The Story of Jim Simons: The World’s Most Successful Investor

who is the greatest investor of all time is it Warren Buffett Ray Dalio George Soros or some other investor this could be considered the pantheon of great investors if it wasn't missing Renaissance founder Jim Simons who should be considered the world's most successful investor his legendary medallion Fonda has returned thirty nine point one percent on average per year since 1988 generating over a hundred and four billion of trading profits even better he is showing no signs of slowing down Renaissance is often excluded from the best hedge fund list because its well-known medallion funds results are hard to verify as it has been closed to outside investors since 2003 but there is undeniable evidence that the returns are very real for example when an employee was fired in 2017 he negotiated into his settlement a clause that allowed him to stay invested in the medallion fund which has produced otherworldly returns since 1988 other facts showing legitimacy is that Renaissance would be the world's worst Ponzi scheme as it does not allow in outside money in addition Securities and Exchange Commission evidence shows it manages over a hundred billion of assets and it confirms its famous 544 structure which is likely the highest V structure in the world this means an investor pays 5% of his assets each year and 44% of his profits to Simon's even at this structure investors would line up to invest in Renaissance if it was open to outsiders Simon's wealth did not come out of thin air and Renaissance strong returns has made him one of the richest people in the world finally the IRS is asking for 6.8 billion in back taxes the IRS believes a strategy used from 2000 to 2015 was for tax avoidance Renaissance disagrees but the dispute has not yet been settled Simon's now 81 is eccentric despite keeping a low and secretive profile his secretive personality may have developed when he worked for the Institute for Defense analysis from 1964 to 1968 Simon's remembers not even telling his wife soon-to-be-ex-wife what he did there but we now know his task was to decode Soviet messages Simon's eccentricity shines through during this 2019 interview where he receives a phone call so when did you first interested in business when you were at MIT you mentioned something about that last week I'll have to call you back well kadesha he earned more than any hedge fund manager in 2017 with 1.7 billion of fees and again with 1.6 billion in 2018 Renaissance strategies are standing the test of time better than any other legendary active fund such as Ray Dalio who's famous pure alpha fund has struggled compared to the S&P 500 since the financial crisis Warren Buffett has made many recent investment mistakes including his investment in IBM and Kraft Heinz Buffett's firm has only slightly better results in the S&P 500 since the Great Recession and this is excluding the incomplete 2019 year where Berkshire Hathaway is badly losing so how is Simon continued to have so much success this video will go through his exciting life his firm Renaissance Technologies should go down as the greatest fund of all time before we start the video if you like this type of video please hit the like button or subscribe so that we can trigger the YouTube algorithm also you can follow us on our website the market is open calm we publish original news articles and we also have a message board where you can post articles or you can follow us here Jim Simon's was born in Massachusetts in 1938 he was a spacey prodigy and was often daydreaming about a math problem at 14 he remembers enjoying a part-time job sweeping floors as it allowed him time to think in 1955 he started an undergraduate degree at the Massachusetts Institute for technology or MIT Simon's was a very cocky student in his second year he registered for a graduate level course in abstract algebra he almost failed the course but he would spend the entire summer studying and blossomed the next year in 1958 he graduated from MIT with a Bachelor of Science in mathematics Simon's first real taste of investing was in 1959 when he received a $5,000 wedding gift eager to multiply the money he drove over to Merrill Lynch asking for investment ideas it put him in two stocks but Simon's was disappointed by the lack of excitement he then asked Lynch if it had anything more for a risk-taking investor it recommended soybean futures which were trading at two dollars and 50 cents a bushel a future is an agreement to buy or sell an asset typically a commodity at a predetermined price a future is similar to a forward contract but the difference is the physical commodity never exchanges hands for example if one were to buy a future do next at two dollars and fifty cents assuming the price went to three dollars the other party would owe 50 cents when the contract expires if it was a Ford then it would be settled by buying physical soybeans futures are risky because they typically involve a large amount of leverage simon's bought two contracts and each contract was based on the value of 5,000 bushels luckily soybeans quickly increased to three dollars giving Simon's a 50 cent profit per bushel or $5,000 despite his success the position could have led to 25,000 in losses because of the leverage in the position however his PhD thesis was suffering given the time constraints the trading was putting on him so he put his trading career on hold for the rest of his PhD he then solved the difficult math problem which landed him a prestigious job at Harvard however he found the teaching lives to be rather dull and at 26 he left for the ITA a government agency which sought to break intercepted coded Soviet messages at the ID a summons worked with many other skilled mathematicians in addition the ITA allowed employees to work up to half their time on their own personal math work Simon's flourished but he realized some of the other mathematicians were technically stronger than him but he still believed he was more creative this led him to start I star in 1966 which was a firm that would electronically trade stocks though this firm abruptly closed because his bosses did not appreciate the multitasking in 1968 Simon's published an internal ID a paper exploring how a quant firm could make fifty percent a year Simon's proposed using a hidden Markov model which is the same as a Markov model just as simply has some hidden information for example say it was sunny yesterday that would be the event also assumed there is a pattern that sunny days predict future sunny days then tomorrow's weather would be the hidden state therefore a simple hidden Markov model could allow one to predict the weather leni bum one of the strongest mathematicians at the I D a developed a famous algorithm to find more events to better predict tomorrow's weather or hidden states for example his data could also show that humidity predicted whether his algorithm would become known as the bombe Welch algorithm which is still prominent today simons argued that this algorithm could identify many separate events to predict stock market behavior or implementing the strategy Simon's was fired in 1968 because of what he said during an interview the cocky Simon said because the I da lets you spend half your time on your own work and because I'm against the Vietnam War I'll spend 0% of my time on their work until the war's over and I will make it up after he was immediately fired and at 29 he was searching for his third career fortunately Stony Brook University was looking for a chair of its math department at Stony Brook Simons people skills flourished as he was responsible for recruiting talent to grow it's math department he recruited well-known mathematicians like James axe who would later join his trading firm Simon's was strong at identifying and managing highly skilled employees in 1976 he won America's top honor for geometry and he had grown the department into a respectable force but Simon's was lusting for real wealth and he was once again getting bored he remembered the rush of trading soybeans in 1958 and he started investing in sugar based on a former students algorithms he would make ten times his money but the price of sugar collapse soon after he withdrew which was not predicted by the models he was lucky not skillful but on another strengths of Simon's was identifying when he was lucky he was therefore motivated to improve his trading methods Simon's drifted away from Stony Brook in 1977 he felt currencies represented a unique opportunity because the last remnants of the gold standard known as the Bretton Woods Agreement collapsed in 1971 and many major countries recently started floating their currencies floating just means that market forces determined the price watch how the market is changing the value of the US dollar right now relative to the euro an opposite example is the Hong Kong government has been forcing a price of 7.8 Hong Kong dollars per US dollar since 1983 this type of exchange is known as a fixed exchange rate with many new floating currencies Simon's felt there was an opportunity he resigned from Stony Brook in 1978 and started mana metrics which was a combination of two words money and econometrics at this time his net worth was between 500,000 to 1 million at his new firm his lauren recruiting skills were important as he hired Lenny Baum who worked with Simons at the ITA Simons was able to convince Baum after showing him currency charts which they both agreed showed clear patterns he also hired James axe who worked with Simon's at Stony Brook mana metrics raised four million from outside investors it's early models used mostly intuition as computing power was still weak its first big game came in 1979 Lenny Baum theorized that Margaret Thatcher then the Prime Minister of the UK was holding down the British pound and it was poised to spike Simon's mockingly told Baum I wish you'd come here this morning he said why because Margaret Thatcher just stood up and however Baum said the pound would rise even more the firm ended up scoring a 50% gain on that trade and gained 100 percent in 1979 but Simon's was not satisfied that they were relying mostly on intuition he started collecting price data as far back as he could find despite not yet integrating the data the funds soared six times in 1980 his net worth was now between six to twelve million dollars Simon's now became a bit of a Renaissance man by investing in tech startups because of the strategy change of investing in tech startups mana metrics was renamed to Renaissance Technologies still relying on intuition bomb purchase gold and ignored Simon's advice to sell after it spiked in early 1980 Simon's learned that there were lines of people trying to sell their gold he told bomb sell the gold he said no you don't know how far it's been I was the boss and I said sell the effing gold he said ok ok he was once again blessed with excellent luck not skill as the price of gold collapse after they sold it in 1984 Baum stubbornness did eventually cost the firm 40% and the two agreed to go their separate ways Simon's would now rely on James axe the firm's other star mathematician who preferred algorithms to intuition his mid-1980s strategy was to look for pairs of currencies or bonds that tended to move together Renaissance would then buy the currency or commodity that didn't rise as much and sell short the one that rose more this is a reversion to the mean strategy that Renaissance likely still uses today this strategy is like predicting a baseball player that is hitting 500 over certain stretch of games will soon fall back to his usual average say three hundred by going through a transition period of hitting lower than 300 acts expanded the firm's quantitative methods by using kernel methods allowing its computers to find nonlinear patterns for example a human can easily find the missing part of this pattern but a machine at this time couldn't because the pattern was nonlinear teaching the computer to identify nonlinear patterns was valuable as this type of pattern won't always be so easy for a human to see Renaissance could now find patterns in higher dimensions despite this success the firm was returning only 20% a year far from the 50% a year that Simon's predicted in his 1968 paper this critique of Acts led to a falling out and axe left the firm Elwin Birla camp another famous mathematician would replace him he told Simons to focus on short-term trades because the law of large numbers would allow the firm to be right only slightly more than wrong producing steady profits with this change in strategy Renaissance results have been on a rocket ship it returned 78% before fees in 1990 and it has not returned less than 31.5% since the firm continued to add rates by finding more patterns it found that assets tended to move the same on Friday and Monday the firm would then buy or sell investments late Friday knowing the pattern often continued into Monday in the early 1990s Renaissance had conquered currency commodity and bond trading but it was not making large profits trading stocks the former markets had less liquidity and Simon's sought to enter the lucrative stock market in order to manage more money in 1993 he hired to star IBM language programmers Bob Mercer and Peter Brown in 1995 the plan paid off as the two had a breakthrough the firm was now able to grow from 30 million to nearly 2 billion of assets under management by the end of the decade despite its 1990 success Renaissance was overshadowed by another kuan firm long-term capital management or LTCM LTCM was also led by PhDs but it's PhDs also had nobel prizes in fact myron scholes co-developed the famous black Scholes option pricing model however LTCM was less secretive and its core strategies were uncovered one trade that LTCM liked was too short new US Treasuries and by older issues if that new issues were often priced at a premium and the firm could make money through arbitrage but because these returns were so small he had to use a tremendous amount of leverage he borrowed a hundred and twenty 4.5 billion compared to its 4.5 billion of equity or a staggering 25 to 1 ratio leverage amplifies returns but it also amplifies risk but LTCM returned 21% to 95 43% in 96 41% in 97 but in 1998 it imploded it had to be recapitalized by banks in order to avoid a bond market contagion Simon's felt that LTCM was arrogant for several reasons first once its core trades became well known it shifted to more obscure strategies such as Danish mortgages secondly it had too much confidence in its models Simon's never believed that models were reality but a version of reality and Renaissance often reduced its positions when it suffered big losses with full confidence in its models LTCM continued to add to its positions despite mounting losses while Renaissance appreciated big data more and continue to have success in 2001 Simon said the firm downloaded one terabyte of information and made 150 to 300 thousand trades per day in 2003 Renaissance increases fees to its famous 544 structure it also kicked out all outside investors Renaissance still has an upper limit on what its core fund medallion can manage which seems to be around 10 billion if it was much larger then trading could move the markets limiting its gains in 2003 with outside investors gone Renaissance employees can now make more gains for themselves but in 2005 Simon's somewhat relented and Renaissance launched Renaissance institutional equity fund or reef which as of 2019 manages 27 billion and is still open to outside investors Renaissance also launched two new funds in 2012 and 2016 as we move through the 2000s we were seeing the golden age for quantitative investment firms Goldman Sachs's quantitative investment strategy unit or QAS was in fact larger in 2007 and it is today a little-known event occurred in August 2007 known as the quant quake demolishing many firms and ending this golden age for the time being Goldman's epilogue was that too many quant funds had the same strategies in pan and created a quake but it said that this would unlikely happen in 2019 as there are more strategies but this remains to be seen Renaissance also lost a lot of money during the 2007 quake but Simon's used his intuition and reduced the firm's trading positions that were doing badly he also reduced positions during the tech crash when Renaissance was also losing money he often used intuition in irregular market trading times as he didn't want to suffer the same fate as long-term capital management which vanished into history as a rather disgraced fonda medallion soon recovered returning a staggering 137 percent that year but things weren't all good its new fund reef lost money and in 2009 it lost another 5% compared to the 27% gain in the S&P 500 investors then fled reef realizing it was not medallion reef was set up to make long-term trades as to not interfere with the short-term trades of medallion reefs original promise was to beat the S&P 500 by a few percentage points a year as investors fled reefs assets dropped from 30 billion to under 5 billion since then it has mostly recovered in 2019 it now manages approximately 27 billion of assets and has beat the sp500 in most years since 2010 Renaissance star medallion fund has continued to have unparalleled success during the financial crisis of 2008 while the market dropped 37% medallion returned 152 percent before fees its best year ever it continues to make returns at a breathtaking pace Simon stepped down as CEO of Renaissance in 2009 leaving the company to be managed by the IBM pear Renaissance and Simon's have a profound legacy and show no signs of slowing down while legendary investors such as Ray Dalio and Warren Buffett have suffered lower returns in recent years for example Warren Buffett has struggled since 2010 making many dreadful investments and barely beating the S&P 500 and will likely be worse once 2019 ends Ray Dalio spear alpha fund has returned only 6% of years since 2009 compared to the 12% average of the S&P 500 so while these two are struggling Renaissance is flourishing so who is the best investor ever one argument for Buffett is that he has been able to compound the returns one fly with Renaissance is that it can only manage a finite amount of money buffets firm berkshire hathaway is now worth over five hundred and thirty billion dollars another negative for renaissance is its returns or pre-tax berkshire hathaway strategies allow for tax deferral renaissance has a very poor tax strategy as its short-term trades have the highest possible capital gains tax at thirty nine point five percent whether you like Buffett or Simon's these two should go down in history and Simon's deserves to be in the same sentence as Buffett maybe even ahead of him because Simon strategies are better standing the test of time I hope you enjoyed this video as we explored Renaissance Technologies the secretive quant fund if you like the video please hit the like button and visit our website so what is Renaissance strategy since Renaissance is so secretive we can only make educated guesses to what it really does we have outlined five themes the first is technical analysis while Renaissance does not use the voodoo magic of most technical traders who look for our esoteric patterns such as the head and shoulders pattern can you imagine someone looking at this and saying I see a pattern but worse even if there was a pattern how is the scientific Simon's fund has patterns for statistical significance most traders do not and are always going on intuition on what looks like a pattern second it uses a reversion to the mean strategy which looks for pairs of investments that usually move similarly this strategy is a good one and is likely still used third it finds patterns using its data treasure-trove it can then correlate how price changes usually move of economic events or articles patterns can be found using algorithms like the bombe Welch for its main medallion fund uses short term strategies allowing the firm to benefit from the law of large numbers with many trades it only has to be right a little more than wrong to make huge profits finally Renaissance has a human face in certain crashes such as a tech bubble and the quant quake Simon's came in and reduced the firm's positions statistics are not reality Sid Simons they're just a way of showing reality thank you for watching the video please subscribe to our channel if you like the video also please visit our second channel PM IO Tesla if you enjoyed Tesla videos [Music] [Music] [Music] [Music] you

Channel: The Market is Open

Views: 551,610

Rating: 4.910058 out of 5

Keywords: Renaissance Technologies, Jim Simons, Simons, James Simons, Quant Investing, QIS, Ray Dalio, Dalio, Warren Buffett, Buffett, Berkshire Hathaway, Pure Alpha, Goldman Sachs, George Soros, Bob Mercer, Peter Brown, Robert Mercer

Id: _RpPg4ew4E4

Length: 21min 19sec (1279 seconds)

Published: Sun Nov 24 2019