Jim Simons - Renaissance Technologies Corp

The plane truth about trading from Simons

A theoretical-mathematician-turned-hedge-fund-manager-and-venture-capitalist, Renaissance Technologies founder and president James Simons has left his mark on fields ranging from futures trading to electronic books to theoretical physics. Publicity shy, Simons won't reveal any of the specific trading strategies that have allowed him to post one of the great long-term investing records of all times. But in a recent day of interviews with Senior Editor Hal Lux, Simons talked about his various academic and professional lives, what they have in common and what they don't.

Do you still do any math research?

Simons: I think about math, but not with any particular success. When I left academia, there were still a couple of problems I was interested in that I'd like to work on when I retire. About a year ago I started doing some work with a professor at MIT. I don't know that I have the brains for it anymore. This work is really different from the deep thinking you do in math.

Is there a connection between the math you did and your trading?

None. Absolutely none.

Yet you hire mathematicians and scientists to do much of your work. Why is that?

Mathematics and science are two different notions, two different disciplines. By its nature, good mathematics is quite intuitive. Experimental science doesn't really work that way. Intuition is important. Making guesses is important. Thinking about the right experiments is important. But it's a little more broad and a little less deep. So the mathematics we use here can be sophisticated. But that's not really the point. We don't use very, very deep stuff. Certain of our statistical approaches can be very sophisticated. I'm not suggesting it's simple. I want a guy who knows enough math so that he can use those tools effectively but has a curiosity about how things work and enough imagination and tenacity to dope it out.

Why are the numbers so good this year for your hedge fund, Medallion?

Once in a while the phenomena we exploit are particularly present. We like a reasonable amount of volatility. In our business we want some action.

Yet for many firms the market has proved increasingly difficult.

Many of the anomalies we initially exploited are intact, though they have weakened some. What you need to do is pile them up. You need to build a system that is layered and layered. And with each new idea, you have to determine, Is this really new, or is this somehow embedded in what we've done already? So you use statistical tests to determine that, yes, a new discovery is really a new discovery. Okay, now how does it fit in? What's the right weighting to put in? And finally you make an improvement. Then you layer in another one. And another one.

Are markets more efficient than when you started?

Considerably more efficient. There was a time when we were trading Treasury bills and we were looking at the discount structure of the bills. We said, Something is crazy here. Far-out bills were trading at some huge discount, but the 12-month physical bill was not exhibiting any such discount. Something was wrong. This was certainly something that a Long-Term Capital Management would have eliminated in a microsecond. So we just kept looking at it and saying, Why is this? The answer was that no one was picking up that inefficiency. So we bought up a whole bunch of Treasury bill futures, hedged the position in various ways, kept our fingers crossed, and sure enough, it came in. It could have gone the other way, I suppose, but not for very long, because the chickens had to come home to roost. But those kinds of opportunities don't exist now. The commodities markets used to trend pretty heavily -- long-term trends -- but those don't really exist anymore.

Long-Term Capital Management was, like Renaissance, a quantitative trading firm. Did you learn any lessons from its collapse?

Everyone in the company read the book about LTCM. It makes you wary in a general sense. Our approach is very different. We don't start with models. We start with data. We don't have any preconceived notions. We look for things that can be replicated thousands of times. A trouble with convergence trading is that you don't have a time scale. You say that eventually things will come together. Well, when is eventually?

How did LTCM's collapse affect you?

If anything, it was positive. We did very well during that period. Tumult is usually good for us. We don't have credit lines of any significance. We don't do a lot of leveraged-type financing. People were calling us from various banks asking us about our balance sheets. I had our guys calling our counterparties: "Tell me about your problems." Generally, those kinds of times -- and also in '94 -- when everyone is running around like a chicken with its head cut off, that's pretty good for us because they seem to evidence the patterns that we know how to take advantage of.

Is there a size limit for a firm like Renaissance?

There undoubtedly is, but frequently one does not discover that number until after you're past it. The budget this year is to end with 150 people. If you were to have asked me five years ago, "Could you run Renaissance with 150 people efficiently?" I would have said, "What the hell would they be doing?" That's why we're on the third expansion of this building. For years people have asked me, "How much money can you manage?" And my honest answer has been, "About twice as much as we now manage." And that's still my answer. We now manage a little less than $4 billion. Can we manage $7 billion or $8 billion? Yes. Could we manage $70 billion? Of course not. I wouldn't have a clue as to how to manage that. It's inconceivable to me to manage that much doing what we do now, but maybe new things would come along. They always have.

Are you prouder of your mathematical legacy, or of this firm?

I would say about equal. The math stuff I did, the outsize reputation that some of it received, came well after I stopped doing it. I wouldn't say that either one is a source of more satisfaction.

Did you always want to be more than an academic?

In college, while I was busy learning mathematics, it occurred to me to start a movie theater. There was only the Brattle Theater in Cambridge. And I thought maybe there's room for another one. Fortunately, I did not start a movie theater. There were periods when I would only think about mathematics, but then I would think, "Gee, maybe there's something else." Through high school, anything related to business seemed absurd to me.

Will you retire anytime soon?

To myself, I have said, "I'm 62; by the time I'm 65, I'd like to pass the baton."

When you retire, will you go back to math?

There are other things I would like to do. I have a charitable foundation. I'd like to travel. But I expect I would try anyway and go back and do some mathematics until the point it occurred to me that this was a waste of my time. I don't know how quickly that would be. But I'd try, yeah.