Random Walks: April 2010

The Known Universe

Mind = Blown!

Gods of this industry!

Imagine a bearded mathematician who shows up at formal business meetings without socks, a former code cracker for the U.S. Security National Agency, whose work in differential geometry is used in theoretical physics and also who has pushed the most for research in the treatment of Autism (a disorder of neural development). But what is most extra-ordinary is that this person happens to be the best trader on the planet! Chances that you haven't heard of Jim Simmons are quite high because the founder of the world's biggest and the most successful hedge fund shuns the limelight and rarely gives interviews. Right now my work is in the field of quant-intensive algorithmic trading. In simple words, it is working on mathematical models and algorithms to create computer programs that trade in the financial markets. Over a few months, while trying to read stuff related to quant trading and hedge fund industry, I was totally amazed to know about the success achieved by Jim Simmons and his army of scientists.

In 1982, Renaissance Technologies Corporation was founded in New York and none of the MBAs nor Wallstreet traders have been hired in this investment firm. Only physicists, mathematicians, astronomers and computer scientists have driven the work when they have known almost nothing about finance! So it seems like with the potential of technology, the people who have been working on characterizing the motion of particles or directions of heavenly bodies have been most successful in predicting the prices of whatever that exists in the financial markets. May be.. Its the ability to re-see the financial markets in terms of its patterns that has made the scientists more successful as compared to the economists or fancy MBAs who are well equipped for explaining the markets.

Renaissance's flagship Medallion fund which trades on almost anything from commodity futures to international government bonds, has returned frikkin 38.5% annualized, net of fees, from the end of 1989 through 2006! Whether they have audio hookups to futures exchanges to analyze noise with voice recognition software or they might have found correlations of asset prices with positions of astronomical objects, the formula for this insane success is certainly kept secretive :P. Along with huge returns, a very high management fee of 5% and a performance fee of more than 40%, Jim Simmons is the world's "smartest" billionaire. He earned an estimated $2.5 billion in 2008, which is more than five times what any top-notch investment bank's CEO might be earning. The campus near Stony Brook University might look like a space program - majority of people with PhDs in mathematical sciences. They don't even have a real website of their own and nobody knows what they really do in there to multiply the $40 billion in assets that they have currently.

All of this has been the stuff gathered out of interest in this amazing quant shop. If investments is the religion, then these people are the Gods!