There is a popular anecdote that Jim Simons (Trades, Portfolio) tells of his early life: As a teen, he got a summer job at a garden supply store. But he was a failure as a stock boy because he was so forgetful, and so was demoted to floor sweeper, which he enjoyed. He drew laughs from his bosses when he told them about his plans to get a university degree in mathematics. Simons says he also failed as a computer programmer, saying he kept forgetting notations; inevitably he was fired.
That same man went on to earn a doctorate in math, and ended up heading a university math department. But he grew restless in that position, and wondered about applying mathematical principles to investing.
The rest, as they say, is history.
Who is Simons?
The hedge fund billionaire was born in 1938 and grew up in the Boston area, where his father owned a shoe factory. He earned a Bachelor of Science in mathematics from the Massachusetts Institute of Technology and a doctorate in mathematics at the University of California, Berkley. He finished his latter degree at the age of 23.
In 1964, with his newly minted doctorate, he began working as a code breaker at Institute for Defense Analyses. Simons was fired again when he publicly voiced anti-war sentiments during the Vietnam War, a position at odds with that of the general who was his boss. After teaching mathematics part time at MIT and Harvard University, he became a member of the math faculty at Stony Brook University and chairman of the department in 1968.
During the 1970s, he developed an interest in finance, and how financial data could be analyzed using mathematical models. In 1978, he started his own investment firm, initially known as Monemetrics, and from 1982 onward, Renaissance Technologies. The firm was one of the first "quants," which, in simple terms, means using complex mathematical models to analyze and trade. Beyond that, he is not saying much; Business Insider quotes him as saying, "Of course I'm not going to tell you the various predictive signals --Unless... No, I'm definitely not. [Laughter erupts] That's even bigger secrets than those at, down there [the Defense Analysis at Princeton]."
Simons retired as CEO of Renaissance in 2009, becoming the firm's non-executive chairman. Until recently, his vice-chairman was Robert Mercer. Between the two, we have an odd couple, according to OpenSecrets.org.
Simons is a staunch Democrat and is said to have donated at least $11.5 million to liberal causes. Mercer is staunch conservative; he is well known as an anti-establishment Republican. He has commited some $18.5 million, which includes buying a stake in the far-right media Breitbart.com, donations to Ted Cruz’s presidential bid in 2016 and later to then-presidential candidate Donald Trump; he is also said to have introduced Trump to political strategist Steve Bannon.
Behind the mathematics and code breaking is an exceptional ability to find patterns within and among unrelated or nonconsequential events and relationships. Combining that ability with robust computing technology, Simons can find opportunities others miss.
What is Renaissance?
New York-based Renaissance Technologies LLC describes itself as an investment management firm in its Form ADV Part 2A (March 30). It goes on to say it acts as a partner or manager to U.S. and non-U.S. private investment funds, and two institutional accounts.
It provides its services through four “feeder” funds:
- Medallion Funds.
- Renaissance Institutional Equities Funds.
- Renaissance Institutional Diversified Alpha Funds.
- Renaissance Institutional Diversified Global Equities Funds.
In addition, it has two other funds for employees and employee-related investors. These funds invest in the four funds listed above.
As of March 30, Renaissance had $97 billion of discretionary assets under management.
Strategies
Simons and Renaissance begin with quantitative analysis. In their case, that means developing and using mathematical and statistical models. The objective is to find technical indicators that have predictive values, according to the Form ADV Part 2A.
The analysis is a starting point; going forward, they use the analyses to create proprietary computer models, models that use publicly available financial data. The output from the models is then used to identify buy or sell points and "implement trading decisions." Highly complex computer models are being used to make buy and sell decisions, and to execute those decisions.
Each of the four strategies has its own unique twist on the general strategy:
- Medallion Fund: tactics include the application of leveraged, short-term trading strategies to a diversified portfolio of globally traded instruments.
- Renaissance Institutional Equities Fund: trades global equities that are publicly listed in the U.S., as well as derivatives on the equities.
- Renaissance Institutional Diversified Alpha Funds: trades equities that are publicly traded on global exchanges, as well as derivatives and global futures/forwards markets.
- Renaissance Institutional Diversified Global Equities Funds: trades equities on publicly listed companies on global exchanges, and derivatives.
While the firm, its principals and employees are extremely tight-lipped, some examples come out.
- In Sebastian Mallaby's book, “More Money Than God,” cited at A Wealth of Common Sense, co-manager Mercer is quoted as saying, “In one simple example, the brain trust discovered that fine morning weather in a city tended to predict an upward movement in its stock exchange. By buying on bright days at breakfast time and selling a bit later, Medallion could come out ahead – except that the effect was too small to overcome transaction costs, which is why Renaissance allowed this signal to be public.” So that was a pattern that did not work out.
- Mercer goes on to say, “Some signals that make no intuitive sense do indeed work.” Indeed, it is the nonintuitive signals that often prove the most lucrative for Renaissance. “The signals that we have been trading without interruption for fifteen years make no sense,” Mercer explains. “Otherwise someone else would have found them.”
Welcome to the exotic world of quant trading, where huge volumes of data are pushed into one end of a computer, and actionable information comes out the other. Theoretically, at least. As the “nice morning” example indicates, not all patterns are equally robust and guarantees are nonexistent.
Holdings
Simons has a portfolio that just about every other fund manager would find impossible: 3,170 different equities. This GuruFocus chart shows the sectors:
Such a large portfolio is possible because it is managed with computer algorithms, rather than with human minds. These are his top 10 holdings as of Sept. 30:
- Humana Inc. (HUM, Financial): 1.05%
- Gilead Sciences Inc. (GILD, Financial): 0.98%
- Amgen Inc. (AMGN, Financial): 0.86%
- Nvidia Corp. (NVDA, Financial): 0.84%
- NetEase Inc. (NTES, Financial): 0.83%
- Colgate-Palmolive Co. (CL, Financial): 0.82%
- Novo Nordisk A/S (NVO, Financial): 0.81%
- Bristol-Myers Squibb Co. (BMY, Financial): 0.81%
- Domino's Pizza Inc. (DPZ, Financial): 0.75%
- VeriSign Inc. (VRSN, Financial): 0.74%
GuruFocus also reports quarter-over-quarter turnover is 24%; that means he bought or sold 761 different stocks in the third quarter, or an average of 11.7 trades per day. Again, something that is only feasible with computer-managed trading.
The top 10 list would fit with the portfolios of many investors. There is nothing new or unique in terms of names, just how the decisions are made and the speed with which they are traded.
Performance
As with most hedge funds, information about returns is private, and it is necessary to put together some pieces to get a sense of overall results. Also, it is necessary to recognize the funds do not necessarily have similar returns. For example, the Wall Street Journal reported in May 2009 investors were unhappy because the Medallion Fund did so well in 2008 and the Renaissance Institutional Equities Fund lost money (and lost again in 2009). Medallion, which gained 80% in 2008, is only available to current and past employees and their families. The Institutional Equities, which lost 16% in 2008, was owned by outsiders.
The non-Medallion funds apparently have done quite well since; a Forbes article on May 12 reports, “Renaissance’s funds that still include outside investor capital keep posting solid returns. Renaissance Institutional Equities fund, the firm’s biggest hedge fund, is up 6% net of fees in 2017 after surging by 21.5% in 2016. Renaissance Institutional Diversified Alpha, another large fund, has returned 7.5% in 2017 after posting gains of 10.7% last year. The smaller Renaissance Institutional Diversified Global Equities fund is up 8% in 2017.”
This GuruFocus chart provides a look at equity holdings, presumably for the three strategies open to outside investors:
This may or may not reflect actual performance, but is potentially a proxy for investors who want the bigger picture.
It seems investors in non-Medallion funds have done quite well, while the insiders who were able to invest in Medallion did extremely well.
Conclusion
Two phrases, from the same sentence, stick out in this profile of Simons. First, “technical indicators,” which means technical analysis tools such Moving Averages, Bollinger Bands and literally hundreds and hundreds of others. We have no idea which Simons and Renaissance use, but clearly they are not analyzing fundamentals such as price-earnings, earnings or return on equity.
The second phrase is “predictive signals,” indicating a focus on what could happen in the future rather than what has happened in the past. Again, it is not the world view of most investors, who examine a stock’s history in hopes of gaining some future guidance.
But, of course, Simons is not most other investors. He is one-of-a-kind, for better or for worse and an example that proves there is more than one way to be a successful investor.
Disclosure: I do not own shares in any of the stocks listed in this article, and I do not expect to buy any in the next 72 hours.
