Simons at Renaissance Cracks Code, Doubling Assets (Update1)
By Richard Teitelbaum
Nov. 27 (Bloomberg) -- On a hot afternoon in September,
Renaissance Technologies LLC founder Jim Simons is too busy to
take a phone call. It is, he says, from Cumrun Vafa, a
preeminent Harvard University professor and expert on string
theory, which describes the building blocks of the universe as
extended one-dimensional filaments.
``Get another time when I can talk to him,'' Simons tells
Then he mentions that the next day, he'll be meeting with
Thomas Insel, director of the National Institute of Mental
Health, to discuss autism research. And he's slated that
Saturday to host a gala honoring Math for America, or MFA, a
four-year-old nonprofit he started that provides stipends to New
York City math teachers.
``I'm undoubtedly involved in too many things at the same
time,'' Simons says in his 35th-floor office in midtown
Manhattan. ``But you make your life interesting.''
String theory, autism, math education: It's fair to ask how
Simons, 69, manages his day job overseeing the world's biggest
hedge fund firm. The answer, judging from the numbers, is very
Renaissance is on fire: Its Medallion Fund -- which uses
computers and trading algorithms to invest in world markets --
returned more than 50 percent in the first three quarters of
2007. It had about $6 billion in assets as of July 1.
Simons registered that performance as subprime and related
markets were collapsing, sending two mortgage-related hedge
funds run by Bear Stearns Cos. into bankruptcy. The turmoil
pummeled the Goldman Sachs Global Alpha Fund, a rival to
Renaissance's funds, which fell more than 25 percent during the
same time. Morgan Stanley's computer jockeys lost $390 million
in a single day in early August.
Medallion's returns are no anomaly. The fund, which trades
everything from soybean futures to French government bonds in
rapid fire, hasn't had a negative quarter since early 1999. From
the end of 1989 through 2006, it returned 38.5 percent
annualized, net of fees.
More surprising than those returns is Simons's life story.
At an age when hedge fund pioneers such as Michael Steinhardt
have long since stopped managing other people's money, Simons is
building on Medallion's success. He's adding funds and
strategies and accumulating assets, which totaled $35.4 billion
as of Sept. 28.
In August 2005, Simons started Renaissance Institutional
Equities Fund, or RIEF, which invests in U.S. stocks. Through
Sept. 30, it has returned 12.8 percent annualized. Unlike
Medallion, which turns over its holdings dozens of times each
year, RIEF keeps its positions for months or longer. Simons said
at the time of the fund's inception RIEF could theoretically
manage as much as $100 billion.
In December 2006, he limited new investments in the fund to
$1.5 billion a month. As of Sept. 30, 2007, it had $25.6 billion
In October, Simons started Renaissance Institutional
Futures Fund, or RIFF, to invest in commodities. It's up 5.2
percent for the month. He says Renaissance's research shows the
new fund can manage as much as $50 billion. Along with RIEF, it
will promote cross-fertilization of ideas inside Renaissance,
``Challenge is good,'' he says. ``It opens one's eyes to
When not in Manhattan, Simons runs his empire from a 15-
foot (4.6-meter) by 20-foot office in Renaissance's gated and
guarded campus off Route 25A in East Setauket on New York's Long
Island, some 50 miles (80 kilometers) east of the Empire State
Building. With most of the trading automated, there's little of
the hurly-burly of a typical hedge fund firm.
Along with routine personnel and marketing tasks, Simons
makes time for the researchers and programmers who stop by his
office to discuss mathematical and statistical issues they've
encountered as they work on new trading strategies.
More than 200 employees, of whom about a third have Ph.D.s,
work in East Setauket. Another 100 are based in Manhattan, San
Francisco, London and Milan. ``He creates an environment where
it's easy to be creative and works hard to keep the bullshit
level to a minimum,'' says former managing director Robert Frey,
who worked at Renaissance from 1992 to 2004.
Even without the new commodities fund, Renaissance's assets
have more than doubled in a year from about $16 billion on Sept.
30, 2006. That growth has catapulted Renaissance past such
titans as Daniel Och's Och-Ziff Capital Management Group LLC,
Ray Dalio's Bridgewater Associates Inc. and David Shaw's D.E.
Shaw & Co. to become the world's largest hedge fund manager,
according to data compiled by Hedge Fund Research Inc. and
Medallion's 3.9 percent return during August, though that
fund too was whipsawed by volatility, bolstered Simons's
reputation as the silver-bearded wizard of quantitative
In quant funds, mathematicians and computer scientists
mine enormous amounts of data from financial markets looking for
correlations among stocks, bonds, derivatives and other
instruments. They search for predictive signals that will
foretell whether, say, a palladium futures contract is likely to
rise or fall.
``There are just a few individuals who have truly changed
how we view the markets,'' says Theodore Aronson, principal of
Aronson + Johnson + Ortiz LP, a quantitative money management
firm in Philadelphia with $29.3 billion in assets. ``John
Maynard Keynes is one of the few. Warren Buffett is one of the
few. So is Jim Simons.''
Aronson credits Renaissance with validating the entire
field of quantitative investing and proving that the freedom
accorded to hedge fund managers to short stocks, borrow money
and invest in myriad instruments can produce results that far
outstrip typical market returns.
Simons, standing just under 5 feet 10 inches tall and
weighing 185 pounds (84 kilograms), has trod an unlikely path. A
former code cracker for the U.S. National Security Agency, in
1968 he became chairman of the mathematics department at Stony
Brook University, part of the New York state university system.
He built the department into what David Eisenbud, former
director of the Mathematical Sciences Research Institute in
Berkeley, California, calls one of the world's top centers for
In 1977, frustrated with a math problem and eager for
change, he abandoned academia to start what would become
Renaissance, hiring professors, code breakers and statistically
minded scientists and engineers who'd worked in astrophysics,
language recognition theory and computer programming.
``All the quants in the world are trying to follow in Jim's
footsteps because what he's built at Renaissance is truly
extraordinary,'' says Andrew Lo, director of the Massachusetts
Institute of Technology Laboratory for Financial Engineering and
chief scientific officer of quant hedge fund firm AlphaSimplex
Group LLC. ``I and many others look up to him as a tremendous
The tendency for fund managers to try to emulate Simons may
become more curse than blessing in the years ahead. As the
selloffs in July and August showed, many quant funds are chasing
the same investments. For example, as of June, Renaissance and
rival AQR Capital Management LLC had four of the same top 10
stock holdings: Johnson & Johnson, Lockheed Martin Corp.,
International Business Machines Corp. and Chevron Corp.
The overlap became problematic as the subprime contagion
spread beyond housing-related stocks, bonds, collateralized debt
obligations and commercial paper, forcing some funds to lighten
their holdings precisely as demand was drying up.
``All these quant funds are using similar models, looking
to buy something cheap and sell something dear,'' says Sol
Waksman, founder of Barclay Hedge Ltd., a consulting firm based
in Fairfield, Iowa. While expensive securities are by their
nature easily traded --liquid, in industryspeak -- the cheap
securities hunted by most quantitative managers aren't, Waksman
says. After all, the reason they're cheap is that nobody wants
``Once you try and sell a low-liquidity stock, by
definition there is no one to buy it,'' Waksman says. Overpriced
stocks rose in August as hedge funds bought shares to cover
their short positions, and cheap stocks plummeted as managers
rushed to raise cash.
Renaissance is under increasing pressure to stay ahead of
the pack -- and to keep 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 money from
outside investors in 1993 and returned pretty much the last of
their capital 12 years later. Today, the fund is run almost
exclusively for the benefit of Renaissance staff.
The wise-cracking Simons himself is mum on virtually all of
What can he say about Medallion's trading strategy?
``Not much,'' Simons says with a chortle, and then takes a
drag on one of the Merit cigarettes he often smokes.
What kind of instruments does it trade?
How many different strategies does it use?
Simons says his Ph.D.s laugh when they read the far-fetched
theories about what their fund might be doing. One chat room
participant speculated that Renaissance uses audio hookups to
futures exchanges and analyzes the noise from the pits with
`Conjectures and Hypotheses'
``All of us in the quant business have conjectures and
hypotheses but very little data,'' MIT's Lo says. ``So we like
to speculate about what Renaissance could possibly be doing.
They are so far ahead of everybody else that it's both
challenging as well as exciting to engage in that kind of idle
For his part, Simons says he once explored whether sunspot
activity affects the markets. He doesn't say what he found.
Interviews with former Medallion fund managers and with
investors, rivals and quantitative scientists provide a glimpse
into how the fund is run. So do annual reports, marketing
materials and court documents: Ever secretive, Renaissance is
suing in New York State Supreme Court two of its former Ph.D.-
level researchers who were fired in 2003 after refusing to sign
The firm accuses Alexander Belopolsky and Pavel Volfbeyn of
appropriating trade secrets. Belopolsky and Volfbeyn deny the
charges. In a July decision, the two briefly described three
strategies that Renaissance had explored. One involved swaps,
which are contracts to exchange interest or other payments;
another used an electronic order matching system that
anonymously links buyers and sellers; and a third made use of
Nasdaq and New York Stock Exchange limit order books, which are
real-time records of unexecuted orders to buy or sell a stock at
a particular price.
With his myriad positions in different markets, Simons
likens his approach to the extensive farming he once practiced
in Colorado, using center pivot irrigation to grow wheat on
thousands of acres.
``Every little stalk of wheat was not doing so great, but
most of them were, so you're working on statistics,'' Simons
By contrast, he says, the traditional focused investing
practiced by Warren Buffett is akin to intensive farming, in
which each individual plant really counts. ``It's two completely
different ends of the spectrum,'' Simons says.
Medallion's farm stand sports quite a markup: The firm
generally charges a 5 percent management fee and 36 percent of
profits compared with the industry standards of 2 percent and 20
percent. With virtually no outside investors in Medallion,
Simons and Renaissance employees are paying the tab -- and
reaping the rewards. RIEF investors can select from four share
classes with varying and far less expensive fee structures.
Though Simons dislikes talking about it, Renaissance has
built him a tidy fortune. U.S. Securities and Exchange
Commission documents show he controls 25-50 percent of
Renaissance, having spread the rest of the firm's ownership
among employees. So Simons's share of the performance fees
earned by RIEF and Medallion was roughly between $375 million
and $750 million in 2006, according to data compiled by
With Medallion's 44.3 percent return in 2006, if Simons
had invested $2 billion in the fund, he would have garnered an
$885 million profit. He declines to comment on his investment.
According to Bloomberg calculations, Simons ranks No. 3
among the world's hedge fund managers with $1.01 billion in
firm-wide performance fees during the first three quarters of
Chief Scientist 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, owns less than 5
percent, as does Renaissance trading desk manager, Paul Broder.
At the core of Renaissance's success -- and the wealth
Simons is creating -- is his own mathematical mind-set. Outside
the financial markets, he's best known for the Chern-Simons
theory, which he co-developed with Chinese-American
mathematician Shiing-Shen Chern in 1974.
In simple terms, the theory provides the tools, known as
invariants, that mathematicians use to distinguish among certain
curved spaces -- the kinds of distortions of ordinary space that
exist according to Albert Einstein's general theory of
Chern-Simons is viewed as important partly because it has
proven useful in explaining aspects of another field: string
theory. This describes the building blocks of all matter and the
universe as vibrating one-dimensional extended filaments or
loops called strings.
``It turns out these things we invented, Chern-Simons
invariants, had their real applications to physics, about which
I knew nothing,'' Simons told the International Association of
Financial Engineers in May.
Simons says he's also proud of the work he did in
differential geometry at the Institute for Defense Analyses'
research and development center in Princeton, New Jersey. In
1968, he published a paper in the Annals of Mathematics called
``Minimal Varieties in Riemannian Manifolds.'' The paper helped
him win the American Mathematical Society's Oswald Veblen Prize
in Geometry in 1976. The prize is named for the Princeton
University geometrician who became the first professor of the
Institute for Advanced Study.
Simons's most enduring legacy may be as a philanthropist as
he builds on the mathematics and science that have shaped his
life. In his New York office, Simons gets up and walks across
the room to grab a newspaper clipping. It's an article about the
administration of President George W. Bush planning to add $50
billion to the defense budget.
``Just a little extra; give them an extra $50 billion,''
Simons says, his voice rising in anger. ``Well, for $2 billion,
we could revolutionize math education in the U.S.''
He's referring to what he considers paltry funding for a
key provision of the America Competes Act, which was signed into
law on 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 competitiveness is at stake.
A 2003 study of 15-year-olds by the Program for International
Student Assessment found the U.S. trailing 23 Organization for
Economic Cooperation and Development countries, including No. 1
Finland, in math literacy at that age level. The U.S. was ahead
of just five countries, among them Greece, Turkey and Mexico.
Simons places the blame for poor high school math scores
largely on unqualified teachers. Because of low pay, good math
and science teachers tend to get sucked into the private sector
-- and the rate is accelerating.
``Students, up and down the line from affluent to
impoverished, are being cheated,'' Simons says.
MFA pays full scholarships for math teachers to earn their
master's degrees in education at designated graduate schools.
Then, it pays a stipend of $90,000 over five years of teaching
as a subsidy. Fellows and other experienced teachers are
eligible to apply for a master fellowship program, which
provides a stipend of $50,000 over four years. MFA is rolling
out the program in Los Angeles and San Diego in 2008.
$13 Million Donation
Simons has donated tens of millions of dollars to math and
science endeavors worldwide, including Stony Brook University
and MSRI. In 2005, he kicked in $13 million with other
Renaissance employees to keep the Relativistic Heavy Ion
Collider operating at the Brookhaven National Laboratory in
Upton, New York, after the U.S. Energy Department cut funding.
The collider creates hot, dense matter similar to that which is
believed to have existed in the first 10 microseconds, or
millionths of a second, of the universe's existence after the
Simons's other major push: research into autism, a disorder
marked by repetitive behavior and impairment in social
communication and language. In 2005, he hired Gerald Fischbach,
former dean of the faculties of health sciences at Columbia
University in New York, to serve as scientific director for the
Simons Foundation. The foundation funds a variety of math and
science-related projects. Simons's wife, Marilyn, 57, is
president. Their daughter Audrey, 21, displays some symptoms of
Asperger's syndrome, a milder disorder that bears similarities
Under Fischbach, the foundation is building a database of
DNA samples and clinical information from thousands of families
across the U.S. with affected children. Scientists will use the
data to identify genes that may contribute to autism.
The foundation is also attracting scientists from outside
the field, such as geneticist Michael Wigler of Cold Spring
Harbor Laboratory in New York. Fischbach says that, in the past,
autism research has had trouble luring top talent because of its
Simons splits his week between two homes. His Manhattan
apartment is in the same limestone building as another investor-
turned-philanthropist, George Soros, 77. In Setauket, the white,
gambrel-roofed house Simons has lived in for 31 years has broad
picture windows overlooking the herons that populate the
shimmering waters of Conscience Bay.
For all of his achievement and material success, Simons's
life has been beset by the kind of tragedy that few parents can
fathom -- the death of not one but two of his five children in
separate accidents. In 1996, his son Paul, 34, was struck by a
car and killed while riding a bicycle near Simons's Setauket
home. In 2003, 24-year-old son Nick drowned while on a trip to
Simons grimaces when asked whether Nick's death played a
role in his flurry of recent activity. He pauses before
answering. ``There was some connection between losing Nick and
my desire to get as busy as I could,'' he says.
Scientific exploration underpins all of Simons's work.
``What motivates me?'' he says. ``I'm ambitious and I like to do
things well. I love to create something that really works. We
have lots and lots and lots of strategies, and each new one
gives me a lot of pleasure, to see something new that works.''
The laws of the financial markets present a special
challenge, Simons says. Unlike the laws governing physics or
chemistry, they tend to change over time. ``One can predict the
course of a comet more easily than one can predict the course of
Citigroup's stock,'' he says. ``The attractiveness, of course,
is that you can make more money successfully predicting a stock
than you can a comet.''
Steeped in Math
Investments, philanthropy, academia -- it all traces to a
life steeped in math. James Harris Simons was born in 1938, the
only child of Marcia and Matthew Simons. He grew up in
Brookline, Massachusetts, a Boston suburb designed partly by
landscape architect Frederick Law Olmsted.
Early on, Simons asked complicated mathematical questions.
At about age 3, he was shocked to learn that a car could run out
of gasoline. Why? By Simons's reckoning, a car would go through
half a tankful, then half of what remained and then half of
that, and so on: There would always be a small amount left. He'd
discovered one of Zeno's paradoxes, named for the ancient Greek
pre-Socratic philosopher, which would puzzle mathematicians for
``Those were sophisticated thoughts for a little guy,''
Simons says, laughing.
At high school in Newton, Massachusetts, Simons blew
through the equivalent of advanced placement math and went on to
MIT. In his freshman year, he was cocky enough to enroll in a
graduate level class. ``The course said no requirements,'' he
At MIT, Simons worked hard and played hard -- mostly late-
night poker. By 1 a.m., he and friends would pile into his
Volkswagen Beetle and head off to Jack & Marion's delicatessen
in Brookline for $1.25 chicken in a basket. Simons recalls how
two renowned MIT mathematicians, Isadore Singer and Warren
Ambrose, would sit down, order food and work into the wee hours
on math problems.
``I just thought it was kind of a great life,'' Simons
says. ``Here they were, grown-ups, eating in this deli, late,
late at night, just working away. That seemed wonderful to me.''
Singer, still an MIT professor, would become a close personal
In June 1958, after just three years, Simons collected his
bachelor's degree in mathematics from MIT, returning that
September for his first year of graduate school. He then headed
west to the University of California, Berkeley, to complete his
Ph.D. in math. There, Simons dabbled in commodities -- using his
and his then wife Barbara's wedding gift money to make a $500
killing in soybeans.
Simons's thesis adviser -- Bertram Kostant, now professor
emeritus at MIT -- was skeptical about him pursuing the proof
that would form the basis of his dissertation, ``On the
Transitivity of Holonomy Systems.'' It dealt with the geometry
of multi-dimensional curved spaces and related to work by Singer
``He solved it in a remarkably short period of time, under
two years,'' Kostant says. ``Jim's an original guy. He likes to
go off in his own direction.''
After UC Berkeley, Simons won a three-year teaching
position at MIT. He left after a year to become an assistant
math professor at nearby Harvard. He stayed in touch with two
poker-playing MIT classmates, Colombian nationals Edmundo
Esquenazi and Jimmy Mayer.
In 1958, Simons and Mayer had celebrated their graduation
by buying Lambretta motor scooters and driving to Bogota from
Boston. In 1964, the three cobbled together money with Simons's
father to start a Colombian vinyl-floor-tile factory. It would
eventually prove a lucky move, providing the younger Simons with
a stake to build his empire.
Simons was growing restless at Harvard. He was eager to
earn more money -- and frustrated by some of the math he was
working on. The Institute for Defense Analyses offered a better-
paying solution: Simons could spend half of his time on math at
the nonprofit's Princeton center and half breaking codes for the
In 1967, the IDA's president, General Maxwell Taylor,
former chairman of the Joint Chiefs of Staff, wrote an article
for the New York Times Magazine in favor of the Vietnam War.
Soon after, Simons penned a note to the editors. ``Some of us at
the institution have a different view,'' he wrote. ``The only
available course consistent with a rational defense policy is to
withdraw with the greatest possible dispatch.''
Fired at 29
Taylor eventually fired Simons, who was then 29, married
and a father of three. Stony Brook University President John
Toll wanted a star to build the school's math department. In
1966, the university had made a splash by luring Nobel Prize-
winning physicist Chen Ning Yang from the Institute for Advanced
Study. Simons would hire stars for the math department.
Stung by his firing from the IDA, Simons threw himself into
the task. ``Having just sort of been knocked around a little
bit, I liked the idea of being my own boss,'' he says.
Simons negotiated all of the elements of a math position to
lure great geometers to a young school: salary, class load,
leave policy and research support.
``He'd figure what you needed and get it for you,'' Toll,
84, says. ``He did an outstanding job of building the department
at Stony Brook.''
Among the future stars Simons lured were Detlef Gromoll
from the University of Bonn; Jeff Cheeger from the University of
Michigan; and Mikhael Gromov, who'd taught at Leningrad
University. All had published in prestigious journals.
``It was viewed as one of the two or three best geometry
groups in the world,'' says Irwin Kra, who succeeded Simons as
math department chairman and is executive director at MFA.
One of Simons's other hires was a Bronx, New York-raised
math professor from Cornell University: James Ax.
Simons dabbled again in commodities while at Stony Brook.
The Colombian factory investment had made some profit. Simons
and his partners invested about $600,000 of it with Charles
Freifeld, a former math student of his from Harvard. During
seven months in 1974, Freifeld increased the investment 10-fold,
after fees, as sugar futures more than doubled. The $600,000 was
now $6 million, Freifeld says.
Simons suddenly had money -- but he was at a crossroads. He
had separated from his wife Barbara. As the '70s wore on, he
grew frustrated with a math problem related to the Chern-Simons
``It was driving me crazy,'' he says.
Simons met Marilyn Hawrys, a graduate student in economics
at Stony Brook who helped take care of Simons's children and
would become his second wife.
Birth of Medallion
Simons left Stony Brook in 1977 and started Monemetrics, a
predecessor to Renaissance, in a strip mall across from the
Setauket train station. He wanted someone to trade currencies
and commodities and turned to an old friend, a fellow code
cracker from the IDA: Leonard Baum.
Baum was co-author of the Baum-Welch algorithm, which is
used to determine probabilities in, among other things, biology,
automated speech recognition and statistical computing. Simons's
idea was to harness the mathematical models that Baum was
writing to trade currencies.
``Once I got Lenny involved, I could see the possibilities
of building models,'' Simons says.
Baum never traded using the models. In the late '70s and
early '80s, Baum was making too much money on fundamental
trading. Such trading involves betting based on, say, whether
British Prime Minister Margaret Thatcher would let the pound
rise. In an era of one-way markets, it was much easier than
``The dollar was very weak; all you had to do was short
the dollar and you'd make a lot of money,'' Simons says.
`Magic or Nonsense'
Simons brought in Ax to look over Baum's efforts. Ax
declared that not only would the models work with the currencies
Baum had written them for, they could be applied to any
commodity future --wheat, crude oil, you name it, Simons says.
Simons set up Ax with his own trading account, Axcom Ltd.,
which eventually gave birth to Medallion. Ax died of colon
cancer in 2006 at age 69.
In Axcom's early days, professionals were skeptical about
the kind of systematic trading Ax was doing. Still, he was
brilliant and a natural at understanding probability, having
shared the American Mathematical Society's Frank Nelson Cole
Prize in Number Theory in 1967.
``He had the ability to see patterns in trading data,''
says Brian Keating, 36, the younger of Ax's two sons. ``People
in the business thought it was magic, or nonsense.''
Talking to Lawyers
Ax was also sometimes difficult to work with. ``Most of
times things went well,'' says Kevin Keating, 38, Ax's older
son, who talked with his father about his days at Axcom. ``But
when they didn't, they'd butt heads.''
During the 1980s, Ax and his researchers improved on Baum's
models and used them to explore correlations from which they
could profit. If a futures contract opened sharply higher versus
its previous close, they would short it; if it opened sharply
lower, they would buy it, says Sandor Straus, a former manager
for Medallion who now runs his own investment firm, Merfin LLC,
in Walnut Creek, California.
The stuff wasn't complicated, and it worked. In 1985, Ax
persuaded Simons to let him move Axcom to Huntington Beach,
California, to escape a painful divorce and enjoy year-round
boating. By 1988, investors wanted to invest directly in Axcom.
Simons and Ax started a hedge fund and christened it Medallion
in honor of the math awards that they had won.
Ax's signals soon seemed to short-circuit. Peak-to-trough
losses by April 1989 had mounted to about 30 percent.
Ax had accounted for such a drawdown in his models and
pushed to keep trading. Simons wanted to stop to research what
was going on.
``Both were talking to their lawyers,'' Straus says. Ax, in
fact, threatened to sue. Simons pulled rank, and Ax left. He
went on to write a screenplay and poems in addition to working
on problems involving the mathematical foundations of quantum
mechanics with Princeton University professor Simon Kochen, with
whom Ax shares the Cole prize.
Simons turned to Elwyn Berlekamp to run Medallion from
Berkeley, California. A consultant for Axcom whom Simons had
first met at the IDA, Berlekamp had bought out most of Ax's
stake in Axcom. He worked with Straus, Simons and another
consultant, Laufer, to overhaul Medallion's trading system
during a six-month stretch.
In 1990, Berlekamp led Medallion to a 55.9 percent gain,
net of fees -- and then returned to teaching math at UC
``I got a lot more pleasure talking to academics than
financial types,'' says Berlekamp, who is now professor
emeritus. ``Most people in this business are pretty dollar-
centric. It makes for a dull life.''
Ax was gone. Berlekamp was gone. Medallion's revamped
trading system remained. Straus took the reins. Medallion
returned 39.4 percent in 1991, 34 percent in 1992 and 39.1
percent in 1993, according to Medallion annual reports.
Back on Long Island, Simons was gathering an A-team of math
brains. Laufer, a former Stony Brook professor, joined full time
as research chief in late 1991. Frey, a trader from Morgan
Stanley's Analytical Proprietary Trading group, the pioneering
black-box quant desk, came in 1992. Nick Patterson, another
cryptologist from the IDA, joined in 1993. That year, Simons
also hired Brown and Mercer, two language technology experts
from the IBM Thomas J. Watson Research Center.
The nastier that stock or bond markets turned, the better
Medallion seemed to perform. In 1994, as the Federal Reserve
raised its federal funds target rate six times to 5.5 percent
from 3 percent, Medallion returned 71 percent for the year. The
Bloomberg/Effas long-term U.S. government bond index lost 6.7
percent that year.
In 1995, Simons moved most of Renaissance's California
operations to Long Island. The firm needed computing 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 Renaissance
headquarters rose by a factor of 45, according to a Medallion
The year 2000, during which the Standard & Poor's 500 Index
tumbled 10.1 percent, proved Medallion's best to date. It gained
98.5 percent, net of fees. By the end of that year, Renaissance
had 148 employees -- and the fund had a 43.6 percent annualized
return over 11 years, net of fees, according to an annual
report. It hasn't had a down quarter since.
Performance such as that feeds the hedge fund industry's
insatiable curiosity. Rivals search for the signals underpinning
Renaissance's returns. One set of clues came in the New York
State Supreme Court decision in July, which the court heavily
redacted. It cites three strategies tested at the firm,
including one using limit order book data.
MIT's Lo says that a fund firm could look at such data and
identify a large sell order for, say, $15 a share when a stock
was trading at $15.05. The fund could short the stock at $15.01
and benefit if the stock hit the $15 trigger.
``There's going to be tremendous downward pressure on the
stock,'' Lo says.
`Wolf at the Door'
Former employees say observers may gain as much insight
into Renaissance's performance by scrutinizing a more obvious
factor: Simons has succeeded in building a pretty good business
model. First, it's a firm run by and for scientists.
``I've always said Renaissance's secret is that it didn't
hire MBAs,'' says Berlekamp, who blames the herdlike mentality
among business school graduates for poor investor returns.
Programming and modeling are treated as the heart of the
firm's advantage -- not an expense. ``If you needed a lot of
computer power, the decision was based on whether you needed it,
not the budget,'' says Peter Weinberger, former chief technology
officer at Renaissance and now a software engineer at Google
Decisions are made quickly and feedback is constant. ``One
of the things about Renaissance is that there's a feeling of
urgency,'' says Frey, who left to teach applied mathematics and
statistics at Stony Brook in 2004.
``We always believed that there was a wolf at the door,
that somebody would get there before we did.''
From Simons on down, the company encourages openness,
whether it's about market signals that show where a security
might be headed or about technology or trading. Frey says he
doesn't recall Simons ever raising his voice at an employee.
Simons says new hires are encouraged to troll computer files
detailing Renaissance's past strategies, successful or not. ``If
Simons's door was open, you could walk in,'' Weinberger says.
That would go for everyone from secretaries on up.
For his part, Simons says he's proud of Renaissance's low
personnel turnover. The firm is owned by 80-85 employees. From
managing directors to cleaning staff, everyone receives a
percentage of the profits, Simons says. It's compensation for
what he expects them to contribute over the long term.
The notion of paying someone based on a single year's
performance makes no sense in an environment where some projects
take years to complete, Simons says. ``We want everyone to want
everyone else to do well,'' he says.
Issue of Succession
In his New York office, Simons pauses for a full eight
seconds when asked who will run Renaissance after he retires --
a simple question given that the firm has just two executive
``Most likely someone inside the company,'' he finally
Does his likely successor have any idea he or she will be
``I suppose who would succeed me has a pretty good idea it
would be he,'' he says.
Will it be a surprise?
``I don't think so -- but I can't guarantee it,'' Simons
Simons is busy as he rounds out his seventh decade: the new
RIEF and RIFF hedge funds, Math for America and the Simons
Foundation's support for autism research.
He's even returned to geometry, working with a friend,
Stony Brook professor Dennis Sullivan, to solve a problem
involving multidimensional spaces that's long bedeviled him. In
January, they published a paper proving the theorem.
When pressed about retirement, Simons responds with a
trademark mathematical paradox.
``I've always intended to retire in the next two years,''
he says, laughing. ``I've been saying that for a long time. The
two years is a constant.''
In the end, whether Simons is building charities, plotting
strategies or contemplating his own legacy, it always comes back
to the math.
To contact the reporter on this story:
Richard Teitelbaum in New York at
Last Updated: November 27, 2007 13:12 EST