Institutional Investor's Alpha Magazine - June 2008 - (Page 52)

ALPHA HALL OF FAME smart in the conventional way, but science and research are about being creative. It’s about discovering something new, something that wasn’t known before. And you don’t ﬁnd that out by reading books or looking in the library. You need creativity, and you need ideas. Lenny, the famous Lenny, would say to me: “Bad ideas is good. Good ideas is better. No ideas is terrible.” And that’s the markets. Was that a time to override the models? We did lighten up for those few days. Volatility was huge and, I might say, in the wrong direction. So volatility, plus the fact that we were losing money at a rate that we had never seen before, inspired us to lighten up, which we did for a couple of days. And then it seemed to be over. We stopped lightening up and started making money again. What lessons should investors learn from last August? The positions that collapsed those few days in August all came back, and came back rather quickly, almost certainly being taken on by a different set of players. This told me two things: ﬁrst, that there’s more overlap among quant investors than I might have guessed. So we may think — and we have some reason to think — that we’re the best at what we do, but that doesn’t mean that everything we do is completely different from what everybody else is doing. Second, that our positions were perfectly sound and that this particular incident was brought about by a rush for liquidity on the part of some participants, not by the frantic desire to dump positions which no one else would want. Renaissance seems to borrow a lot from academia. The best science is done in an open exchange of ideas. So when a new researcher comes in here, we want him to learn everything about the system. Learn about every predictor that works, every way that we do things. And learn about things that have failed. Once he’s up to speed, he’ll get his own ideas. What you don’t want inside the walls is secrecy. If people don’t talk to each other, it’s just that much less likely that good ideas will have their day. way, in a sense, that science and research work. You have to generate a lot of bad ideas for every good one. And the great thing about science is, your bad ideas don’t count against you. Trading is a little bit different. Your bad ideas can end up losing you money. Don’t you test your ideas ﬁrst? Does that mean that everybody within Renaissance knows exactly how you make money? Well, no. Not because we refuse to tell them, but because they’re either not particularly interested or not able to think about it. What would you consider to be your greatest legacy? Everything’s tested in historical markets. The past is a pretty good predictor of the future. It’s not perfect. But human beings drive markets, and human beings don’t change their stripes overnight. So to the extent that one can understand the past, there’s a good likelihood you’ll have some insight into the future. It’s worked for us. Do you ever override your models? Renaissance. I was the founder, and it’s achieved a good success. I’m also proud of some of the mathematics that I did. And now that I’m involved with philanthropy, particularly in autism research, I’m proud of the progress that we’re making. I’m also pushing hard for Math for America. Is the U.S. really that far behind when it comes to math? There are no human overrides built into the models. But every year or two, if there’s some event that looks to us like it indicates more volatility in the markets than the computer could have guessed, we’ll override the system. During the second week of August last year, many quant shops, including Renaissance, experienced huge, unanticipated losses as a mass wave of selling hit the equity We have this curious problem in the United States. Generally speaking, teachers of math and science don’t know math and science, particularly at the high school level. Obviously, some teachers do, but it’s fewer and fewer. To correct the problem, we have to pay teachers more and make their jobs more attractive. If we don’t, the U.S. is not likely to maintain any kind of economic leadership in the next 20 or 30 years. Praying is not going to work. — Interview by Michael Peltz 52 • INSTITUTIONAL INVESTOR’S ALPHA • JUNE 2008

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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