183: Gregory Zuckerman – Jim Simons—The Pinnacle of Trading Greatness

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Chat for more information. Tasty Trade Inc. is a registered broker dealer and member of FINRA, NFA, and SIPC. Podcast. What's up? Welcome back. Here we are for episode 183.

Featuring is Gregory Zuckerman, a writer at the Wall Street Journal and the author of several books, his latest release being The Man Who Solved the Market, how Jim Simons launched the quant revolution. And that is the very reason why he's here today. For anyone unfamiliar, Jim Simons is the brilliant-minded mathematician who founded hedge fund Renaissance Technologies. Using quantitative models and with billions in AUM, Renaissance has averaged annualized returns of net 39% since 1988.

These returns only become more spectacular once you actually discover that Renaissance investors pay a management and performance fee of five and forty four. therefore bringing the gross annualized returns to 66%. Due to the fund's superior performance today, Jim has an estimated net worth of twenty-three billion dollars. Greg describes him as being the greatest moneymaker in modern financial history.

Although journalists have previously covered the rise of Renaissance, for the longest time, much of it was still shrouded with mystery. But by gaining remarkable access to Jim and also many of the people around him, Greg has been able to now tell the full story in print with detail and accuracy. If you'd like to pick up a copy of The Man Who Solved the Market, it is available now. Just make your way to chatwithtraders dot com slash Simons, which will take you straight to Amazon.

Now, I know Greg has been doing a bit of media lately as the book has just come out. He's done several other podcasts and he's been featured in many online publications, and deservedly so. But fingers crossed you'll hear something new during our chat about Jim and how he reached the pinnacle of trading success. Hopefully.

I'm also aware that the audio is a bit scratchy at times. Sorry about this, uh though I'm sure you will manage just fine. And that is that. Let's jump across to the interview. Here is Gregory Zuckerman.

And probably a good place to start this conversation is why did you actually want to write a book about Jim? So I've been at the Wall Street Journal twenty-three years. I've written a few books and have uh it l a range of interests, but the one story that I always wanted to do, the one story that hadn't been written. was how Jim Cipons became the greatest investor slash trader in history. And

Part of the reason I wanted to do this project is because I knew it was gonna be a big challenge. I had approached Simons over the years at least once. And he didn't have any interest in sitting down with me. Sort of if you're a financial reporter, financial writer, it's sort of the great white whale. This is the one you wanted to capture. So I for whatever reason thought this was the time to write it and and frankly

he's getting older and a lot of his colleagues are getting older and if it wasn't now i it wasn't gonna be done in five, ten years, I don't think anyone could write this story, so now is the time. I just imagine it being such a such a huge undertaking because he's renowned for the his secrecy and the h the whole fund is renowned for its secrecy. Um, I just imagine it would have been really ambitious setting out to take this on.

Yes, so I agreed to do it and I got an advance. As a writer you get a a book advance. And most writers, ninety nine percent of them, go and cash their check. Um, we don't exactly have a lucrative profession, so you have a sizable check, you cash it. But I had mine on my desk in my uh downstairs office in suburban New Jersey for months, uh, and I wouldn't cash it because I wanted the

uh ability to return it because I wasn't sure I could pull this thing off. And eventually the accounting department of uh random house, penguin random house. The the accountants were were kinda like, Well w what's going on with that? Well w we got a discrepancy here. He d this cash this check isn't cash and that's pretty unusual. And they came to me and I was like, Yeah, I'm not sure I can do this

So I I did get comfortable. I finally got in touch with people who would talk, but for months uh I was concerned that I wouldn't get enough for this book and then I broke through.

So tell me about that because I know this is one of the things you highlighted in the the beginning of your book, how reluctant and how I guess in some ways it was surprising how to the extent of how reluctant people close to Jim and his colleagues, et cetera, how hesitant they were to actually speak with you. Well, I wasn't surprised, but it was quite difficult. This is the most secretive firm.

the financial industry has ever seen, has ever dealt with, they aren't from the industry. They're not people that um went came from other firms. They're generally speaking academics. They work there, make a lot of money, then go back into academia. And they generally don't have any incentive to talk. And they also are bound by pretty pretty sophisticated non disclosure agreements and beyond that they all love and respect Jim Simons and Jim Simons doesn't want anyone speaking.

As I mentioned in the book, I had interviews scheduled with some of Simon's competitors and these are billionaires in their own right often. and people work for them, etc. But keep in mind these arrivals, these are what should be enemies, competitors. And on the eve of those meetings, I was told, So s sorry, Greg, I have to cancel my the meeting with you. I can't talk to you because Jim asked me not to talk to you. And

Which is again pretty curious given that they're competitors. Why should they care that Jim Simons doesn't want them to talk? But people who work for him, people who used to work for him, people who even compete with him

don't want to get on his bad side and part of it is because they have respect for him. Part of it is they fear him a little bit. This is th the greatest trader in history. He's got a powerful firm. You kinda don't want to get on his bad side. So for all those reasons Right from the beginning I was told don't waste your time on this book.

Uh but but but I I was lucky enough to get some people who did talk to me and their stories were just compelling. It was a lot of drama early on in the in the firm's uh history and I figured and I knew Simons himself. had gone through a lot even before he started Renaissance. Even before he started Renaissance, you could write a book about that period, quite honestly. Uh and people will read it.

i in my book. So um I I I I did have this breakthrough where I got enough people to talk early on that it gave me Uh, it encouraged me. It gave me hope. I wasn't sure I could get others to talk, but at least I had some hope. And how did you get the opportunity to actually speak with Jim himself?

So eventually, I think Simons realized I wasn't going away. I spoke to people he grew up with. I spoke to people he was colleagues with, people he was uh in school with. family members. Um at one point I when I did get to speak to him, I showed him a picture.

and he didn't really recognize the photo on my phone. It was one of the homes h he he lived in growing up. So I think he got the message that I wasn't going away and also that I was serious about it. And I wanted to tell the story accurately and I made it clear that, you know, if I don't do it, someone else is gonna do it and probably may not take it as seriously.

for me I I'm pretty obsessive, maybe not to the level of of the mathematicians I dealt with, and I did um recognize a new brand of of of character w w when dealing with these people. They're they are a different breed where I don't know, I would share a paragraph or two that I've written with with a mathematician and they would get all upset. Greg, you can't write this. How do you write this? What kind of research do you do? Pretty critical stuff.

And at first I was pretty insulted. You know, I've been doing this for a while. I didn't think it was all wrong. And then we dig into it. And basically, five percent of what I wrote. was inaccurate and it was inaccurate and it needed to be changed, but that's kinda why I sent it to them, so we could um we could discuss it and see what was wrong. So

They are a different breed. They are obsessive about details and accuracy, even more so than I am. But um, you know, you you you learn to deal with that. And I think Jim realized I take it seriously. I wanted it to be accurate and not be frivolous. And so he eventually decided to talk, though l I do need to be clear.

He didn't address things he didn't want to address. He didn't give me secrets. And I said to him, Jim, you can lay out your best algorithms in front of me. I'm not gonna understand them. Uh but nonetheless he he didn't wanna do that. So he was very clear about what he did and what didn't want to speak with, but he gave me enough. He talked a lot about his early period and his evolution as an investor and as a person.

He talked a lot about his uh later periods of his life and I got enough about how uh they became what they are. Hawaii Renaissance is the greatest investment power. that the financial industry has ever seen, how Jim Simons made twenty three billion dollars and why they've got returns of sixty six percent a year uh for the since nineteen eighty eight. How many times did you get to speak with them? Was it just a once off or were there a a couple of times?

So we end up speaking uh in person about five or six times. And I'd say each time was about an hour and a half or so. So I got enough uh smok. Um I breathed enough smoke from his cigarettes to uh qualify for ha having uh having uh interviewed him and and uh it was a it was a it was a privilege because he's uh

He's a fascinating character. He's not a perfect individual. He's made mistakes. Some people can hold various things against him. But Netnet, uh pretty impressive and he's done a lot both for in the investing world, obviously, but society. At large.

That's also quite impressive that you got uh that much time with them as well. That's uh that's a little bit surprising actually. I can be persistent and I wasn't going away. He he could tell and and maybe you know at some point. I y part of him wanted to tell her story. a remarkable story. And again, even if he had never traded

uh a uh a a single equity or or g or bond or commodity contract, he'd still be worthy of a book in my eyes. He's got he's got led a really interesting life just in terms of his accomplishments in mathematics, he was a code breaker.

He's trying to cure autism today. He's trying to figure out the origins of life. He's a big big political uh involvement. He's an interesting guy. So I think part of him, most of him didn't want to speak and even as a as of a re a few months months ago he said he he doesn't want the book coming out. But part of him must have really also wanted to uh share some of his uh accomplishments and perspective.

Yeah, well I was gonna ask you about that'cause uh yeah, that's what you said at in the beginning of the book is that he asked you not to publish this or to to go ahead with the book and put it out. I mean, how do you feel about that? Does it put you in a bit of an awkward position? As a writer If you're told not to write something, it's a little bit akin to a

a young person, you know, told not to touch a stove, you kinda want to touch it a little bit more. So um I am not out to make friends. I'm out to tell an accurate story. So the fact that Jim didn't want me to write his story on a personal level I I I I felt a little bad for him, I guess, but my job is to deliver for my readers. So my audience. I I care about foremost and I needed it to be accurate and they deserve to h hear his story. I mean, these aren't state secrets at the end of the day.

Um, I'm not jeopardizing the nation's security. So these people and the they take themselves quite seriously and they have accomplished a lot. But let's be honest here, th they are trading stock. and other kind of investments. So the fact that uh Jim didn't want me to write the book. Um he's a very nice guy and and generous. individual. So I I you know, I I I feel for him to some extent, but you can't trade uh in the size that he does and his colleagues do, and you can't manage money

for institutions and others as they have over the past decade or so. Obviously the medallion fund is is for their own money, but now they take outside money and you so you can't take outside money and expect not some some level of scrutiny. So that's my job. Sure, that makes sense. I understand where you're coming from there. Let's hear a little bit about Jim's life prior to Renaissance. As you've already mentioned, he led quite a outstanding life even before uh he went full time into trading.

You know, he had a pretty uh accomplished academic career. So yeah, just tell us a little bit about life before Renaissance.

Sure. So Jim Simons is someone an individual who is um um especially smart, mathematically inclined. He did um MIT, uh Massachusetts uh Institute of Technology, one of the top undergraduate programs. He did that in three years. He um got his PhD from a top school, began teaching, he taught at both um MIT and then later at Harvard and um was popular and respected. And was on his way to a career in academia but he always had sort of this outside interest. And he's a really unique guy.

and an individual. And we can all in some ways learn from him, but it's hard to emulate him because He has talents sort of in both worlds. The the quantitative world, the the mathematic world. he is as accomplished as as anybody. He was a geometer and his accomplishments really did rival almost anybody in that world, but he also had the talent has the talent of dealing with people and interacting people. He um so early on and he's got a sense an interest in business. Not so he didn't really have

an interest in trading until he played with his money. He played with some of the money he got from his uh wedding, his wedding uh gifts, but then he gave that up. He couldn't do both. It was difficult to really pull off both. So he really focused on academia, but he always had this pull that very few other people in that world, in the world of mathematics, world of academia, had, and he had a pull to make money. And It it's really this like unvarnished uh appetite for wealth.

And some people close to him thought he wanted the money, the wealth to to be able to change the world. And later he uh has been able to do that a little bit in terms of politics and philanthropy, but um others just didn't understand that drive and really couldn't figure out why he

had had that interest in making money, but he really did. Um, so he had these two interests. He had this interest in academia and mathematics, and again, his uh He he he he won uh awards that um the the the Oswald um um Veblen Prize in Geometry, which is uh the top, he eventually was elected National Academy of Sciences. So he he rivaled almost anybody in that world in the world of geometry. Um and they're pil they're still si um they're still citing him.

Um churn simons uh is an accomplishment which uh very few people can match. Um it's he he did work with uh uh Shing Shen uh Churn and It's something called the theory of characteristic classes and

And sh and Chern Simons uh is a theory that is cited over and over again in academic papers till to this day. So um again, these these i it had an impact in physics that he didn't realize it would have, but it did. But so his accomplishments were pretty remarkable, but he always had this pull, always had this interest, making money.

Trying to figure out ways to trade on the side, he'd get distracted, he'd come back. So I find it kind of fascinating that he had one foot and he kind of acknowledges as much. He sort of had one foot. in both worlds and then eventually got into code breaking. We can talk about that as well.

Okay, yeah, sure let's let's hear a little bit about that because that's quite a significant part. Sure. So he in the early sixties was again teaching at Harvard and was a little bit unhappy, wasn't making enough money, had these debts that had piled up. He and his father had uh l borrowed money to invest in a business and uh South America, which was doing okay, but it it it hit it wasn't really thriving, so they needed to pay down their debts.

Um he was teaching extra courses on the side to make money, but Uh, he had this focus on getting wealthy. And first his initial focus was just paying down his debts. So he had an opportunity to go work for. a division of the National Security Agency in nineteen sixty four.

He went and did that. And for four years he was on the staff of something called the the C C R D, the Communications Research Division. It's a division of the Institute for Defense Analysis. Um basically it's connected with Princeton and they do work for the government. And what they were trying to do at the time was break Soviet code.

And um it was challenging. It was they were going through a difficult p period of the time where they hadn't been able to really um break code. And he was a a tremendous success there and it rose the ranks and Um th he could have r run the whole thing, but he found himself on the outs. He had spoken out about Vietnam and he did it in a public way. He wrote an article, he wrote a letter in the New York Times. And his superiors weren't thrilled with that. So eventually he lost that job.

quite an opinionated interesting person and underscores that theme. So originally he was academic. He goes and breaks code for the the government, the United States government and the Russians is quite successful, but loses that job. And then he begins a a different job, a position running a mathematics department at Stonybrook, Stonyburg University, and that was in 1968. And each step along the way, he developed new skills. So

at and when he was working for the government, he dis he figured out, he learned, he was really educated in creating algorithms. And that's w w how they broke code. Um they used mathematical models for the first time. He w he learned how to do that. Again, that kind of led to his his future success. And what happened at Stony Brook University was he he led this department that really was struggling. No one really had heard about the school.

And he built it up and he did that by finding and wooing and luring talent, talented individuals to come and work for the school. And again, those were new skills and new talents that he had to develop.

And it's it it really um set the groundwork for his eventual firm because uh his firm uh um I c I'll talk about how how he s went and and started to tr trade full time, but eventually he was somebody who hired the best talent from all over the country and convinced them to leave sometimes Cushy jobs, sometimes really respected positions in academia and elsewhere, to go take a chance.

on this firm he started called Renaissance Technologies. So each step along the way in academia, code breaking, uh mathematics, he developed skills that eventually led to his success.

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Now one of the things you highlighted a couple of times there was he had a pretty strong motivation to become wealthy. You also mentioned that he had, you know, borrowed some money and he wasn't sort of happy with the money he was making. What was his financial situation like during this period in his life? And I I just think that's an interesting question to ask because

We know Jim Simons today is worth twenty something billion dollars, but where did he actually start out from? Like what was his financial situation like before Renaissance came into the picture? Sure. So he was uh born uh and lived outside Boston in the city of Newton. And he was firmly middle class.

His father was someone who uh worked in a shoe factory. It was his grandfather's Jim Simon's grandfather's shoe factory. Jim Simon's father went and worked uh in the family business, it was his father-in-law's business and was always a little bit

um disappointed in his life. This is Jim Simon's father. I'm talking about Maddie. He had opportunities elsewhere. He was in the film industry for a little while. It was a thriving, growing industry, and he was loving it. And due to family obligations, he felt compelled

to go and work for his father in law in the shoe business and he thought he was gonna get equity and he never got the equity and he basically uh that was a lesson that Jim Simons learned that you should follow what your your passion. And um he he decided w when it comes comes to my own life, Jim Simon says, I'm gonna do what I love. And it what he loved was mathematics and again he was middle class

The the factory, the family factory was successful, but not not tremendously so. And then he went into academia and he was like any other academic. Um, got paid like an am academic. Uh, when he worked for the government he did a little bit better, but we're not talking about wealth whatsoever. And uh he did have this hunger, this real desire.

So people think of Jim Simons as this remarkable success, and he is, but I don't think people pay enough attention or are aware, and I spent a lot of time in my book. focusing on how much he overcame and how he struggled for years. I mean until qu past his forty your his fortieth birthday

He still hadn't figured out, couldn't really understand how to trade, how to make good money. He was still investing like a macro kind of tourist, using his instincts and intuition and Reading the news and and trading off that. even though he's a mathematician, it took a while for him to become a quant and to model and to to use algorithms. So it's it's sort of a lesson of both the importance of resilience and

having confidence in oneself, but also how difficult it is to be a Kwan. Yeah, that's one of the things which I find so fascinating about Jim is that

he didn't completely focus his attention on trading. Like he didn't go full time into trading until he was like forty years old. I mean, when you think about Jim and and how much he's accomplished to know that he he didn't start until he was forty. It's it's quite amazing. Yeah, it's funny. I've written uh uh uh this is my third book and

If for whatever reason, all those who've accomplished a lot in in in my books are people that pa did it past fifty or forty, and it's a nice reminder that there's uh greatness ahead. If if if you haven't reached it at that age You you still can. So when it comes to Jim Simons and I I I write it in the book, he really had um a series of obstacles and difficulties and

could have flamed out a a bunch of different places along the way and given up. He really could have given up and it it took this resilience and innate confidence in himself and in his colleagues. And he was able to motivate them, hire the right people, keep them focused on the job, figuring out how to solve um this this challenge, this problem of trading algorithmically and

developing the proper model and they eventually did, but it could have gone an another direction. Yeah. Well let's get into that a bit more about the early days of Renaissance. Like what were some of the early wins or some of the stumbling blocks which that you know, they came upon. Um, who were some of the first people that he hired, what were their roles? Like yeah, I'm just interested to hear a little bit more about the roots, how this started.

When Simon started, he decided to become a trader full time, started a firm to do that. His first hire was a guy named Lenny Baum. He was an American mathematician who was Pretty famous in in various circles of mathematics. He developed uh the Baumwelch algorithm, uh which uh helps in terms of predictions in various areas, and some people even cite it. as uh part of the reason uh things like uh

Google can operate the way it does and other pr predictive methods. And he's a guy who went to Harvard and got his PhD from Harvard as well. Uh is a interesting guy, gentleman that they work together when they were breaking code for the government. So he knew Baum was smart, he knew he was talented, he can but but Baum had no interest in trading. And and and time after time in my book, Simons will find top scientists, mathematicians.

and say, Hey, come work for my trading firm and they have no interest whatsoever. What do I know from trading? Well, I don't care about trading. They don't even these people don't even hunger for money really. They're not people that always wanted to be wealthy and and Baum was one of them. He was an academic, but it was the challenge. It was the idea of yes, you've accomplished a lot in academia.

See if you can now solve this riddle and the riddle being a market. And you know, trading is among the most challenging riddles. Yeah, there's been an existence and that's what captivated Lenny Baum. So Baum got curious about markets and Simon's sparked that curiosity and together they started building a system and early on it had some success. Um they called it the uh the the piggy the piggy model because it bought a lot of hogs. Well they weren't doing equities back then and

for whatever reason it it it bought a lot of hogs and uh at one point and it was going pretty well but at one point um it it it was early you could really see it as an early form of uh AI, machine learning. It started the the the mo the model taught itself uh in some ways and it started loading up

on potatoes and before they knew it, they had cornered the market on Maine potatoes, potatoes from the state of Maine, and regulators called and they were upset and it disrupted the markets. And Simon started his kind of humorous. He's a funny guy actually and

got a good view on on on life, but the regulators did not see it any humor in there. So they they fined him and they lost millions of dollars on the escapade and eventually both Simons and Lennybaum just said, you know, enough of these models. It's just not gonna work. Let's trade like everybody else. Let's read the news. Let's analyze economic data.

They hired this consultant named uh this economist named Alan Greenspan, went on to do big things. Um they tried to get news and react quicker than other people. They were like anybody else. That's the irony. Here's his mathematician, genius, uh borderline, genius kinda geometer, and he was training like I would, y you know.

in my basement kind of. Oh, I read a piece of news and some some politician made an announcement, so I'm gonna go quickly buy or sell. And you know, they made a lot of money, they lost a lot of money. Net net they actually did quite well. Lenny Baum though became a little headstrong and determined and and stubborn and he and Simon sort of did their own trading, had their own accounts. Um and eventually they had a falling out. And net net they made money, but it was just too hard.

emotionally on Simons and he couldn't take it. He's like, I can't trade this way anymore. Maybe I'll make money, but emotionally I can't handle the ups and downs and feeling like an idiot one day and on top of the world the next and Physically he had some issues with his stomach back in college, I write about in the book.

they were recurring now. So he had to find a different approach. And to do so he brought in a different academic who he had come across. Again He had the advantage of dealing with um real superstars when it comes to the world of mathematics. And so he brought in a different individual named Jim Axe. another American mathematician. He was he also did some groundbreaking work in terms of algebra and numbers theory. Um he won the Cole prize in number theory, which is

uh one of the top prizes in that area and once again had no interest in trading or investing until Simons told him about it and and kind of put the challenge to him and Axe left academia. He was at Stony Brook. and joined Simon's firm. And once again it worked for a while and they did algorithmic trading, but it they developed a m some computerized models and Simon wanted it to be automated.

Just and we're talking this w now we're in in i in the seventies, the nineteen seventies at at this point and early eighties and and then until like sort of the late eighties they they they tried, they make they tried to work on it. And eventually he's a real character and a fascinating individual in his own right, Jim Max. And he moved out to California and

w want to get away from people and brought part of the firm there and they struggled and and made some money, lost some money, and eventually they had a falling out. So there he was, Jim Simons. in nineteen eighty seven, didn't really have much hope for his firm. He hadn't hadn't worked with a couple of the superstar academics, so he didn't have any reason to think it would work going forward. But he brought in

A different individual named Elwin Burlicamp, who managed to help turn this thing around. And while my book is really about Jim Simons is just as much about the people around him, the people who worked there, the people he dealt with, colleagues. uh staff members and others who in their own right are I I I found the one thing that I found uh surprising is how many of them are just fascinating, accomplished.

characters in their own right. So I was very lucky as a writer that it wasn't just a book about Jim Simons, uh it was about these other real care colorful oddballs in their own right.

And so it sounds like there was a lot of up and downs to this point. Was there like is there something you can pinpoint, like a key turning point that turned Renaissance around and sort of put it on the projectory to be the superstar fund that it's become? Yeah, it was the shift by Burlacamp at the helm. Simons was always sort of around, helping, dealing with investors, giving guidance, hiring. Making some key decisions.

But he was also doing things like venture capital and that's why they call it Renaissance Technologies. He had some interests in different businesses and he's one of these guys with a lot of different interests in life. So he was focused on his firm, but he had other things going on too. And he would hire people to help run the firm and step in and guide them, but he was off doing other things. So I really did give a lot of credit to a mathematician named Erlin uh Elwyn Burlacamp, who

was known for his work in computer science and coding theory and covenatorial game theory. Again, pretty well known person in those areas of mathematic mathematics. And he's a guy who just Doesn't even didn't even trust he he died last year, unfortunately.

I had um the the privilege of spending a lot of time with him. He's a guy doesn't even trust financial markets, not even sure he believes in capitalism. He um thinks that markets are kinda rigged and he's suspicious of them and yet Simon's got him to leave academia to try to figure out what to do, how to turn around.

their key hedge fund, which was called Medallion at the time. And it was a shift. The turning point was in nineteen eighty eight or so. And it was a shift to shorter term trading. And the idea that It's just too hard to make these large outsize bets. Outside bets that some comes can go right, some comes can go wrong, and but when they go wrong they can really sink you. And they decided to turn their firm into something of a of a casino where

If you can get it right most of the time, even if it's just fifty or fifty-one or fifty-two percent of the time, that's enough if you trade frequently enough. And it's not to say they don't do longer trading. But on average. back then and it's continued today, they hold investments, their positions for about two days on average. Sometimes they get confused with these flash traders and

Um high frequency. They're not high frequency, they're medium frequency. And that all b ch changed in uh eighty eight when Belt Berlicamp started running the firm. He only did it for a year. He got in a fight with Simons like a lot of these other people I write about in my book, and he said I'm going back to academia. And quite frankly, Burla Camp and the others who left

They didn't think that Simons and Medallion and Renaissance would go on to make history. They thought it was a successful firm and Maybe it would go on to be profitable, but no one had a clue that Simons could keep improving things. And that's

pretty r starting start that was startling to me as well. I mean these were people who could have stayed or kept their interest or fought to keep an interest in the day and and they did well enough and they left and they made their millions, but they didn't suspect that Medallion could be what it was. I mean, Burlacamp had a fight with Simons at one point. He said, because Simons said, I think we can make

I think it was 80% a year. And Burlic Ham's come said, come on, there's no way we can do that. Jim, that's preposterous. And they he they he left. And Simon said, You know what? I'm gonna run this place. And the rest is history.

Let me ask you just a real quick question. How long was it until Jim made his first billion dollars? That's a good question. So their turning point was in nineteen eighty-eight and they started they were small. For years they were small. They couldn't get much backing from investors. Even though quants were just getting going some firms like D.E. Shaw, 1989, 1990, Simons couldn't get many people to back him, institutional investors or others.

I describe a scene where Donald Sussman, who who was one of the backers of D. E. Shaw and a super smart guy in his own right. Uh s Simons came to Sussman asking for money for the firm and Sussman liked Simons and thought he might be successful, but didn't have an interest in investing. He was already backing Deshaw. It went and worked out. So for a while Jim and his colleagues didn't invest much money, so they couldn't make that much.

Um and then the turning point was sort of when they got into equities and that and and figured out equities. It took them years to figure out equities, but there's a cap. in terms of how much in AUM you can have. See, I can say AUM for your audience. Most people I can't say AUM. So there's a cap when it comes to the the the futures world and commodities and and and bonds and

currencies. There's just so much these are some of those uh corners of those markets are just too small. You can't manage Tens of billions. And that's what Simons wanted to do because again, he wanted huge wealth. He wanted to become the guy who solve the market and you couldn't really do that just by managing uh uh commodities and such. So equity was was the key and it took them years to do it, but they finally turned the corner in nineteen ninety six and started allocating much more

to it to their their fund, but also to to equities. And then that was really the charting that that's when huge wealth wealth started piling up for Simons in the late nineties. Right, right. Okay.

Now, you said just before, and I'd love to go on this a little bit more if we could, uh you spoke about Uh, they often get confused as like a a fund that just does high frequency trading, uh, you know, in and out without in in seconds and minutes, etc. But you said that they they tend to hold most positions for an average of two days um and uh could be described as a medium frequency operation. So, I mean, can you give a little more insight and this is obviously what everyone wants to know.

A little more insight to the strategies that they are running and, you know, their their actual approach to the market. Sure. So what they do today and Although we're fast forwarding to today, it's not dissimilar from what they did even a decade ago, so it's okay to discuss it. They've built on what the accomplishments of a decade or so ago, and I write about it in the book, but

The principles and the approach are s similar. They do fast trading, but it's not super fast. And if not for lack of trying, they actually looked into being a fa fast trading and high frequency and it didn't work. And the irony is, you know, you think of Jim Simons uh and they are cutting edge in a lot of ways.

But when it comes to technology, it's not they're not the most sophisticated firm, believe it or not. People internally kinda joke about it. Yeah, they're high powered and they've got great technology and computers, etc. But there are firms with much More power. And they looked at high frequency stuff and they they're not one of these people that can do it millisecond type trades. They look for patterns in the market and everything is about

Um past patterns that might repeat. And these are all based on relationships among equities. Yes, they still do bonds and and debt investments and commodities and they make money there. But the bulk of their It uh profits come from equities. And the way they invest is they hold 4,000 or so stocks long, and they're 4,000 or so short.

So it's a version of statistical arbitrage and pairs trading, but much, much more sophisticated. That's really a just a simplistic way to look at it. These are trades that Yeah, as I said, that the the average a holding period of about two days, they do trade much more frequently, um, but that's usually when they're establishing positions or getting out of position. So they'll

do rapid fire trades to put on a trade, they'll break up the trade. So that will seem like they're really rapid fire, high frequency type. operation, but those are again just just getting into positions. And yeah, some are a little bit longer. They'll do m minutes to to months is the way they describe it. But on average it's about two days. And what they've discovered are

Relationships among equities. And they'll trade, they're never looking, they're never outright betting on a stock or even a group of stocks to go up or down. It's all groups of individual stocks. and larger um um segments of of of the market in relation to each other, in relation to an index, in relation sh to a factor. Um it's pretty sophisticated stuff and they increasingly it's become much more sophisticated. So

It's not like they've discovered okay, every Tuesday morning at at ten A. M. the market always goes up. People always think of it that way. It's not like that. There are principles that they've discovered and they're all based on um historic patterns uh of the market. But have a sense that there are more that are just not we just can't see. I liken it to sort of a bee that looking at a flower can just see many more um hues than

you and I can just l looking at that same flower, there that bee. They can see other things affecting markets and Um, they trade on them, but they have so many more advantages that it's not just about where things are going. They've got much better system of evaluating their impact on the market. They've got a much much better system of eva of evaluat the risk. They know when to put on leverage. They've got the ability to put on lots of leverage that other people don't have.

And they can do it in moments where they have more opportunity. Um, they hire much better talent, partly because they're renaissance, partly because they come from the world academia. They know who the talent is. They're talking superstars. Every firm nowadays says, Oh yeah, we've got you know, PhDs, but it's not just a question of PhDs. These are people who dominated their fields, be it physics, be it um astronomy. And they also have this

real emphasis on data that needs to be discussed. They were pouring through, they were collecting data much earlier than anybody else. I sort of liken it to The amount of data they have is comparable to let's say

Uh I let's say I were to say to you, okay, how how long would it take you to start a library? Like a local library? Well, you know, I don't know, a few months maybe to get a decent library going on your corner kind of thing, getting enough books, et cetera. But what if I were to say to you, Okay, now build me the United States Library of Congress The Smithsonian Museum. In other words, artifacts historic um artifacts that no one can get their hands on and they've got that data. It goes back

To the seven nine seventeen hundreds and eighteen hundreds. And they don't usually use this data, frankly. It's sometimes it's Though they can they're curious, they check it out, they compare stuff, but basically they're looking for patterns. And we as investors. We repeat our behavior is one of the conclusions uh from the Renaissance and Jim Simons experience. And they're better able to than others to identify these patterns that sometimes

You mentioned data there. What was perhaps some of the most obscure uh data sets that you you heard that they were collecting? The data they collect, it's not so much they started off with pricing data and they had it before others. It's more sophisticated, it's more detailed, then it goes back. much, much, much further, but they also early on began developing and collecting a database that includes other kinds of data and it includes

Everything, everything you can imagine, they've purchased and they've scrutinized. And that's weather patterns, that's all kinds of economic data, behavior, shipping, uh, etcetera. Anything you can imagine they've got and they've poured through and they've figured out. And it's not even so much that they have better than others But they've been scrutinizing it for longer and they have a better ways of of looking for

for um different patterns. So it's better data, it's older, it's more sophisticated, but they've also been dealing with it much, much longer.

Did you hear about any areas of mathematic uh mathematics? I can't even say the word. Yeah, yeah, yeah. Did you hear about any areas of mathematics or specific methods of modelling which are commonly being used inside of Renaissance? Uh, I think Markov models is maybe something that gets mentioned a little bit in the book. Um, you know, ma maybe that's it, or is there something else which um you heard popping up a few times? So the math they use uh is sophisticated and

It's it's not uh what an an an average investor would use, but other quants share some of these approaches. Things like Uh um as you said, mark of models but also the kernel method is a it's a it's a m it's an approach to um uh AI and uh and and that um and they were doing that early on, so you do have have to give'em credit for their f in in that regard. Um they weren't doing simple regressions.

Um they were doing more sophisticated uh approaches. Um and again it's it's it's sophisticated stuff, but it's it's early it's earlier than other people in in terms of things like uh again the kernel method, uh, which is a you know a class of algorithms for for pattern analysis. So they were doing that, but I I have to emphasize that people don't don't r recognize, I don't think, that it's how they manage as much as anything else and how Jim Simons manages. So

It's not so much his genius, I I like to say, and I think I even quote someone in my book saying that someone who works with Sim with Jim. It's how he manages genius. So He incentivizes people, gets them on the same page like no one else. He's really a a management marvel in some ways. He's a rare breed, sort of this world class mathematician.

who who learned early on how to recruit and manage star scientists and mathematicians and few quants share this ability to motivate employees, keep them on the same page. So it's his ability to manage genius as much as His genius itself. He he he attracts top talent. Few people de facto. He's got this open architecture. Um they they share work like nowhere else. They've got one model. Anybody in the firm can see the code.

There aren't corners of the code that are available only to the most senior people like some tech firms and others. There's no there's only one model, unlike some some firms. They all share, they all can work. They could all can pick apart and they're encouraged to pick about each other's work and and they can see each other's work. And that open architecture, I think, is A huge advantage. Um

So because they don't lose as many people as others, they make a lot of money. They've got these they've got these documents, these non combete documents. and others so they don't fear the loss of talent and the loss of intellectual property like other firms and as a result they can share more than others. They're less fearful that employees are gonna leave

for arrivals. So they embrace this open architecture and even allow, you know, junior employees to see e every line of code, which is pretty impressive.

Yeah, yeah, absolutely. Uh what you're talking about here is it's quite insightful. It's very interesting as well. Um and you know, it's it's a little bit surprising that um you were able to kind of get this information as well, as Renaissance is so renowned for their secrecy. Was there anything that you uncovered that surprised you or you didn't expect to discover? So I was surprised that I eventually could explain to the reader

some key breakthroughs, how Bob Mercer and Peter Brown figured out equities. They had some stumbling blocks and they were able to figure that out. Um I think I outline for the reader, I tell the story of how they um had approaches that really others couldn't match, I haven't been able to match yet. Um some nuances, how they do things like hiding their signals and trade in the market.

uh in a way that people can't pick up on little nuances. So there's no I I I guess I did come into the project thinking, wow, there's this one huge secret that I'm hopefully gonna find. And for a while it kept me up at night. God, what what is that secret? What is that one secret that Jim Simons knows that no one else knows? Again, maybe it's, you know, at four o'clock on every Wednesday, there's an order that he places and

It is nothing like that. It's a it's a collection of a good 20 or 25 secrets, I would say. And it's things like keeping a cap on the funds. Um they have limited competition. They've got these great cost, risk, and impact models is having this collaborative culture. Um Stuff they that I I thought I hadn't really focused on that kind of stuff. But there are nuances to how they trade and how they

fine signals and the fact that they don't mind non-intuitive signals. They they'll they will trade and that's not true of places like Two Sigma and some other big quant firms, they will trade signals that don't make any sense whatsoever. And you do worry about that as a trader. Um most again, most rivals won't do that. And but they are scientists and if they f decide that there's a um enough of uh convincing um data, they're scientists. It's i it's i th the story really in some ways is a

is is a reminder of the importance of the scientific method and not letting store get not getting carried away with stories. And you see it time and time again. Investors Make that mistake. You look at what's happened with with WeWork. You look at what happened with um Uber. Amen. with with with t with company after company where it's a story and you get carried away. Even sophisticated investors get carried away with the story, Theranos, etc. You look at the President of the United States.

It's all about instinct and intuition and and gut and the Federal Reserve to some extent too. It it's ironic to me and almost sad that some of the biggest and most important decisions in the world get made are are made based on intuition and research and I've become much more of a subscriber to the view that you need to embrace the scientific empro o approach. Testing. Using data, not being swayed by your intuition and your your instincts. And it's hard. It's really hard. I mean, I tell a story.

You talk about what's surprising to me. One of the most surprising things to me was learning that last year, at the end of last year, Jim Simons panicked. And the market was going down, if you remember, end of twenty eighteen, um, the market was going down and Jim Simons was on vacation on his super yacht somewhere. And he started panicking about the market. And because he's got a lot of money still in the market and he's got a huge family office and he has these huge

Philanthropic commitments. He's got one of the biggest foundations uh in the world and they've got huge ambitions. So the market was was tumbling. Jim Simons picks up the phone, he calls his financial advisor. We should put on some some a short here. We we should get some some s some some protection. And his advisor says, Well, Jim, you know, maybe let's wait a little Here he is, Jim Simons. The quant of all quant, the hero in the quant world

And he wasn't using quantitative analysis. He was investing like he had back in the eighties, using his intuition and instinct and and emotion. And that's and he's the one who takes advantage of emotion. He and his His colleagues are trained. to do so. So it's hard to be a quant. It's really hard, even for quants. And in the end He didn't panic and it all worked out fine. But I was just struck by if Jim Simons can panic, then who who who isn't?

um liable to panic and and have fear. And it's important to just remember to stick with the model and with the data and with the scientific approach. And it's hard.

Yeah, we all have uh moments of vulnerability. Yeah. Even Jim Simons. Yeah, yeah. That's saying something. Um, what's Jim's level of involvement in Renaissance today? So it's a fascinating thing that he makes about a billion dollars a year, billion and a half, give or take, you know, a hundred million here, a hundred million there, and he hardly ever goes in the office.

in pretty good pretty cushy position there where you don't even have to go into the office and you make a billion and a half dollars. So he's still in touch with them and he From a management perspective, he's the one who ousted Bob Mercer. Bob Mercer was the co-CEO and was doing a really great job and an interesting character in his own right. He became involved in politics. He helped put Donald Trump in office.

And Jim Simons is a left leaning guy. He was uh the third biggest supporter of Hillary Clinton in the two thousand sixteen presidential campaign and and yet he likes Bob Mercer on a personal level and he liked him also because Bob Mercer was very successful and he made Jim Simons a lot of money. So Simons was really torn what to do. And you can't fire someone for their politics, he decided, and he didn't. But eventually

He became such a divisive character within the firm. I'm talking about Bob Mercer, and I write about it in the book that morale was being impacted, and Simons had to step in. So he had a tough conversation with. Bob Mercer and forced Mercer to step down. He's still there, but he's not running things. So Simons will get involved with those kind of bigger decisions, but in terms of day to day, Simons is really focused on philanthropy. and trying to change the world uh while caching his checks.

That's something I wanted to ask you. You know, as we spoke about earlier on in this conversation, Jim was someone who, you know, had a drive to become very wealthy and he became outrageously wealthy. What's he done with his money? What does he do with it? So Jim Simons runs one of the largest foundations in the United States, charitable foundations, and he does a lot of interesting things with that money. Um he

subsidizes every public school teacher in math and science in the in New York State. And he does that with about ten thousand dollars each. And he does that so that they'll stay as teachers. He believes in the importance of math and science and he thinks we've lost too many people from that world to private industry.

As I kinda point out in the book, um Simons and and Renaissance are among those who do that hiring and so he has himself to blame. But he wants there to be more better teaching of math and science, so he subsidizes all these public school teachers with considerable amount of money. He at the is at the forefront of autism research. He's got

um, dozens and dozens of scientists he funds to make progress. And there are some drugs in the pipeline, hopefully they're successful, that will help those with autism. Uh he funds research on the beginning of life and how this universe began, the first few moments and whether the Big Bang uh was was truly how things began or not. Um he does um all other kind of scientific and healthcare related research, um Math for America, which um tries to encourage

mathematics education in the United States, um Stony Brook University, education, etcetera. So he does a lot of really good things with his money. Also, you know, we we speak about Jim Simons making a lot of money from Renaissance.

Obviously there were other people uh involved in some of them we've spoken about. Who else made a lot of money from uh this venture? Like and how how does their wealth compare to Jim's? People don't really focus on it, but the average

individual there, the average researcher, they just call'em out researchers, or maybe they're on the other side of the business, elsewhere in the business, is pretty darn wealthy in their own right. So A guy like David Magerman, who I write about in my book, who spent a good decade or so at the firm and was senior, but he wasn't the most senior person. Uh when he left the firm he had enough money to become

One of the largest philanthropists in his own local community. He's probably worth a good fifty to a hundred million dollars. And again, this is somebody who was senior. And important and made contributions, but never ran the firm, wasn't the top, you know, five people at the firm. So there's a remarkable amount of wealth.

there. And increasingly you're seeing the impact in various areas, be it in philanthropy or or elsewhere, of secondary type people. And the people who run the firm have a lot of impact. So Bob Mercer Who was the CEO, co CEO for a number of years, and as a billionaire in his own right, he uh it was the top. A supporter, financial supporter for Donald Trump. He got involved with conservative causes. He's he helped in terms of making uh Brexit a reality. He was the person who put

Kellyanne Conway and Steve Bannon in the Trump campaign, stabilizing it in a really difficult, uh tumultuous period in the Trump campaign. And one can argue that there's really no one more important than Bob Mercer in terms of putting Donald Trump in the White House. So you're seeing an impact from these different characters within Renaissance. So it's not just Jim Simons.

Uh, this might be a little bit controversial, but what do you know about Jim Simons and uh the Paradise Papers league? I read something when I was doing a little bit of uh prep for uh this discussion that we're having here, and it went something along the lines of His ac his net worth had been reported in Forbes, uh, I'm not sure what year this was, maybe early two thousands, as being a certain amount. I think it was around about eight billion dollars at the time.

Uh, and then this Paradise Papers leak came out and it turns out he's got another eight billion dollars or so uh in a tax haven offshore uh in Bermuda. I don't know how much truth is in that, but what do you know about um yeah, the Paradise Papers and Jim Simons? So the Paradise Papers reveal that Simons is wealthier than most people assumed. I add up all his money at being uh twenty three billion dollars. I'm very comfortable and confident of that number.

And in terms of the Paradise Pipers and the offshore money, he has a lot of money offshore, but he's not the only one. And frankly, I didn't find anything nefarious about it. Uh did he take advantage of of tax? Uh benefits for sure, but there's nothing nefarious. It's and frankly, almost all that money offshore is gonna go into his foundation at some point, is dedicated to his foundation. So at some point it will be given away.

I do write in the book about their use of Of really um aggressive tactics to convert short term profits to long term profits. and thereby avoiding billions, billions and billions of dollars of taxes, both the firm and the individuals themselves. And I think they're gonna lose this case. So the the United States eventually found out about it and is challenging

their use of these tac um these stratagems and I think Renaissance and Simons are gonna lose this case. They're gonna have to write checks for billions of dollars. I mean Simons will still be worth tens of billions of dollars. But I think they're gonna lose that case. So yeah, I do fault them or at least I critique them.

for converting I mean here he is Simons talks about how um the gov people don't support the government perhaps enough. He's left leaning. He's um believes maybe taxes should go a little bit higher. And yet he and his firm were so aggressive in avoiding tax payments. So one can fault them in that regard. But generally speaking, the offshore money I didn't find really that troubling.

Yeah, I just thought that was incredible that he'd been quoted in Forbes as being worth however much and then all of a sudden it it it comes out that he's also got you know, another eight billion dollars or whatever it is, uh, offshore and his actual net worth is like double what everyone ev thought it was, you know. Yeah. Then there was the time when uh

Someone was cleaning his couch and they found a couple hundred million dollars in the in the corner there too. Yeah. But uh he he doesn't it's it's different than you and I. But right. For years people internally kind of giggled.

about how little Forbes listed him uh each year. And people internally too, there are other people Henry O'Alfred and talk about Bob Mercer, Peter Brown. They were all billionaires and yet It was hard for Forbes and other people to realize this isn't the most secretive firm. And a group of individuals were just secretive, unlike anybody else. So that's kind of why I wanted to

Do this book, shed some light on them, explain how they made their wealth, maybe we can learn from them or just be entertained by their exploits. Yeah. Well I gotta say, on a personal level, I I appreciate you for writing this book. I mean, I was I was pleasantly surprised to hear that there was a book coming out about Jim's story because um you know, if there's any trader I'd love to learn more about, it's it's Jim Simons. I mean, it's he he's kind of the pinnacle of of trading success.

Yeah, massive undertaking from you and uh you've done a really great job of the book. I'm only part way through it, but um I'll I'll certainly be finishing this one. It was the most difficult project I've ever undertaken. I um would do these late night um sessions typing and trying to figure out and understand and there were a couple of times when I heard some noise upstairs. I I worked down in my basement and um

I said, Oh, my kids left the T V on again. I gotta go turn it off and I go upstairs and there's no T V on and I realize it's the birds getting up in the morning. So I just had just work through the night and I needed to because They were di i it was a it was difficult to get information from these people, but it was also difficult to understand it and to make it comprehensible to people and to write it in the form of a of a narrative. And but I I thought it was a compelling story here, um, tale.

And I wanted to be the one to do it. So I kept working on it. Yeah. No, that's incredible, man. I'm I'm glad you've done it. Thank you. Anyone who's listening to this podcast, uh, if you want to get a copy of Greg's book. Uh you can go to chatwithraders.com slash Simons. They'll redirect you to it on Amazon. I've I've set up that link. Uh chatwithraders.com slash Simons and the book is titled The Man Who Solved the Market.

Uh, Greg, really appreciate you coming on the podcast, man. Thank you very much. Oh, it was a lot of fun. Thank you for having me. You've reached the end of this episode of Chat with Traders, but rest assured there are more episodes. soon. Love it if you leave a-