Earn $100 billion in 30 years? ! Uncovering the praise and skepticism of the Simons Medallion Fund

On May 10, local time, legendary investor Jim Simmons passed away in New York at the age of 86. Because he founded the most successful quantitative hedge fund in history and earned more than $100 billion during his investment career, Simons is known as the "market conqueror" in the investment community.

Simmons was born on April 25, 1938 in Newton, Massachusetts, USA. He showed early interest in mathematics. "I loved everything about math," Simmons said in a 2015 interview. "The only thing I thought about was that I would be a mathematician."

He received a bachelor's degree in mathematics from MIT in 1958 and a PhD in mathematics from the University of California, Berkeley, in 1961.

After earning his PhD, Simons taught briefly at MIT and Harvard before joining the Institute for Defense Analyses in Princeton, New Jersey. There, he worked as a codebreaker for the National Security Agency, dividing his time between solving cryptographic problems and continuing his own mathematical research.

In 1968, he was fired from the institute for speaking out against the Vietnam War.

Later, he came to teach in the Department of Mathematics at Stony Brook University, a subsidiary of the State University of New York. At Stony Brook University, Simmons continued to pursue mathematical research, most notably with Chern. Their paths briefly crossed during Simmons’ time at UC Berkeley. At Stony Brook, they were finally able to combine their talents.

"This was undoubtedly the pinnacle of my mathematical career," Simons said in his obituary for Chern in the 2005 newsletter of the American Mathematical Society. "I think anyone who worked with Chern would probably say the same thing."

In 1974, Simons and Chen Shengshen collaborated to publish a paper entitled "Characteristic Forms and Geometric Constants", which introduced a geometric measurement method called the Chen-Simons invariant. Although the pair didn't know it at the time, their work would play a seminal role not only in mathematics, but also in quantum field theory, string theory and condensed matter physics. In 1976, Simons received the American Mathematical Society's Oswald Veblen Geometry Prize for his mathematical research achievements.

"This job was a good experience," Simmons said in an interview in 2015. "I was very happy with it, and so was Chen. It even created a niche that is now booming. Today, those who are Something called the Chern-Simons invariant had spread into a lot of physics, but I never thought it would apply to physics. But that's the thing about mathematics - you never know. Where will it go?"

While at Stony Brook University, Simmons met Marilyn Hollis and they married in 1977. He and his wife donated $500 million to the Stony Brook University Foundation, the largest unrestricted donation from an individual to an American university in history. “Stony Brook gave me an opportunity — so it’s very fulfilling to see this university further grow and develop,” Simmons said.

Simmons has always been interested in business, especially finance. While at UC Berkeley, he began trading stocks and dabbled in soybean futures, always looking for investment opportunities.

In 1978, various currencies became more elastic and began to decouple from the price of gold, and the pound began to plummet. Simons, 40, saw this market opportunity and officially decided to leave the academic circle and join foreign exchange trading. He founded a company called Monemetrics, which he later renamed Renaissance Technologies. Completely different from the thinking of mainstream investors at the time, Simons adopted a strategy similar to that he used when deciphering codes at the Institute for Defense Analyses. He was convinced that mathematical models could be used to unearth the hidden patterns behind prices - "There must be a way to predict prices." mold".

More than other investment firms, Renaissance Technologies is more willing to hire mathematicians, physicists and computer scientists than Wall Street talent. Many of the talents who joined the Renaissance were former colleagues of Simons - mathematicians with no financial background, including Lenny Baum, one of the founders of the "Baum-Welch algorithm". With the help of Baum, Renaissance input the historical trend of interest rates, current closing prices of various currencies, news and other data into the database, which was not yet electronic at the time, and created a model that can predict the market.

However, in the early days of its establishment, the company's development was not very smooth. In 1988, when Renaissance launched the Medallion Fund, the return rate that year was only 9%, underperforming the S&P 500 Index by 16%; the next year, when the S&P rose by more than 30%, the Medallion Fund It also lost 4%, and relations within the company became increasingly tense.

Subsequently, Simons recruited the famous game theorist Erwin Bellekamp to redesign the company's trading system from scratch. In 1990, the Medallion Fund's net return reached 55%. However, he and Bellecamp soon parted ways due to different ideas.

But Simons continued to hire elite mathematicians and optimize models to realize his dream of "a system entirely driven by machine decision-making."

In terms of performance, Medallion Fund can be regarded as the top class in the investment world. In the 30 years from 1988 to 2018, the Medallion Fund has created a cumulative income of more than 100 billion US dollars, with an average annual return of 39%. For comparison, the S&P 500 Index rose 5.1% annually during the same period, while "Stock God" Buffett's average annual return was 20.5%.

Despite its great success, Medallion Fund is not open to the public and investors are limited to internal employees, so the market knows little about its investment strategy. The investment philosophy of the Medallion Fund was analyzed in the book "The Man Who Conquered the Market" written by "Wall Street Journal" columnist Gregory Zuckerman.

First of all, unlike Buffett's long-term investment philosophy of "buy and hold", Simons pays more attention to the short-term inefficiency of the market, uses algorithms to capture fleeting price deviations, and quickly closes his position when the price returns to normal. . At the same time, Simons never invests money betting that "the market will eventually return to normal." Simons' trading behavior is more based on the program's analysis of price trends rather than human subjective judgment, so it can avoid unstable investments caused by emotions. Performance.

Secondly, Simons is very cautious in the use of high leverage, which is also significantly different from the American Long-Term Capital Management Company, which is also a "model arbitrage". If a trade loses money, the position can be closed quickly. This not only controls losses, but also avoids liquidity problems caused by high leverage, which was the main culprit of LTCM's collapse.

Finally, rigorous and diversified investments have also contributed to Medallion Fund’s amazing returns. The fund has strict restrictions on the scope of investment. Investment products must simultaneously meet the three conditions of being traded in the open market, having high liquidity, and being suitable for trading using mathematical models. Therefore, it does not get involved in startup stocks. At the same time, Medallion Fund uses non-stock instruments to invest in global markets. Trading instruments in the United States include commodity futures and U.S. Treasury bonds; overseas transactions include exchange rate futures, commodity futures and foreign bonds.

Despite the impressive performance of the flagship fund, Renaissance's other funds open to outside investors have not performed as well.

Public information shows that Renaissance has three funds open to the outside world, including the Renaissance Institutional Equity Fund launched in July 2005, the Renaissance Institutional Diversified Alpha launched in 2012, and the Institutional Diversified Global Equity Fund launched in 2016. .

Before and after the 2008 financial crisis, RIEF's performance was very poor. The fund fell 16% in 2008 and 6.17% in 2009. In the past two years, Medallion Fund's returns were as high as 82.4% and 39%.

During the COVID-19 outbreak, fund performance once again diverged sharply. In 2020, the Medallion Fund returned 76%. However, according to HSBC hedge fund performance, RIEF fell by 22.62%, RIDA fell by 33.58%, and RIDGE lost 31%. The latter two funds entered HSBC's list of the world's worst-performing hedge funds that year.

The huge returns of funds managed by the same manager have aroused many voices of doubt.

But Zuckerman still believed in Renaissance Fund and Simons. He believes that the huge difference in the returns of the four funds is due to different investment strategies. The Medallion Fund conducts high-frequency quantitative trading strategies across multiple asset classes, while the other three funds are completely different. According to fund registration documents, RIEF funds only trade stocks and hold stocks for the long term. RIDA Funds trade equities, derivatives and various financial instruments in global futures and forward markets. Like RIEF, RIDA funds also take large positions in individual stocks, often for the long term. RIDGE funds seek market neutrality by maintaining low levels of beta or exposure to the broader market.

"While fund returns varied dramatically, I've never seen evidence that a scandal occurred," Zuckerman said. "Nor did the SEC, which spent two days in their offices after the Madoff scandal." Year."