market folly

  Three-time winner of the Gerald Loeb award, author Gregory Zuckerman has just released his latest book, The Man Who Solved The Market: How Jim Simons Launched The Quant Revolution. 

Before diving in, let's take a second to acknowledge that it's amazing such a book exists in the first place.  The subject of the book, Jim Simons and his firm Renaissance Technologies ('Rentec'), have always been shrouded in secrecy.  Most on Wall Street have at least heard of their mysterious Medallion Fund and heard rumors of the insane returns it generates.  But little was actually known about the firm and how it made money.

For those unfamiliar with Rentec, a quote from the book jacket sums up why you should care (emphasis ours): "No other investor - Warren Buffett, George Soros, Peter Lynch, Steve Cohen, or Ray Dalio - can touch the track record of Renaissance Technologies founder Jim Simons.  Since 1988, Renaissance's signature Medallion fund has generated average annual returns of 66 percent.  The firm has recorded trading gains of more than one hundred billion dollars.  Simons himself is worth twenty-three billion dollars." (The book also has a yearly performance breakdown in the Appendix.)

While value investors look up to Warren Buffett and Seth Klarman, and traders look up to Stan Druckenmiller and George Soros, in the quant world Medallion is quite literally the gold standard.  And while many hedge funds charge 2 and 20 (percentage management fee and performance fee), Medallion charges an audacious 5 and 44.

Over the years, we've talked to a few former employees of the firm and even then they would be very vague about their work, never giving specifics, and certainly wouldn't go on the record about anything.  'Googling' the founder and his firm yields only a handful of rare interviews with Simons (mostly about mathematics) and some performance numbers, but that's about as in-depth as it gets.

So the fact that Zuckerman was able to interview more than 40 current and former employees, Simons's friends and family, as well as Simons himself, says a lot.  It's safe to say that doesn't happen without Zuckerman's excellent work in the past as a journalist and author.  His previous book, The Greatest Trade Ever about John Paulson is one of our favorite financial reads and no doubt laid the groundwork for him to be able to write this new book on Simons.

The Man Who Solved The Market profiles Simons's journey from mathematician and Soviet code breaker to quant pioneer in a Long Island strip mall.  It highlights how he hired physicists, mathematicians, and computer scientists to blaze an entirely new path on Wall Street, one dominated by fundamental analysis and human traders at the time.

Some of the biggest takeaways from the book were the lessons on culture, management, and alignment of interests.  For a firm so reliant on computers, the human aspect was perhaps the most intriguing, from managing people to building models around human behavior in order to exploit it.

Interlaced throughout the story are also interesting anecdotes, like when Rentec once had a 'fat-finger' trade buying 5x more wheat contracts than they were supposed to and the next day the media blamed a 'poor harvest' for the price move.

One unanticipated turn the book takes is by examining some of the inner turmoil at the firm and in particular the effects of all the wealth Rentec partners and employees wound up with, like how Rentec senior executive Robert Mercer is basically responsible for Donald Trump's presidency.

Normally, we end each book review outlining who should read the book or might benefit from it.  But honestly, we think everyone would enjoy it.  Even if you're not a quant or have zero interest in quants, there's still lessons to be gleaned and it's a very entertaining read.  After all, we're big believers in learning from all types of investors or traders, regardless of which strategy you follow. 

Obviously, the book isn't going to just give away Rentec's secrets and outline the blueprint to market success.  More than anything, The Man Who Solved The Market gives you a peek behind the curtain of a notoriously secretive firm and tells a previously untold story.  We highly recommend Zuckerman's profile of the 'modern-day Midas' and it's the perfect gift this holiday season for anyone interested in markets.