The Ultimate Alpha: Jim Simons


I can bet most of my readers had at least heard of this name. Well if this is the first time, then let me give a quick brief about the man who solved the markets – Jim Simons. Jim Simons was a mathematics teacher until he decided to put together group of scientists, mathematician(and yes, no person with a degree in finance or MBA!) to develop trading models and investment strategies.

The ultimate goal of these models is to do what seems almost impossible, beat the market continuously. The year was 1988 when this event happened on some island. Then what followed is history, making Jim Simons 24th on Forbes rich list.

So, why I am throwing on this subject? Well I thought there is a lot to learn from his work and recent events surrounding his firm – Renaissance Technology. Renaissance actually have two categories of funds, first one is only for their employees and people connected to RenTech, and second fund is open to outside people to invest. Their private employee only fund called “The Medallion fund” clocked 40% CAGR for the period of 1988 to 2018 after fess and expenses according to Bloomberg! Imagine this number before fess- This man truly solved the market, right? 

Not only this, the 2020 medallion fund is up by 76%. But their three other funds open to outside investors category actually lost its values between 20 to 33% in the year of 2020. These last two facts have caused lots of discussion and debates over the last couple of weeks around Wall-street. But let us put aside these debates and try to decode this mystery for our learning purpose.

All RenTech funds are created to capture inefficiencies in the market. Their models are extensively backtested on the past data and at the core it is based on concepts of technical analysis like trend. Irrespective of what all finance textbooks say, Jim Simons actually nailed it and proved that market can be beaten through quantified trading models and systems.

All of his firm’s investment decisions are computer based with absolutely no discretion involved. Huh, got your first thing? Make a quantified system with positive expectancy for trading and ignore all other noise. And trading system also have to be perfect fit with traders belief system.

Now, coming to Medallion again, their average holding period is just around 2 days! So, anybody specially so called value investors who are experts on just giving advice whole day long on twitter next time that Buy and Hold is the only way to make money, maybe divert him/her to this fact. Actually this is what came to help in the year 2020 for Medallion, as their average holding period is short it quickly adopted market dynamics and rode both crash in March and uptrend after that.

Medallion is not reinvesting its profit back unlike most of other funds, meaning profit is often distributed to the investors back. Why? Because they are aware of the fact that as investment size gets bigger and bigger it is hard to get in and get out of trades. The edge of the trading models gets depreciated. Even the market wizard Paul Tudor Jones also closed one of his fund and returned investors their money stating that, “ After certain scale it is hard to generate alpha” So, this let us to very important learning that our strategy should be robust enough to generate alpha over period of time with sufficient big capital – not only with small allocation.

So this is all I have to say about most secretive funds on wall-street! 

Until then Happy trading!

Thumbnail Credits: The New Yorker

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Kevin Kukadiya

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