Secrets of the Greatest Hedge Fund of All Time

hi it's Josh Brown welcome to live from the compound I'm here with Michael batt Nick as usual and our special guest Greg Zuckerman Greg wrote a book that I think is the best business book of the year we're gonna talk about the greatest hedge fund of all time and you guys are really gonna love this stick around let's see what's going on [Music] okay first of all Greg thanks so much for coming in great to be here before we get into the book which is amazing just a little bit on your background quickly your Wall Street Journal you've been writing about quant specifically in finance in general for how many years I've been the journal 23 years and I thought yeah no and I'm a buy side guy it's not necessarily quads but guys and women making money losing money personalities on the streets I kind of have a sports guy so a lot of home runs and strikeouts that's sort of my special okay well let me tell you something this is the book that has never been written but everyone has been waiting for so you got I think you said 400 interviews with employees partners ex-employees of arguably or maybe definitely the greatest hedge fund of all time Renaissance technologies and specifically the story of how Jim Simon's pulled over a hundred billion dollars out of the markets which nothing else compares right like Buffett Soros they don't even come close in terms of returns no one comes close in terms of personalities they're kind of you could argue pioneers because they've got this approach to markets this is very distinct from everybody else and they paved the way for this quant revolution that everyone is sort of trying to understand and embrace today can we be specific in terms of returns like what were grossa fees what did he do over this almost 30 year period right so you got to remember he charges a lot but before fees 66 percent on average since 1988 yeah so what one of the things among many that was interesting to me was so was it five and 40 that he charged her something hilariously ludicrous - 44 5% management fee on the whole fund yeah and then 44% of the annual profits right so after fees his returns are only 39% that's it yeah so the 5% is not just because they're pigs but they are using so much manpower and computer power that the the management fee was going to cover the operational costs I mean there's a little bit of pinkness probably - they started off with the 5% years ago when they needed that they worked out how much their computers their expensive cost and it was about 5% of AUM at a time and they just sort of kept the 5% ever since I mean it's important to know that they we're talking about the key font it's called the medallion funds and that's the one that's it's capped at ten billion dollars so they've got other funds that do well but not as well as this one this is the key one that's been going on since nineteen and my understanding is it's almost all or all employee money at this point they've they've sent back excess capital to investors over some so long there's nothing left yeah there's no outside money there may be some outside family money but even friends are kind of disgruntled because over time Simon's kicked them out of the fund - even people that kind of stuck with him at the beginning there was a little bit of frustration that hey why are we getting kicked out but they made a decision that anything above ten billion dollars they can't make these crazy returns so they had to kick people okay so let's get into the story of how they've been able to do this so Jim Simons is essentially pursuing a career in mathematics he gets involved with government work doing code breaking eyes he at the NSA or where it's a it's a not-for-profit called the IDE and Princeton that reported up and helped the NS okay but then like on the side he's kind of screwing around with stocks and he catches the bug and then at some point he realizes the most fun he could have and the highest use of his skills is not government work or teaching it's actually running money and trying to solve the market yes so Simons is a fascinating guy because he as a mathematician geometry to be specific and his groundbreaking guy even if he had never invested or traded a dime he'd still be worthy of a book I think because he would did fascinating important things in the the mathematics kind of groundbreaking stuff and then as you suggest he was a Code Breaker for the government fighting Russians in the 70s at the height of the Cold War yeah and did some interesting work there it's also not public I write a little bit a little bit about it in the book so he was a guy who always was an academic and a real groundbreaking mathematician and yet he had these impulses these kind of interests outside of academia and mathematics trading he traded all his money for he got from his wedding and he it was a real rush he enjoyed it as you kind of suggest so who I always had this kind of one foot in in a world of academia and one foot in the real world as it were and and doing kind of trading and trying to make money some of the more hilarious anecdotes about those early days is Simon's running to Merrill Lynch to like a human broker and not being satisfied with the speed with which he can operate or he can get information from them about what's going on and it just reminds me of like everyone when they start trading so I thought that was kind of I was kind of fun to say that because one of the things I found so surprising in my research is Simon's is a lot more like you and I than you would think you would think he's this quant and it's all scientific and they have that approach and they are quants but he also has to fight those instincts like you and I seeing you know a stalker or gold going up or going down hey shouldn't we be doing something and it does there's a lesson there that you have to kind of fight those two even Jim Simon has to fight those instincts so that so that sort of his most surprised about he like he's not like one of these people who is so mathematic that they can't relate to people to me as the founder of a firm like so much of what he goes through is about managing people and recruiting talent it's not just like figuring out these formulas it's like herding all of the people who were going to ultimately produce this astonishment track record that was the biggest revelation to me is that Simon's was really more of like the architect and not necessarily the investor like he relied a lot on Mercer and Brown to really spearhead the investment efforts so he was as much as this book is about performance it's also about personalities and management I completely agree and how to deal with with interesting a colorful often difficult employees and how recruit how to hire so a lot of what he does is hiring talent kind of best player available kind of thing as opposed to I have a slot and I need to find somebody for that slot he hires some of the top scientists around the world and says you know go to it guys go figure out how to make money and and as you suggest he was never kind of in the trenches building the algorithms but he was aware of them and he helped them and encouraged them and gave advice and asked good questions but right he was sort of the architect of this all and a lot of the book is about some of these colorful interesting mathematicians and scientists who work for him there's there's some really interesting pivotal moments in the book where the firm is is is running money based on the mathematical strategies and there's just like such such apathy toward well what's the reason this works on the part of the mathematicians but Jim seems to have that inclination to want to know okay I get that it works but I have to know why and then there are these moments where he wants to override the math because he's got a hunch about let's say oil prices in the 70s for example it's so it's it's really interesting you look at this guy he's a most successful hedge fund manager of all time and even he struggles with all right we have a process but I want you to add 10% oil futures because I'm worried about Saudi Arabia or whatever right so that was early on and over the last few decades they really haven't strayed from their models you got all that over it but in periods of crisis you're right he does pull back and sometimes it's others he overrides the views of others some of the scientists are like trust the models Jim trust the models and yet he's got that instinct he's and sometimes it works and it helps them so he was able to do that it with within the fund but with this personal money sometimes he did trust his intuition I want to give any spoilers but I thought that was just like mind blowing I totally agree so you know just I'll get into it a little bit basically this guy's built this quant powerhouse the greatest money-making machine in financial history and it's based on being a quant in an algorithmic trading and in the scientific approach and yet late last year when we all remember and market was crashing he's on vacation with his wife and I write about in the book and he starting panics like you and I would panic any calls as well a manager yes exactly it's amazing and he's like show me be buying some protection here and there's no no one realized the rich irony here is Jim sign Jim Simons is panicking or at least adjusting to the market market bottom of the next day right and his biz advisor luckily said you know let's let's wait a little bit here but it just shows like it's alleged long Jim Simon's financial advisor yeah yeah and also a lot of these guys in Simon's and others they invest in non quant investments you would think they'd only stick with quant and there's only one approach but they're not above considering other other approaches and seeing success so we see Simon's today he's worth twenty something Billy three ok so twenty three billion dollars but he left a little to see now see eighty-one okay so he left academia late in life he was not a billionaire until he was what fifty something yeah he really was kind of struggling and trying to figure out in his late 40s so in the late it's hard to remember but you know late 80s intro nineteen ninety it wasn't clear he was gonna stick with even trading it's called Renaissance technologist because they had these kind of outside VC like investments and some of his only employees were like our turns aren't very good this is 1989 is Jim gonna stick with this thing so yeah a couple points along the way in the arcanist of story it could have gone bad for so we were talking before we press record like there were so many what-ifs in this book this was not a smooth ride to success there was a lot of times when they could have turned it off or if they didn't find the bug in the system like this could have gone very differently yeah so until 1994 they were pretty successful they were managing about 800 million dollars commodities currencies bonds and people within the firm were like that's great Jim we're making a lot of money that's enough for us and Jim said no we gotta figure out equities got to figure out stocks because you can't manage lots of money billions of dollars unless you're gonna play in the stock market got to they got too big for the commodity markets and they had to figure out stocks to scale and meet his ambition it was his ambition more than anything he wanted to kind of change the world in some ways use his built make billions and then use it to influence society to some extent and they couldn't figure it out and they hired different people and they were super small and there different approaches they couldn't figure out equities and you suggest if they had int and they that turning point was 1996 and that's Bob Mercer and that's Peter Brown and they get a lot of credit for that and Jim gives him the credit if they hadn't be able to figure out equities and there was a bug involved as you say and if they hadn't found the bug they would have been known as kind of a good hedge fund like many other but not the greatest of all time the man who found the bug the analyst was was almost asked their previous to that david acraman yes and i won't text later as well just an amazing story so so many things had to have fallen on the right side of the fence for the whole thing to have worked yeah one of my favorite chapters is you kind of like give the reader the context of who the other investment industry Giants were while Jim was putting this together so if I say right now I'm a quant and I'm managing money based on formulas people go alright that's great you were never you and everyone else but in the 80's 70's and 80's you talk about guys like Soros and Druckenmiller who are doing incredibly big macro trades not trading in and out but like coming up with what's about to happen in the world and how to profit then you talk about what Peter Lynch had been able to do at Magellan for fidelity grew his fund to 16 billion so in the in the context of the people who had been successful at that time Simon's and his crew must have looked like a freak show yeah they chose an unpopular approach to investing if you remember at the time even the early 90s I mean George Soros and Stanley Druckenmiller did the British Pound bet which was the greatest of all time at the time in 1992 so in that early 90s period you've got Soros you've got Peter Lynch calling up companies and checking out you know legs his wife likes a certain pantyhose and most ematic and stories yeah in talking to companies Jim Simon's never picked up a phone to call a company up you wouldn't even know what what a what cash flow is he how to calculate it even he doesn't know what about this stuff so for him to choose this different approach and stick with it and be confident right he was sort of this outlier and people scoffed people didn't give him money or we're talking the early 90s and that so long ago didn't Bob Mercer make a joke about maybe they wouldn't own a company whether it was Chrysler one of the car companies and it actually was in the portfolio yeah that's good memory yes so he had some big meeting with the big investor at the time this is when they were starting an outside funds and and he was giving an example of how their system operates and the example was a stock that no longer existed and everyone in the room was like dude don't you know that this I think was Chrysler had been acquired or and he's giving Chrysler as the example but the point being can even know companies and businesses and where things the economy is going and he didn't care and none of them really care within the firm they do a very different approach it's all patterns all short-term it's not high-frequency but it's something very distinct from what everybody else is doing so you mention some of the earlier quants who maybe even predated renaissance technology you talked about david shaw of the now well-known from de Shaw you talked about Ed Thorpe was from Princeton Partners yeah yeah or Princeton Newport yeah so are those your next books like are is there new territory with or have you now caught the white whale and and and you need to pivot to something else you know honestly I'm still recovering from this one so we'll see about the next one I've got some ideas but Thorpe wrote a really good book of his own a man's role Marc exactly and I've spent time with him and he's a great great guy and super smart so I'm not sure I want to do his story necessarily but yet this was the story the Jim Simon's story was kind of the one that was out there for me as a writer this is what I do write about by side you know how individuals make a lot and lose a lot so this was the guy I always wanted to write about I didn't wasn't sure I could pull it off congratulations this was huge yeah I mean we really loved it it's right apart it's almost like it was written for us all the behavioral stuff in there all the building a business stuff like if you're if you're an entrepreneur there's a lot in here for you if you're a trader needless to say I just feel like the audience for this is so wide even if you're not necessarily into finance or sort of read like fiction you know what I have my wife often in mind when I write these things and she doesn't have much interested in finance so I tried to make it relevant into the quant in mathematician too because a lot about math and about the history when he was in academic so I tried to make it relevant to those guys but also make it entertaining enough for the for the average reader and you make an issuing point about management skills and everything's relevant to all kinds of people by the way the firm is bicoastal for most of its life it's it's out east Long Island and then they have people in California for a while yeah nowadays that's common but back then that was hard to pull off yeah they were groundbreaking in a lot of things not just an investor who's playing Simon's in the movie yeah Sean Connery yeah bro matter retired like that so I want to ask you what the I want to ask you what the response has been did do you know whether or not Jim has read the book is he willing to read it Jim and I have a complicated relationship he didn't want you to do it to begin with he didn't and still doesn't as of recently happen yes even a few months ago we kind of expressed unhappiness but he's a generous guy it's been we spent over ten hours together he's a he's been very patient explaining some mathematical and other themes and lessons for me so um III go I can't speak for him I I hope he liked it but I didn't really write it for him to like it or not I tried to tell the truthful story he's not gonna look great in some of these parts of the book but overall an amazing philanthropist and investor right so listen I just want to congratulate you again let me make sure people know what this thing looks like you're gonna see it in stores everywhere make sure you order it comes out this is this is gonna go up November 5th yeah publishing date publishing day 5th yeah pretty excited so you're gonna make the rounds sure I'm gonna have your work cut out right so be here first up we're thrilled to have you and we just we love the book we're gonna try to sell thousands of copies for you appreciate and congratulations on getting all these people to talk and you know it's it's just an incredible feed so anyway listen where can people follow you think I'm at G's occur man at G's outcome Inc so yeah alright follow the man on Twitter by the book we're gonna have links to both in the show notes and we'll see you soon [Music]

Channel: The Compound

Views: 275,512

Rating: 4.8885899 out of 5

Keywords: Stocks, Stock Market, How To Invest, Investing, Money, Trading, Financial Advice, Investment Advisor, Josh Brown, Michael Batnick, ritholtz wealth management, finance, financial markets, retirement, the compound, financial services, investment management, investment, greg zuckerman, jim simons, hedge fund, gregory zuckerman, the man who solved the market, mathematician, best hedge fund, medallion fund, renaissance technologies, invest, quant, returns, quantitative, hedge fund strategies

Id: VjuL1TH_cWY

Length: 17min 52sec (1072 seconds)

Published: Tue Nov 05 2019