Tuesday, July 30, 2013

Jim Simons, the most famous quant of all

Since the 1969 moon landing, the American government had cut funding for science programmes and diverted it to the war in Vietnam.

“A generation of physicists who had gone to graduate school left with their PhDs and entered a severely depressed job market,” explains James Owen Weatherall, author of The Physics of Finance. They had to earn a living somehow, and, seeing how much money that there was to be made on Wall Street, many decided to move into finance.

In Britain, the fall of the Soviet Union led to an influx of Warsaw Pact scientists. In both cases, these scientists brought with them a new methodology based on analysing data and also a faith that, using sufficient computing firepower, it was possible to predict the market. It was the start of a new discipline, quantitative analysis, and the most famous “quant” of all was a shambling donnish maths genius with a scraggly beard and aversion to socks called Jim Simons.

For those who know their physics, Simons is a living legend. A piece of mathematics he co-created, the Chern-Simons 3-form, is one of the most important elements of string theory, the so-called “theory of everything”. Highly academic, Simons never seemed the sort of person who would gravitate to the earthy environs of Wall Street. But in 1982, he founded an extraordinarily successful hedge fund management company, Renaissance Technologies, whose signature fund, Medallion, went on to earn an incredible 2,478.6 per cent return in its first 10 years, way above every other hedge fund on the planet, including George Soros’s Quantum Fund.

Its success, based on a highly complex and secretive algorithm, continued in the Noughties and over the lifetime of the fund, Medallion’s returns have averaged 40 per cent a year, making Simons one of the richest men in the world with a net worth in excess of $10 billion.

Of his 200 employees, ensconced in a fortress-like building in unfashionable Long Island, New York, a third have PhDs, not in finance, but in fields like physics, mathematics and statistics. Renaissance has been called “the best physics and mathematics department in the world” and, according to Weatherall, “avoids hiring anyone with even the slightest whiff of Wall Street bona fides. PhDs in finance need not apply; nor should traders who got their start at traditional investment banks or even other hedge funds. The secret to Simons’s success has been steering clear of the financial experts.”

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