Institutional Investor's Alpha Magazine - June 2008 - (Page 50)

ALPHA HALL OF FAME JAMES SIMONS Have you always been interested in trading? “The great thing about science is, your bad ideas don’t count against you. Trading is a little bit different. Your bad ideas JAMES can lose SIMONS you money.” 50 • INSTITUTIONAL INVESTOR’S ALPHA • JUNE 2008 enaissance Technologies Corp. founder James Simons is a man of science. He is also one of the greatest investors of our time. An award-winning mathematician and onetime code breaker for the National Security Agency, Simons has developed sophisticated computer programs to identify price anomalies — used to trade anything, anywhere, anytime — delivering a nearly 40 percent annualized return since he launched his now $9 billion Medallion Fund in 1988. In 2007, when many quant-based investors struggled, Medallion had one of its best years, soaring 73 percent even after its hefty fees were taken. To hear the 70-year-old Simons tell it, the secret to his success is simple: “Hire great people; give them an open atmosphere, great infrastructure; and pay them well.” What he is cryptic about — at least outside the walls of Renaissance — is the computer formulas that he and his army of 100 Ph.D.s are continually trying to improve. Simons is also a busy philanthropist, using his sizable fortune to support autism research and improve education, especially for math students. Not really. When I got married for the ﬁ rst time, I was at graduate school at Berkeley, and we had some money from wedding gifts, and I thought I’d invest it. So I picked a couple of stocks, and they lay there like lumps. I complained to my account executive at Merrill Lynch, and he said, “Well, if you want action, you might invest in soybeans.” Of course, he was talking about investing in soybean futures. I bought two contracts and proceeded to make a lot of money over the next couple of days, only to lose it over the couple of days after that. I started going in earlier in the morning, when the markets opened in Chicago, for a couple of weeks and quickly realized that I was going to either write a thesis or trade soybeans, because I couldn’t do both. I elected the thesis and closed out the soybean contracts with, as it turned out, a small proﬁt, but it was obviously 100 percent luck. What role does luck play in investing? People underestimate its importance except when things go badly. Then they’re very happy to ascribe it to bad luck, which it may be, of course. One has to recognize that luck plays a meaningful role in everyone’s lives. You get born to decent parents in a good part of the world, and you’re way ahead of the game. And that certainly doesn’t have much to do with skill or hard work. In my case, I was lucky to collaborate with some very good people when I was doing mathematics. I was also lucky in my choice of partners at Renaissance. How has luck ﬁgured into the success of Medallion? We started off in the ’70s trading fundamentally — we’d read the newspapers, tickers, news wires, and come to conclusions. And we were pretty good at it. The markets were particularly easy. The dollar was going down like a stone, and the long-term interest rates were going up to the moon. So if you would short the dollar and short the bonds, you’d do pretty well; we made a fair amount of money that way. But I began to look at the data and conclude that maybe one could model this. I brought in a friend of mine, Lenny Baum, who was the best code cracker in the world when we worked for the NSA. I asked if he’d like to work with us for a while and try to make some models. I think I was pretty lucky to know that guy, and indeed, we made some models. Now, it turned out that Lenny didn’t really want to use these models because he was doing so well just guessing which direction the markets would go. But the die was cast. By the late ’80s we were committed to models. We made quite a lot of money trading fundamentally. But I didn’t know how to build a business based on traders. I didn’t know how to judge them. If a guy was extremely good, it would take a while to prove that, and by the time he’d prove it, he would probably be too rich for me to hire. But I did know how to hire scientists and mathematicians. And so we decided to build a business along those lines. What makes a good scientist? Photographed by Ben Baker/Redux for Alpha on June 6, 2008, in New York. Creativity is the most important thing. You need to be pretty

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - June 2008

Investor's Alpha Magazine - June 2008 Contents Letter From the Editor Longs & Shorts Cover Story: Alpha Hall of Fame Bruce Kovner Michael Steinhardt Kenneth Griffin Louis Bacon Steven Cohen George Soros James Simons Seth Klarman Julian Robertson Jr. Jack Nash Leon Levy Paul Tudor Jones II Alfred Winslow Jones David Swensen Looking Ahead: Back to the Future Research Center: Europe Hedge Fund 50 Unhedged: Let the Sunshine In

Institutional Investor's Alpha Magazine - June 2008

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