How Jim Simons Made Billions on Wall Street
How a mathematician averaged a 71% annual return.
Roots
Jim Simons was born in 1938 in Massachusetts, United States. He got a bachelor's degree from the Massachusetts Institute of Technology in 1958 and a Ph.D. in Mathematics from the University of Columbia, Berkley.
After graduating, he focused on the geometry and topology of manifolds. In 1964, he started working at the National Security Agency in order to break codes. From 1962 to 1964, he worked at the Institute for Defense Analysis (IDA) and taught mathematics at Harvard and at MIT.
The job at IDA paid him very well but he got fired because of his views on the Vietnam war.
Renaissance Technologies
When Jim Simons was in his late 30s, he was getting bored of maths. He didn’t have much money so he started trading stocks. In the beginning, it went very well but he describes that as pure luck. After a while, he observed that there was a structure in the price graph so he hired a couple of mathematicians to make models just like they did at IDA.
Their strategy was to gather an enormous amount of data. They first physically went to gather data from sources like the Federal Reserve where they copied interest rates. They even had data from WW2.
His management and hiring style was very smart. He hired people that had almost no connection to Wall Street and were only focused on mathematics. He also gave bonuses to employees if they reached a certain amount of profit that year. The management style resulted in almost no employee turnover.
He first called his fund monometrics which is a play of the words “money” and “econometric”. In 1988, the fund was renamed Renaissance Technologies and the Medaillon Fund was created. In 1993, the Medaillon fund only became accessible to employees and their family members.
The Epic Rise
By combining tremendous amounts of data, computer algorithms, and advanced mathematics the fund created an exceptional return. From 1994 through 2014, the Medallion fund has returned on average 71,4% before fees per year.
In the year 2000, the fund returned 128% before fees and 99% net of fees. In 2005, he received a bonus of $2,8 billion which was the largest compensation ever for any hedge fund manager.
They managed to get these insane returns through betting on really short-term predictions. In 2000, they executed 150 000 to 300 000 trades per day.
In 2008, they had their biggest return ever of 140% before fees and 80% after fees.
From the performances listed above, you can see how wide the gap is between the return before fees and after. This is because Renaissance has the highest hedge fund fees in the world.
The traditional hedge funds have a 2/20 fee structure. This means that there is a fixed cost of 2% per year and a cut of 20% on the gains of the investor. Renaissance first started with a fee of 5/20 but later raised it to 5/44. This is a tremendous fee but the investors still made money through the insane returns.
In 2009, Jim Simons retired as CEO of Renaissance after he received over $7,5 billion in compensations in the prior 4 years. Simon also retired as chairman in 2021.
In total, the Medaillon Fund has made over $100 billion worth of gains for its private investors. Jim Simons net worth is estimated to be $28,6 billion, according to Forbes.
Although the private Medaillon fund has an incredible track record, their funds open to the public aren’t doing that great. In 2004, they created the Renaissance Institutional Equities Fund (RIEF). On average, this fund even performed worst than the S&P 500 with a return of 9,1% per year.
Philanthropy
Jim Simons is a very generous man. In total, he has given over $2,7 billion to philanthropy. In 2012, he gave over $60 million to establish the Simons Institute for the Theory of Computing. He also gave $35 million to Berkley’s Mathematical Sciences Research.
He is also famous for giving the largest donation ever to a university. He first gave $25 million to Stony Brook University. His friend Eliot Spitzer then donated over $60 million to found the Simons Center for Geometry and Physics at Stony Brook. Jim then donated $150 million which is the largest donation to a university ever.
Final Thoughts
On Wall Street, they are all blindfolded to what’s actually happening in society and miss the bigger picture. They FOMO into certain trades and are famous for adjusting their price targets countless times.
However, Jim Simons only used data. Because of his great skill, others cannot magically copy and paste his returns. He is so good, that even Warren Buffett acknowledges him.
I hope you learned something after reading this article. Have an amazing rest of your day!
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