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    © All Rights Reserved
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    597 views11 pages

    Bloomberg - The Code Breakers

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    Stanley Wang
    Bloomberg - the code breakers

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    © All Rights Reserved
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    Bere The Richest Hedge Funds Bloom THE CODE BREAKER Jim Simons’s Renaissance Technologies, the world’s largest hedge fund firm, is deciphering the secrets of global financial markets with its $35.4 billion in assets and a campus loaded with Ph.D.s. By RICHARD TEITELBAUM ‘ON A HOT AFTERNOON in September, Renais LLC founder Jim Simonsis too busy to takea phone call, Itis, he says, from Cumrun Vafa, preeminent Harvard University professor and expert on string theory, which describes the building blocks of the universe as extended one- dimensional particles. “Get another time when I can talk to him,” Simons tells hisassistant. Then he mentions that the nextday, he'll be meeting with Thomas Insel, director of 32 ince Technologies ; = ‘.. Richest Hedge Funds the National Institute of Mental Health, to discuss tutlom research, And he’s slated that Saturday'to hhostagala honoring Math for America, or MFA, a four-year-old nonprofithe started that provides stipends to New York City math teaciers “Pm undoubtedly involved in too many things atthe same time," Simons saysin his 35th-floor office in midrown Manhattan. “But you make your lifeinteresting.” ‘String theory, autism, math education: It's flr ‘oaskchow Simons, 69, manageshis day jobover- seeing the world's biggest hedge fund firm. The answer, judging from the numbers, is very wel. Renaissance son fire: Its Medallion Fend— ‘which uses computers and trading algorithms invert in world markets returned more than SO percentin the first three quarters of 2007. Ithad about $6 billion in assets a of July 1 Simons regis- ‘tered that performance as subprime and related markets were collapsing, sending two mortgage- related hedge funds run by Bear Stearns Cos. nto Dankruptey. The turmoil pummeled the Goldman ‘Sachs Global Alpha Fund, a rival to Renaissanco's funds, which fll more than 25 percent during the ‘same time. Morgan Stanley's computer jockeys lost £8390 million ina single day inearly August. ‘Medallion’s returns are no anomaly. The fund, which trades everything from soyibean futuresto French government bonds in rapid fire, hasn't had negative quarter since early 1999. Prom the end (f1989 through 2006, eretumned 38.5 percent annualized, nevof fees, ‘More surprising than those returns Simon's life story. Atan age when hedge fund pioneers such ‘as Michae! Steinhardt have long since stopped ‘managing other people’s money, Simons isbulld~ Ing on Medallion’s success. He's adding funds and strategies and accumulating assets, which totaled 835.Abillion asof Sept. 28. In August 2005, Simons started Renaissance Institutional Bquities Fund, or RIEF, which invests {in US. stocks. Through Sept. 30,ithas returned 128 percent annualized, Unlike Medallion, which ‘ALL THE QUANTS IN THE WORLD ARE TRYING TO FOLLOW IN JIM’S FOOTSTEPS,’ SAYS LO OF MIT’S LAB FOR FINANCIAL ENGINEERING. tumsoverits holdings dozens of times each year, RIEF keeps its positions for months orlonger. ‘Simons said atthe time of che fund's inception RIEF could theoretically manage as much as $100 billion. in December 2006, he limited new nvest- ‘ments inthe fund to $1.5 billlona month. As of Sept. 30,2007, ithad $25.6billionin assets In (October, Simons started Renaissance Institutional Futures Fund, or RIFF, to invest in commodities. Iesup $2 percent forthe month. He says Ren sance’s research shows the new fund can manage asmuchas $s0billio. Along with RIE, it will pro- ‘mote cross-fertilization of ideas inside Renals sance, Simons says. “Challenge is good,” he says “Iropens one'seyestonew possibilities” WHEN NOT IN MANHATTAN, Simons runshis empire froma 15-foot (4.6-meter) by 20- foot office in Renaissence’s gated and guarded ‘campus off Route 25A in Bast Setauket on New ‘York's Long Island, some 50 miles (80 kilometers) ‘east ofthe Empire State Building, With most ofthe ‘trading automated, here's little of the hurly-burly ‘of atypical hedge fund frm. Along with routine personneland marketing asks, Simons makes time {or the researchers and programmers who stop by hls office to discuss mathematical and statistical ‘saues they've encountered as they work on new trading strategies. ‘More than 200 employees, of whomabout a third have Ph.Ds, work in East Setauket, Another 200are based in Manhattan, San Francisco, Lon- donand Milan.“He creates an environment where i’seasy tobe creativeand works hard tokeep the bullshit level toa minimum,” says former manag- ng director Robert Frey, who worked at Renas. sance from 1992t02004, Even without the new commodities fund, Renaissance’s assets have more than doubled ina year from about $16 billion on Sept. 30,2006. That {growth has catapulted Renaissance past such titans ‘As Daniel Och’s Och-Zif¥ Capital Management Group LLC, Ray Dallo's Bridgewater Associates Ine. and David Shaw's D.E, Shaw & Co.to become the world’s largest hedge fund manager, according todata compiled by Hedge Fund Research Inc. and Bloomberg. Medallon’s 3.9 percent return during, August, though that fund too was whipsauedby ‘volatility, bolstered Simons's reputation asthe silver-bearded wizard of quantitative Investing. Inquantfunds, mathematicians and computer scientists mine enormous amounts of data from financial markets looking for correlations among stocks, bond ‘They search for predictive signals that wil foretell ‘whether, suy,a palladium futures contracts likely toriseor fal, “There are justa few individuals who have trly changed how we view the markets," says Theodore ‘Aronson, principal of Aronson + Johnson + Ortiz [LR aquantitative money management firm in Phil adelphia with $28.3 bilionin assets. “John May ard Keynesis one ofthe few. Warren Buffett is one ‘ofthe few. Soi im Simons." Aronson credits Renaissance wih validating the entire field of quantitative investing and proving tat the free- dom accorded to hedge fund managers toshort stocks, borrow money and invest in myriad instru derivatives and other instruments, ments can produce results tat far outstrip typical market rewurs. Simons, standing just under feet 10inches tall and weighing 185 pounds (84 ilograms),has trod an unlikely path. former code cracker forthe US. National Security Agency, in 1968 he became chair ‘man ofthe mathematics department at Stony Brook University part ofthe New York state uni versity system, Hebuil the department nto what David Bisenbud, former director ofthe Mathemati- cal fornia calls one ofthe worlstop centers for ‘geometry. In 1977, frustrated with a math problem and eager forchange, he abandoned academiato ees Research Instituvein Berkeley, Cali- stare what would become Renaissance, hiring professors, code breakers and statistically minded scientists and engincers who'd worked in astro physies, language recognition theory andcom- puter programming, “Alle quants in the world are trying to follow In Jims footsteps because what he'sbuiltat Renaissanceistruly extraordinary,” says Lo, director ofthe Massachusetts Institute of Technology Laboratory for Financial Engineering and chief scientific officer of quant hedge fund frm Aiphasimplex Group LLC. “land many others look uptohimasa tremendous role model.” Te tendency for fund managers to ty to emu late Simons may become more curse thanblessing inthe years ahead. As the sllofs in July and August showed, many quant funds are chasing the same fnvestments. For example, a5 of Tune, Renaissance and rival AQR Capital Management LLChad four ofthe same op 10 stock holdings: Johnson & Johan son, Lockheed Martin Corp, International Bus ness Machines Corp. and Chevron Corp. The overlap became problematicas the subprime ‘contagion spread heyond housing. related stocks, bonds, collateralized debr obligations and commer cial paper, forcing some funds olightentheirholé- 3 oe oo i a ings precisely as demand was dryingup. “Allshese quant funds are using similar models, Jookingto buy something cheap and sel something dear” says Sol Waksman, founder of Barclay Hedge Ltd, aconsultng firm based in Pirfild,1ows, Whileexpensive securities are by their nature eas Jytraded—liqui, in industryspeak—the cheep securitieshunted by most quantitative managers aren't, Waksman says. Afterall, the reason they're cheapis that nobody wants them. “Once youtry and sell alow-liquidity stock, by definition there sno one tobuyit,” Waksman says, Overpriced stocks rose in August as edge funds bought shares tocover theirshort positions, and cheap stocks 35, tein Kea 36 plummeted as managers rushed toraise cash. Renaissance is under increasing pressure wostay ahead ofthe pack—andtokeep its secrets under ‘wraps. Save current employees and a few former ‘ones, nobody knows precisely how the firm makes its millions. Medallion stopped taking new mone from outside nvestorsin 1993 and returned pretty ‘much the last oftheir capital 12 years later. Today, the fund is run almost exclusively forthe beneitof Renaissance staf. The wisecracking Simons him selfie mum onviruallyall ofits detail ‘What can he say about Medallion’s trading strategy? “Not much," Simons sayswwith a chore, and then takesa dragon one ofthe Merit egarerces he often smokes. ‘What kindof instruments does ic trade? “Everything.” How many dierent strategies does ituse? Alot” Simons sayshis Ph.D.s laugh when they read the fetched theories about what their fund might bbe doing. One chat room participant speculated that Renaissance uses audio hookups to fururesexehangesand analyzes the noise from te pits with volce-recognition software “allofusinthe ‘quant business have conjectures and hypotheses but very lit: tledata,” MIT's Losays “Sowelike to speculate about what Rena ‘ance could possiblybe doing. They areso far ahead of everybody else thatits both challeng- ingaswell as exciting engage inthat Kind of tale speculation.” Forhispar, Simons sayshe once explored ‘whether sunsporactivi ty affects the markets Hedoesn't say what hefound, Interviews with for ‘mer Medallion fund ‘managers and with Investors rivalsand, {quantitative scientists provide a glimpse into how ‘the fund run. Sodo annual reports, marketing materials and court docum Renaissanceis suing in New York State Supr Court two ofits former Ph.D.-level researchers ‘who were fired in 2003 after refusing to sign non- ‘compete contracts. The firmaccuses Alexander Belopolsky and Pavel Volibeyn of appropriating ‘ade secrets, Belopolsky and Volfbeyn deny the charges. In aJuly decision, the wo briefly described three strategies that Renaissance had explored. One involved swaps, which ate com: ‘facts to exchange interest or other payments; another used en electronic order matching sys- ‘tem that anonymously links buyers and sellers anda third made use of Nasdaq and New York ‘Stock Exchange limit order books, which are real time records of uncxecured orders tobuy or sella stockatapartieularprice. ‘With his myriad positions in dtferent markets, ‘Simons likens his approach tothe extensive farm inghe once practiced in Colorado, using center pivo irigationto grow wheat onthousands of Ever secretive WORLD’s LARGEST HEDGE FUND Firms poeta 1 Renaissance Technologie, Fast Setauket, New York 2 JPMorgan Chase,** New York ‘Goldman Sachs New York Bridgewater Associate, Westport, Connecticut DAE, Sham, New York Farallon Capital Mgmt., San Francisco ‘Och- Ziff Capital Memt. Group, Nev York Paulson & Co, New York Citigroup Alternative investments, Naw York ‘Barelays Global Investors, San Francisco ESL Investments, Greenwich, Connecticut Investment, Greenwich, Connecticut Orbis investment Advisory, London Lansdowne Partners, London Harbinger Capital Partners, NewYork Citadel Investment Mgmt. Group, Chicago 20 Tu eu SAC Capital Advisors, Stamford, Connecticut 15.0 (Caxton Associates, New York 42 ‘Atieus Capital, New York Bs ‘Mavetil Capital, Dallas Bo “foc p28 igen myn ts caine sure hee Stee douee ohne acres “Everylite stalk of wheat was not doing so great, but most of them were so you're workingon statisti,” Sons says, By contrast he say,the ‘uaditional focused investing practiced by Warren. ‘Buffett is akinto intensive farming in which each individual plantreally counts. “1e’stwo completely dlflerent ends ofthe spectrum,” Simons ays. “Medallions farm stand sports quitea markup: ‘Thefirm generally chargesa S percent manage ment feeand 36 percent of profits compared with ‘the industry sandards of 2 percent and 20 percent. ‘with virtually no outside investors in Medalion, Simonsand Renaissance employeesare paying the tab—and,reaping the rewards, IEF Investors can solet from four share classes wit varyingand far less expensive fe structures ‘Though Sinonsdiskestalkingabout it, Renais- sance has builthim atidy fortune. US. Securities and Exchange Commission documents showhe ‘controls 25-S0 percent of Renaissance, having spreadthe rest ofthe fms owmership among ‘employees. SoSimons's share ofthe performance {fees cared by RIEF and Medallion was roughly ‘berseen $375 million and $750 milion in 2006, according to data compiledby Bloomberg With ‘Medallion’ 44.3 percent returnin 2006 if Simons Iadinvested$2bilion inthe fund, he would have ‘gamered an $885 million profit He detinesto.com- ‘ment onhis investment. Accordingto Bloomberg ‘aleulations Simons ranks No. 3amongthe world’s ‘hedge Fund managers wth $1.01 billion in firm-wide performance fees during the fist three quarters of 2007. (See"The Money Makers," page 1.) ‘Chief Selentiac Henry Laufer, who helped build the Medallion trading system, owns 10-25 percent ‘of Renaissance the SEC document says. Chief Financial Officer Mark Silber and Executive Vice Presidents Peter Brown and Robert Mercer each ‘own 5-10 percent. Simons's son Nathaniel, 41, ‘who manages the Meritage fund of funds out of San Francisco, ows lessthan S percent, as does Renaissance trading desk manager, Paul Broder. “Atte core of Renalssance’s suecess—and the ‘wealth Simonsiscreating—is his own mathematl calmind-set Outside the financial markets, he's beselmown for the Chem.Simons theory which he ‘co-developed with Chinese-American mathemati- can Shling Shen Chern in 1974.Insimplevrms, the theory provides the tools, nown a invariants, ‘that mathematicians use wo distinguish among er tain curved spaces —the kinds of distortions of ‘ordinary space that exis according to Albert Ein stein’s general theory of elatvity.Chern-Simons is viewed as important partlybecauseit has proven ‘useful in explaining aspects of another feld: string theary. This describes the building blocks ofthe universes vibrating one-dimensional extended articles called strings. “Irturns out these ings ‘we invented, Chern-Simonsinvariantshad their real applications to physics, about which knew nothing” Simons told the Invernational Associa ‘on of Financial Engineers in May, SIMONS SAYS HE'S ALSO PROUD ofthe worlche didn differential geometryatthe Instrate {for Defense Analyses research and development ‘centerin Princeton, New Jersey. In 1968, he pub lished paperin the AnnalsofMathematiscalled “Minimal Varieties in Riemannian Manifolds.” The peperhelped him win the American Mathematical Society's Oswald Veblen Prize in Geometry in 1976. The prizes named forthe Princeton Univer sity geometrcian who became the first professor of the Institute for Advanced Study. ‘Simons’s most enduring legacy maybeasa 39 Sei HL The Richest Hedge Funds “ONE CAN PREDICT THE COURSE OF A COMET,” SIMONS SAYS, ‘MORE EASILY THAN ONE CAN PREDICT. ‘THE COURSE OF CITIGROUP’S STOCK.” philanthropist ashe builds on the mathematics and science that have shaped his life. Inhis New ‘Yorkolfice, Simons gets up and walks across the room togribanewspaper clipping l’sanaticle abourthe administration of President George W. ‘Bush planning toadd $50bilionto the defense budget. Tustalltl extrargive hem an extra 850 billion," Simons says, his voice rising in anger. “Well, for $2bilion, we could revolutionize math cducationinthe US.” ‘e's referring to what he considers paltry fanding fora key provision ofthe America Com- petes Act, which was signed into lawon Aug. 9 ‘The act includes a federal program to bolster ‘math and science education based on the pilot project Simons has bankrolled with more than $25 million of his money: MFA. ‘Simons says America's economic competitive nese sat stake. A 2003 study of 15-year oldsby the rogram for International Student Assessment found the US. trailing23 Organization for Eeo- nomic Cooperation and Development counties, Including No.1 Finland, in math literacy achat age level. The US. was ahead ofjust five countries, SHINING RETURNS ‘The Meetlion Fund's 17-year performance ‘was more than triple that of the SGP S00. 48 ‘And etims 1989-206: ‘se0s00 40 among them Greoce, Turkey and Mexico, ‘Simons places the blame for poor high school ‘math scores largely on unqualified teachers, Because flow pay, good math and science teach- cerstend to get sucked into the private sector—and therateis accelerating “Students, up and down the line from affluent co impoverished, are being cheat 1" Simons rays. (MPA pays ull scholarships for math veachers to ‘am their masters degrees in education atdesig- nated graduate schools. Then itpays.stipend of $90,000 over five years ofteachingasa subsidy. Fl- lowsand other experienced teachers are elgibleto apply fora master fellowship program, which pro- vides a stipend of 50,000 over four years. MPAs rolling out the programin Los Angeles nd San Diego 2008, ‘Simons has onsted tens of millions of dollars sath and sclence endeavors worldwide including Svony Brook University and MSRI. In 2005, he kickod in $13 million with other Renaissance employees to keep the Relativistic Heay Lon Col- lider operating athe Brookbven National Lab- oratoryin Upton, New York after the U.S, Energy Department cu funding. The collider createshot, dense matter similar tothat which is believed ro have existed inthe fist 10 microseconds, ormil- lionths ofa second, ofthe universe'sexistence aerthebighang. ‘imons'sother major push: research nto autism, a disorder marked by repetitive behavior and impairment in social communication and lan- ‘guage. In 2005, he hired Gerald Fischbach, former dean ofthe faculties ofhealth sciences at Columbia Universtyin New York, to serve as scientific direc- ‘or forthe Simons Foundation. The foundation funds variety of math and science-related pro}- ects Simons's wife, Marilyn, 7, is president. Their daugheer Audrey, 21, displays some symptoms of ‘Asperger's syndrome, amilder disorder that ears similarities to autism Under Fischbach, the foundation is buildinga database of DNA samplesand clini information romthousands of families across the US with affected children, Scientists wil use the datato entity genes that may contribute to autism. The ‘Foundation is also attracting scientists from out- side the ld, suchas geneticist Michael Wiger of eral Flachbach a2 (Cold Spring Harbor Laboratory in New York. Fisch ‘bach says that, the past, autism research hashed trouble luring op talent because ofits complexity. ‘Simons splits his weck between two homes. His Manhattan apartment isin the same limestone buildingasanother investor-turned:philanthro Pist, George Soros, 77. In Setauket, the white, {gambrel-roofed house Simonshas lived infor32 years has broad picture windows overlooking the hherons that populate the shimmering waters of Conscience Bay. FOR ALL OF HIS ACHIEVEMENT and mate tial success, Simons'slife hasbeen besetby thekind coftragedy tht few parents can fathom—the deatho not one but two ofhisfive children in separate acc- dent, In 1996, hisson Paul, 34, was struckby car andkilledwhileridingabicyelenear Simons’ ‘Setauket home, In 2003, 24-year oldson Nick ‘drowned whileon trp w Ball Simons grimaces ‘when asked whether Nick's death played rolein is, ‘furry ofrecent activity. He pausesbefore answering. “Tiere was someconnection berweenlosing Nickand my desretogetas busy ‘could;"besays Selentitic exploration underpins all ofimone’s ‘work, “What motivates me? he sys. 'm ambitiousand I ke wo do things well. love tocreate something that really works, We havelots andlots and os ofstate les, and each new one gives ‘me alot ofpleasure, to something new that works.” The laws ofthe financial markets presenta special challenge, Simonssays. Unlike the laws governing physies or chemistry, they tendo change overtime. “One can predict the course ofacomet more easily han conecan predict the course of Citigroup's stoek,"he says “The attractiveness, of course, is that you ean make more money succeseilly predicting stock than you cana comet.” Investments, philanthropy, academia—ieall traces wallifesteeped in math. James Harris Simons wasborn in 1938, the only child of Marcia and Matthew Simons, Fe grew up in Brookline, “Massachusettsa Boston suburb designed partly by landscape architect Prederick Law Olmsted. Early n, Simons asked complicated mathematical ques- tions. Ataboutage 3,he was shocked tolearn that careould run out of gasoline. Why? By Simons's reckoning, acar would go through haf tankful, then halfoF what remained and then half ofthat, ‘and so on:There would alaysbe a small amount left He’ discovered one of Zeno's paradoxes, named forthe anclent Greek pre Socraric philoso pher, which would puzz turles, “Those were sophisticated thoughtsfora mathematician for een Title guy" Simons says, laughing Athigh schoolin Newton, Massachusets, ‘Simons blew through the equivalent ofadvanced placement math and went on to MIT. In his fresh man year,he was cocky enough t entollina gradu ate level class, "The course sad no requirements,” he ays. At MIT, Simons worked ard and played eo = Hedge Funds wa ded 44 auoowaenc MARKETS janes 2008 hhard—mosty late-night poker. By 14m, heand fiends would ple into his Volkswagen Beetle and head off to Jack & Marion's delicatessen in Brook lIne for $1.25 chicken ina basket. Simons recalls ‘how two renowned MIT mathematicians, Isadore Singer and Warren Ambrose, would sitdowmn, ‘order food and work nto the wee hours on math problems, “Tjusethought it waskind ofa great if” Simons says Here they were, grown-ups, eating in this del late, late a night, just working away. That seemed wonderful to me.” Singer stillan MIT pro- fessor, would become aclose personal friend. In June 1958, aftr just three years, Simons col- lected his bachelor's degree in mathematics from MFT, returning tha September fr his frst year of graduate school. Hethen headed west tothe Uni- versity of California, Herkeey,to complete his Ph.D Jnmmath. There, Simons dabbled in commodi- ‘ies—using is and his then wife Barbara's wedding sftmoney to make a $500 killing in soybeans. ‘Simone'sthesis adviser—Bertram Kosta, now professor emeritusat MIT—wrs skeptical about ‘him pursuing the proof tar would form the bas ofhis dissertation, “On the Transitivity of Holono- _my Systems." Ir dealt with the geometry of mult «dimensional eurved spaces ancl related to workby Singerand Ambrose. “Hesolveditina remarkably shor period oftime, under two years,” Kostamt says, “ims an orginal gy. Heike to gooffinhis own direction.” After UC Berkeley, Simons won, three-year teaching postion at MIT-Heleftafterayearto become anassistant math professor at nearby Harvard. He stayed in touch with two poker playing MIT classmates, Colombian nationals, "Famando Esquenaand Jimmy Mayer. In 1958, Simons and Mayer hhad celebrated their graduation by buying Lam- bretta motor scooters and driving to Bogot from ‘Boston. In 1964, the three cobbled together money ith Simone’ father o start Colombian vinyl ‘oor tile factory. It would eventually prove lucky _move, providing the younger Simons witha stake obi hisempire. ‘Simons was growing restless at Harvard. He was ‘eager to earn more money—and frustrated by some ofthe math he was working on, The Institute {for Defense Analyses offereda better-payingsolu- ton: Simons could spend halfofhis time on math atthe nonprofits Princeton enter and halfbreak- ingcodes forthe NSA. 1n 1967, the IDs president, General Maxell ‘Taylor former chairman ofthe Joint Chiefs of Sta, ‘rote an article forthe New York Times Magazine In favor ofthe Vietnam War. Soon after, Simons penned note tothe editors.“Someofusat the Institution havea different view;"he wrote, “The only available course consistent witharational defense policy isto withdraw with the greatest possible dispatch” ‘Maxwell eventually fired Simons, who was then 29, married anda father ofthree Stony Brook Uni -ersity President John Toll wanted stato build the schoo!'s math department. In 1966, the usiver- sityhad made e splash by luring Nobel Prize-win- ning physicist Chen Ning Yang from the Institute for Advanced Study. Simons wouldhire stars for the math department. ‘Stungbyhis firing from the IDA, Simons threw himselfino the task. Havingjust sort ofbeen knocked around ate bit, liked the idea ofbeing _myonmboss,"he say, Simons negotiated all ofthe ‘elements of math position tolue great geome terstoayoung school: sary classloed, leave pol- ‘eyand research support. “He'd figure what you needed and get it for you,” Tol, 84, says. "He did ‘an utstanding ob ofbuildingthe department at Stony Brook” AMONG THE FUTURE STARS Simons lured were Detlef Gromoll from the University of ‘Bonn Jef Cheeger from the University of Mich ‘ganjand Mikhael Gromov, who'd aught 2t Lenin- ‘grad University. llhad published in prestigious journals "itwas viewedas one ofthe twoorthree ‘best geometry groupsin the world,” says Irwin Kra, ‘who succeeded Simons asmath department chalt- ‘manand is executive director at MFA. One of ‘Simons’ other hires was ¢Bromx, New York-raised ‘math professor from Comell University: James Ax Simons dabbled again in commodities whileat ‘Stony Brook. The Colombian factory investment ‘had made some prof. Simons and his pariners invested about $600,000 oft with Charles Preifeld, ‘former math student ofhis from Harvard. During ‘seven months in 1974, refed inreased the investment 10-fld, after fees, as sugar futures ‘more than doubled, The $600,000 was now $6 mil lion, Freifeld says Simons suddenlyhad money—buthe wasata ; an \. Richest Hedge Funds RENAISSANCE Man Simons career includes a mi cof academic philanthropic and Investment ventures. pe ae tena haep Suc fons 46 crossroads. lehad separated fom his wife Barba- ra. Asthe’70swore on hegrew frustrated witha math problem related tothe Chern Simons theory “eas driving me crazy," he says. Simons met ‘Marilyn Hays graduate student in economies at Stony Brook who helped take care of Simons's fuldeen and would become his second wie simon lef Stony Brookin 1977 andstated “Monemetrcsapredevessoro Renaissance, na scrip mall across rom the Setauket ranstation. He ‘wanted someone to trad currencies and commodi- tiesand cured oan olden atelloweodecrack- ‘et from the IDA: Leonard Baum. Baum wasco- author ofthe Baum-Welch algorithm, whichis ‘usedto determine probailesin among ter things, biology automated speech cognition and sais comput- ‘ng Simons'sideawastoharness themathematica models that ‘Baum wos writingto trade curen- dex. “Once got Lenny involved, Told seethepossibilties of building modes” Simons says Baum nevertraded wsingthe rodels.nthelate"0sand early "aos, Baum was makingtoo much money onfundamentaltrading. Such radinginvoves betting ‘base on say, whether Bish Prime nister Margaret Thatch- cxwouldletthe poundris.Inan eraofone way markets twas such easier than sing models. “The dollar was very weak allyou hadtodowasshorethedolarand you'dmakealotofmoney.” Simonssays simmons broughtin Axtolook ‘over Baum'seffons. Ax declared ‘hatnot only would themodels \workwith the eurences Baum hadrittenthem fr they could beappliedtoany commodity farare—swhest,cride cil, you ame‘ Simonsany. simonssetup Axwith sown tradingaccount, Axcom Lx, which everullygave birth¢o Medallion. Axdiedofcoloncancer in2008acage.s. In Axcomsetiy day, profes. sionals were skeptical abourthe kindof ystematic trading was doing Stil he was baliantanda ‘natural atunderstanding probability having shared the American Mathematical Societys FrankNelson Cole Prize in Number Theoryin 1967.“Hehadthe bility to see pattems in rading data,"says Brian Keating, 36,the younger of Ax’stwo sons. “People in thebusiness thought itwas magi ornonsense.” ‘Axwasalso sometimes dfficlt towork wth. “Mostof times things went well” says Kevin Keat- {ng 39, Axx lder son, whotalked with is father slbouthis daysat Axcom. “Butwhen they di, they'dbutchesds” During the 1980s, Axandhis researchers {improved on Baum's models and used them 10 ‘explore correlations from which they could profit. Ifa furures contract opened sharply higher versus ‘tsprevious close, they would short it iit opened sharply lower, they would buy it, says Sandor sStraus,a former manager for Medallion who now runshis own investment firm, Merfin LLC, in ‘Walnut Creek, California. ‘The suff wasn’t complicated and it worked, 1 1985, Ax persuaded Simons to lethim move ‘Axcom to Huntington Beach, California, to escape «painful divorce and enjoy year-round boating. By 1988, investors wanted to invest drectiyin ‘Axcom, Simons and Ax started ahedge fund and ‘histenedit Medallion in honor ofthe math awards that they had won, ‘Ax’ signals soon seemedto short-circuit Peak to-trough losses by April 1989 had mounted to bout 0 percent. Axhad accounted for sucha drawdown inbismodels and pushed tokeep trading. Simons -yantedto stop toresearch what wes oingon. “Both were talkingto their lawyers," Straus say. Ax in fact, threatened to sue. Simons pulled rank, and Ax Jefe Hewentontowritea sereenplayand poemsin additionto workingon problems involving the ‘mathematical foundations of quantum mechanics ‘with Princeton University professor Simon Kochen, ‘with whom Ax shares the Cole prize. Simons turned ro Ehwyn Berlekamp torun Medal lion from Berkeley, California. consultant for ‘Axcom whom Simonshad first metat the IDA, Ber- Tekamp had bought out mostof Avs stake in Axcom. worked with Straus, Simonsand another consul- ‘tan, Laufer, to overhaul Medallion’ trading system dduringa six-month stretch, In 1990, Berlekampled Medaliontoas5.9 percent gan, netoffees—and then retuned o teaching math at UC Berkeley. gotalot more pleasure talkingtoacademiesthan financial types,” says Berlekamp, who snow profes- soremeritus.“Most people inthisbusiness are pret- tydollar-centric Itmakes fora dul if.” ‘Ascwas gone, Herlckamp was gone. Medallon’s revamped trading system remained. Straustockthe reins, Medallion returned 39.4 percent 1991, 34 percentin 1992 and 39.1 percentin 1993, according ‘oMedalion anna repors, Bacon Long island, Simons wasgatheringan A- teamof mathbrains Laufer, former Stony Brook professor joined fulltimeas research chlefinlate 1991, Preyatrader from Morgan Stanley's Analyt cal Proprietary Trading group, the pioneeringblack- boxquant desk, came n 1992. Nek Patterson, another eryptologstfom the IDA, joined in 1993, ‘That yea, Simonsalsohired Brown and Merce, Wo ‘anguage technology experts fom the IBM Thomas {L.Warson Researeh Center. ‘The nastier that stock or bond markers turned, the betver Medallion seemed to perform. In 1994, asthe Federal Reserve raised its federal funds tat ‘getrave si times to. pereentfrom3 percent, Medallion returned 71 percent forthe yeat. The Bloomberg/Etfas long-term U.S. government bond index ost 6.7 pereent that year. In 1995, Simons moved most of Renaissance's California ‘operations to Long Island, The firm needed com- puting power to model the data Renaissance was harnessing, and Simons bought it: From 1994 to 2000, Renaissance's total CPU power grew by a factor of 50. Data bandwidth in and out of Renais- sance headquarters rose bya factor of 5, accord- ingtoa Medallion annual report. ‘THE YEAR 2000, during which the Stan- sdard& Poor's SO indextumbled 10.1 percent, proved Medallion’s best to date. gained 98 per ‘cent, netof foes. Bythe end ofthat year, Renaissance had 148 employees—and the fund had a 43.6 per- ‘centannualizedretum over 1 yers,nctofces, ccordingtoan annual report. thasn!thada down _quartersince, Performance such asthat feeds thehedge fund industry's insatiable curiosity Rivals search forthe ‘signals underpinning Renaissance'sreurns, Oneset ‘ofcus came in the Nev York State Supreme Court decision in July which the courcheavly redacted. It ‘ciesthree strategies tested atthe firm, including ‘oneusinglimit order book data. MIT's Losaysthata fund firm could lookatsuch dataand idenifyalarge sell order for, say, 815. share when stock was rad- Ingat $15.05. he fund could shor the tock at $15.01 and benefitifthestockhit the $15 trigger “There's going tobe emendous downward pres sureonthe stock,” Loss. Former employees sy observers may guinas ‘much insgitinto Renaissance’'s performance by scrutinizing more obvious factor: Simons as suc-

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