Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 551

The greatest investor you’ve never heard of

Who is the greatest ever investor? Most of you will inevitably answer: Warren Buffett. Yet, what if I told you that there’s another contender, one who has an even better track record over an extended period?

Hedge fund investor Jim Simons’ flagship Medallion Fund has returned an astonishing 62% per annum over 33 years. $1,000 invested in his fund in 1988 would have grown to more than $8 billion by 2021.


Image by Gleuschk - Own work, CC BY-SA 3.0.

Net of substantial fees (he’s charged a 5% annual fee plus 44% performance fee, compared to the standard 2% and 20% respectively for the normal hedge fund), Simons has still generated 37% annualized returns over 33 years.

To put that in context, $1000 invested in the fund would have grown to almost $42 million, net of fees, from 1988-2021, while $1000 invested in the S&P 500 would have turned into $40,000 over the same period, and the same amount invested with Warren Buffett would have grown to $152,000.


Source: DFA, Gregory Zuckerman

Simons has only lost money in one year out of those 33 years. He’s also made money when almost everybody else is losing it. For instance, in 2008, the Medallion Fund made 82% net of fees compared to a loss of 37% for the S&P 500.

So, how has Simons done it?

The maths prodigy

Let’s first explore the man behind the track record. Simons is a maths prodigy who completed his PhD in mathematics at Berkeley at the slender age of 23. He went on to become a prize-winning academic who contributed to the development of string theory, which merged quantum mechanics with Albert Einstein's general theory of relativity.

During his time as an academic, he also worked with the National Security Agency (NSA) to help break codes during the Cold War.

From 1968-1978, he led the maths department at Stony Brook University in New York, which he turned into a world-class academic powerhouse through the recruitment of some of the world’s leading mathematicians.

By 1978, Simons thought his pattern recognition skills could be applied to the world of investing.

Renaissance Technologies

He partnered with a former colleague Leonard Baum to form an initial fund, but it didn’t go accordingly to plan. They made a lot of money until the market crash of 1984 where their investments lost 40% of their value. The partnership dissolved soon after, and Simons is quoted as saying that Leonard had mastered the "buy low" technique but hadn't perfected the "sell high" part.

Simons set about refining his techniques. He sifted through huge amounts of data from primary documentary sources, as well as electronic data. He then hired world-class mathematicians and data scientists. He got his employees to study correlations and patterns that could be traded in large volumes and numerous securities.

Yet, the initial years weren’t easy. In its first year, the Medallion Fund returned 9% net of fees versus the S&P 500 which was up 16%. It’s second year was much worse, as the fund returned -4% net of fees compared to the S&P 500’s gain of 30%.

One of the initial partners then left the firm and Simons brought in a game theorist named Elwyn Berlekamp, who revamped Renaissance’s trading systems. The changes worked and the following year, the fund returned 55%, and in subsequent years, it obliterated the indices.

The fund’s secret sauce

Simons was a pioneer in quantitative investing. That is, finding patterns and asymmetries in data to make small profits, and magnify those profits through leverage.

As Gregory Zuckerman notes in his biography of Simons:

“Early on, Simons made a decision to dig through mountains of data, employ advanced mathematics, and develop cutting-edge computer models. While others were still relying on intuition, instinct, and old fashioned research for their predictions. Simons inspired a revolution that has since swept the investing world.”

Simons tries to keep human emotions and judgments out of his investing.

“Simons and his colleagues hadn’t spent too much time wondering why their growing collection of algorithms predicted prices so presciently. They were scientists and mathematicians, not analysts or economists. If certain signals produced results that were statistically significant, that was enough to include them in the trading model”.

And he sides with his computer models even if they don’t make complete sense:

“More than half of the trading signals Simons’ team was discovering were non-intuitive, or those they couldn’t fully understand. Most quant firms ignore signals if they can’t develop a reasonable hypothesis to explain them, but Simons and his colleagues never liked spending too much time searching for the causes of market phenomena. If their signals met various measures of statistical strength, they were comfortable wagering on them.”

However, Simons isn’t a robot and there have been instances where he’s overridden his models. On at last one occasion, he’s traded counter to his models with panicked selling of investments. In 2018, he also temporarily lost faith in his trading systems.

His detractors

You don’t become rich and famous without having detractors, and Simons is no different. Notably, Charlie Munger in one of his final interviews said he was uncomfortable with investors who principally used algorithms like Renaissance Technologies. He said these funds essentially front run investors. And Munger believed that they were making smaller profits with more volume, and the only way that they were still making good returns was through using greater and greater leverage, “which I would not run myself”.

Meanwhile, notable investment author, William Bernstein, questions the purpose of hedge funds like Renaissance:

“Clearly, the quant hedge fund business has little to do with the primary societal purpose of capital markets – the efficient allocation of capital to productive enterprises. Rather, it is a zero-sum game that transfers wealth from those endowed with skill and luck to those less well endowed with them…

… Were quantitative hedge fund managers to suddenly disappear, would they be missed? Or might the world be a better place without them?”

Lessons from Simons

Quantitative trading may be foreign to most investors, yet there are still lessons to learn from the likes of Simons, including:

1. You’re not Jim Simons. The greatest investors including Simons, Buffett, and Soros are maths geniuses. You can’t hope to emulate them. Accept that, and instead formulate an investment strategy that best suits you.

2. Don’t compete with the best and brightest. Quant trading is for experts. If you’re trying to make day trades based on technical analysis and other techniques, you need to be aware that you’re most likely competing with computers and the world’s brightest maths minds.

3. Find your edge. You need to find your edge in markets. It could mean being a long-term investor, a deep value one, focusing on a certain sector that you are familiar with, or other approaches. Whatever it is, it needs to fit with your strengths and goals.

4. Wherever possible, remove emotions from investing. Investing is a hyper-rational endeavour, yet every investor is prone to emotions and biases. Even Jim Simons is. The trick is to find ways to minimize the instances of emotions override rational thinking.

Some fund managers go to radical lengths to achieve this. For example, Guy Spier in his book ‘Education of a Value Investor’ says he deliberately removed having Bloomberg screens in his office so he couldn’t constantly check stock prices. He even ended up moving away from the ‘noise’ of Wall Street to a quiet village outside Zurich to ply his trade:

“Following my move to Zurich, I focused energy on this task of creating the ideal environment in which to invest – one in which I’d be able to act slightly more rationally. The goal isn’t to be smarter. It’s to construct an environment in which my brain is not subjected to quite such an extreme barrage of distraction and disturbing forces that can exacerbate my irrationality.”

5. Find a smart partner. Perhaps Simons greatest achievement has been creating a world-class team. He recognized early that he needed to hire the best minds to make his fund work.

You probably don’t have the luxury of hiring others, though it doesn’t stop you from finding other like-minded and smart investors to bounce ideas off. Investing doesn’t have to be a solo sport and collaboration can make for better returns.

 

James Gruber is an assistant editor at Firstlinks and Morningstar.com.au

 

18 Comments
Goronwy Price
March 21, 2024

There is a great podcast about him and Renaissance. Search Abundance in your podcast app. I happened to listen to it yesterday and it is fascinating how they did it.

Peter Brown
March 18, 2024

I don't understand the point of this article.
Yes Jim and the people who have worked with him are financial and mathematical geniuses. And yes their returns have been extraordinary. I only wish I had been an employee then I could have shared in those returns. But ...
1. Only employees of the firm can invest in the Medallion Fund. The fund has been closed to outside investors since 1993.
2. The company uses sophisticated algorithmic trading strategies and sophisticated computer systems which are not able to be used or accessed by the ordinary retail investor. The company also has over 250 computer scientists, fine turning the algorithms, most with PhDs. So what is the point of the comparison? An individual retail investor can't do this.
2. Warren Buffett and Charlie Munger use many strategies that the individual investor can use. Sure I can't buy an entire company but I can still use many of the same strategies.
3. I can buy Berkshire Hathaway stock and let it compound. If I had done this in1988 (and reinvested) my holdings would be worth tens of millions now. The retail investor can't invest in the Medallion Fund and let their returns compound. I believe the fund provides distributions instead of letting returns compound (like Berkshire Hathaway does).
4.There is a fund the retail investor can invest in, however. The Renaissance Institutional Equities Fund. But wouldn't you know it. In April 2020, Institutional Investor reported that the disparity between Renaissance's Medallion fund and other funds, including RIEF, was approximately 17-19%. In other words you could be getting returns as low as 2-5%. To make matters worse the firm has long told investors that its public funds trade differently than Medallion. In other words, the public don't get those same algorithmic strategies or statistical edge or the rosy returns that the Medallion Fund does and most probably never will. Further, while all three public Renaissance hedge funds posted double-digit returns in 2021, much of that came in the last month of the year and NONE of the funds beat the S&P 500 Index. Finally, money managers who invest in the company's funds are sceptical. A lot of cash has been pulled from the hedge funds, particularly RIEF. The combination of redemptions and performance has led to its assets shrinking by 40% between December 2019 and November 2021. Meanwhile, the Renaissance Institutional Diversified Alpha fund, dubbed RIDA, and Institutional Diversified Global Equities funds, or RIDGE, have lost 67% and 49% of their assets, respectively. How much has Berkshire Hathaway stock declined since 2019? How much has Berkshire Hathaway's assets shrunk since 2019? Oh they haven't. Since 2019 its stock (and its holdings) has risen 103%. And it's assets have risen from 818 billion in 2019 to a little over 1 trillion in 2023, a 25% increase.

Mark Hayden
March 18, 2024

In my opinion Jim is not an investor. He runs a profitable business. He does not invest in other businesses. He could be classed a speculator, but not an investor. He wins in an area that is a zero sum game.

Adrian
March 17, 2024

fund managers and finance reporters always make the fund returns flowery with blooms.
I you actually have the money in the fund , my experience is usually consistent with Barry.
You remain with your original $ 1000 and each year you receive your $ 370 on top, which is consistent with what Orsova was saying.
That is how SMSF performs better, because you cut out people like Jim Simons from getting their share.
That is how SMSF flourish just the same.
Read up about the little secretary in New York who collected $ 9 million on her death, in the Editor's note today's edition.

Orsova
March 15, 2024

"To put that in context, $1000 invested in the fund would have grown to almost $42 million, net of fees, from 1988-2021."

This is simply not correct. The Medallion fund is capacity constrained. It might return 37%, but that return gets distributed - you can't reinvest it. It's not even really appropriate to talk about annualised returns, seeing as how you could never compound it.

It's analogous to owning a bond where you're not able to reinvest the principal. If you earn 37%, but have to reinvest at a more vanilla rate outside of the bond, then what's your real CAGR?

It's certainly not 37% per annum.

Solly P
March 15, 2024

Orsova,

What you say is incorrect.

All returns from funds are calculated assuming reinvestment of capital. Too say otherwise is disingenuous and wrong.

Orsova
March 15, 2024

Solly,

I am aware. My point is simply that it’s not appropriate here.

Jake
March 15, 2024

Yes, the figures are correct, and have been verified by multiple, reputable sources.

Barry
March 18, 2024

Exactly. Because the Medallion fund wants to protect its high returns, it is capacity constrained. So if you invested $1,000 in 1988 then you would still only have $1,000 today, not $42 million, and you would have received about $370 per year in distributions on average. High returns but you are not allowed to compound them. Jim Simons is a REAL fund manager. He has a REAL edge so why should he allow anyone to share in the gains with him? He might as well make all the money for himself. 

Orsova
March 16, 2024

Jake,

You’ve missed my point.

Jake
March 17, 2024

Orsova,

No, I get your point - that capacity constraints have led to some investors not being able to reinvest their gains, and therefore being unable to compound their capital over time.

It doesn't mean all of them. It also doesn't detract from the long-term track record. And it doesn't detract from the article, either.

michael
March 15, 2024

If this is true, it would seem to be an important point of difference. Perhaps a lesson.
Yet not mentioned in article.

Ron L
March 15, 2024

Don''t understand your point, Michael.

michael
March 15, 2024

It may be that the expectation of investors compounding gains leads to a certain behaviour from the managers. A manager refusing to let gains compound, probably has a very different mindset. It would be interesting to investigate, but beyond my abilities.

B2
March 14, 2024

Moving to a little village in Zurich sounds like a good idea. Perhaps it is also tax deductible. LOL

Ian
March 14, 2024

It would (should) be tax deductible if the primary reason is for investment purposes. The ATO may not agree !

Harry
March 15, 2024

HAHAHA. The ATO have a habit of seeing things differently to the "regular guy"!!!!

Mark
March 14, 2024

Great article. Your lessons are sage. I've admired Simons for over 25 years and use him as an example of the best of the best in my courses. HIs investing approach is remarkable.

 

Leave a Comment:

     
banner

Most viewed in recent weeks

2024/25 super thresholds – key changes and implications

The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

Welcome to Firstlinks Edition 552 with weekend update

Being rich is having a high-paying job and accumulating fancy houses and cars, while being wealthy is owning assets that provide passive income, as well as freedom and flexibility. Knowing the difference can reframe your life.

  • 21 March 2024

Why LICs may be close to bottoming

Investor disgust, consolidation, de-listings, price discounts, activist investors entering - it’s what typically happens at business cycle troughs, and it’s happening to LICs now. That may present a potential opportunity.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Latest Updates

Retirement

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Shares

On the virtue of owning wonderful businesses like CBA

The US market has pummelled Australia's over the past 16 years and for good reason: it has some incredible businesses. Australia does too, but if you want to enjoy US-type returns, you need to know where to look.

Investment strategies

Why bank hybrids are being priced at a premium

As long as the banks have no desire to pay up for term deposit funding - which looks likely for a while yet - investors will continue to pay a premium for the higher yielding, but riskier hybrid instrument.

Investment strategies

The Magnificent Seven's dominance poses ever-growing risks

The rise of the Magnificent Seven and their large weighting in US indices has led to debate about concentration risk in markets. Whatever your view, the crowding into these stocks poses several challenges for global investors.

Strategy

Wealth is more than a number

Money can bolster our joy in real ways. However, if we relentlessly chase wealth at the expense of other facets of well-being, history and science both teach us that it will lead to a hollowing out of life.

The copper bull market may have years to run

The copper market is barrelling towards a significant deficit and price surge over the next few decades that investors should not discount when looking at the potential for artificial intelligence and renewable energy.

Property

Global REITs are on sale

Global REITs have been out of favour for some time. While office remains a concern, the rest of the sector is in good shape and offers compelling value, with many REITs trading below underlying asset replacement costs.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.