who don’t know anything about investing or the ways of Wall Street. Some are even outright suspicious of capitalism. Yet, Simons and his colleagues are the ones who changed the way investors approach financial markets, leaving an industry of traders, investors, and other pros in the dust. It’s as if a group of tourists, on their first trip to South America, with a few odd-looking tools and meager provisions, discovered El Dorado and proceeded to plunder the golden city, as hardened explorers looked on in frustration.

One way or another, Simons has had quite a career! He definitely fits the profile of what Dean Keith Simonton terms a true creative genius — someone who has a very high IQ, boundless energy and a never-quenched thirst to learn more and accomplish more.

His story is a great tale, presented very vividly by Zuckerman in his book: The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution.

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