The World’s Greatest Fund – Jim Simons’ Medallion fund!
Who do you think runs the World’s Greatest Fund? Hold onto this answer. If you ask anyone in the world of investing about Renaissance’s Medallion fund you’ll find answers filled with awe due to the results they have managed to achieve – 60 to 70 percent returns for over 3 decades!!!!
To put things in perspective at this rate you’d be a multi-billionaire over three decades just by having invested $1,000 (But it doesn’t work on a growth model). You might have to rethink your answer. Even Warren Buffet has managed an annual average of 23% in the long run. Because obviously a fund being given the title of the greatest of all time obviously will be headed by one of the greatest minds on Wall Street.
In this article, we cover the greatest fund in the world run by Rennaisance, its inception, how it works, the men behind it, and its performance amidst Covid-19. Keep Reading to find out.
How did the Rennaisance start?
The founder of Rennaisance technologies, Jim Simons is a legendary figure in the mathematics and investing community. After graduating from MIT and receiving a Ph.D. in mathematics at the age of 23, Jim Simons went on to work as a professor at MIT and Harward.
Over the years his research earned him the Geometry equivalent of the Nobel prize- the Oswald Veblen Prize in Geometry. He along with his partner professor Shiing-Shen Chern produced the breakthrough mathematical theory known as the Chern-Simons theory.
What many people do not know about Simons is that he also worked for the Pentagon’s Institute for Defense Analyses as a code breaker. The cold war had pushed both the US and Russia to try and outsmart each other. This also required some of the greatest minds to crack each other’s secret codes. Sadly Simons was fired from the IDA for voicing his opposition to the Vietnam War.
Simons finally decided to focus on the big bucks. His initial days in trading commodities weren’t as successful. Simons had based his bets on the fundamentals of demand and supply which did not get him far.
Simons used this for much of the Renaissance’s early years when it was called Monemetrics. It however never occurred to him in his early years to apply maths to investing
The Working behind the World’s Greatest fund?
— Headhunting the Rennaisance team
Simons then tried applying statistics and maths to make trades. His experience at the IDA had helped acquaint him with several great cryptographers and other mathematicians. He began hiring them at Renaissance and they began their quest to decode the financial markets.
Among them were Elwyn Berlekamp and Leonard Baum who were his colleagues at IDA along with professor Henry Laufer and James Ax. They began looking for patterns in the market which they could exploit.
One such example of a loophole they recognized was that S&P’s options and futures closing times were 15 minutes apart which they exploited to make profits for a while. The markets were filled with many similar loopholes which they took advantage of.
They began building models which used both trend following and mean reversion while focussing exclusively on trading. Their results weren’t anything great, making 8.8% and 4.1% in 1988-89 respectively. Renaissance finally received a break in 1990 when its Medallion fund gave a 56% return.
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The Medallion was now going through heaps of data and using advanced maths and building systems that were ahead of their time into investing. On the other hand, his other counterparts were using the same old techniques which relied on the fund manager’s instinct to predict which direction the market would move in.
— Ahead of its time – World’s Greatest Investor
The team in Renaissance included super nerds from their respective fields using some of the world’s most powerful computers to find signals to make predictions.
The scientists would keep looking for signals which they could exploit in the markets. They also teamed up with linguists and focussed on speech recognition and machine translation. Much of their work also set the scene for the creation of Google Translate and Siri.
— Signals and Systems
The signals they identified worked on slim margins. One such signal was identified by analyzing cloud cover data. The team had found a correlation between sunny days and the market trending upwards on those days. This was observed from New York to Tokyo. The team of scientists worked day and night to identify such signals.
The Medallion fund maintains a library of over 8,000 signals. The fund then uses these signals thousands of times daily. The difference between the win and loss percentage is only 2% i.e. 51% win vs 49% loss probability. But as this edge is applied thousands of times per day their odds increase. The funds’ team keeps looking for such signals on a regular basis.
Another example of how far ahead of their systems were was found out when Rennaisance tried to file for a Patent in 2016 for executing synchronized trades in multiple exchanges. In order to achieve this, they had to use one of the most precise time instruments on earth i.e. atomic clocks. These clocks are accurate down to a billionth of a second.
Medallion funds’ Results and Comparison
The unique strategies have helped the Medallion fund achieve 60 to 70% annual returns for over 30 years. According to Bloomberg, the fund has produced more than $US74.5 billion over a period of 28 years. This meant that the Medallion fund generated $10 billion more in profit than those run by legendary investors Ray Dalio and George Soros.
$1 invested in the fund would have earned you $20,000 after fees. Despite assessing the fund on the basis of net returns it still beats the S&P index where your investment for the same period would only result in $20. Let’s make the comparison harder and pit the returns against Warren Buffett’s Berkshire Hathaway. A dollar invested for the same period would have resulted in $100.
What Simons and his team have achieved at Medallion is nothing short of a miracle. The fund beats one of the greatest wealth creators the S&P500 index by 1,000 times and the greatest investor of all time by 200 times.
The fund has been soo profitable and consistent that Renaissance started charging its investors 5% in management fees and 44% in performance fees. This meant that in 10 years the fund itself would make more money than its investors.
Despite this, the fund received loads of interest once the word got out. However prospective investors were met by the unhelpful customer service which included the company’s legal department.
Why is the Medallion fund only worth $10 billion?
Even the Medallion funds size is intentionally limited to only $10 billion. Simons has always believed that the funds’ size could hamper its performance. Due to this, the assets of Medallion are currently capped at $10 billion.
As the profits from Medallion are reliable the firm is able to leverage up to ten times its capital. This means that even though the fund asset is worth only $10 billion dollars they have a trading footprint of $100 billion.
Having a fund that is too big also limits the investment alternatives. This also limits their ability to use the same Ghost Signals. The Signals used by Medallion also cannot handle a huge size. In order to maintain this size, the fund ensures that the profits are distributed every 6 months.
Employees of the Fund – ( no to wall street and riches and Simons as a manager)
Medallion fund in the midst of a crisis?
The ultimate test however comes in the face of crisis. The Medallion fund suffered a $1 billion loss in a few days during the 2008 financial crisis. But still made up for the losses and posted an 85.9% gain as the market began rebounding. In the midst of Covid when most funds were struggling to service Medallion flourished by posting a 116% gain before fund fees.
Most of you will be looking for the means to invest in this fund ASAP. Possibly some apps may assist you to invest in the US markets. Sadly for all of us, the Medallion fund stopped accepting money from external investors in 1993. By 2005 the firm had bought out all of the external investors.
Today access to the fund is only limited to the 300 employees working in Renaissance. Thanks to Medallion at least 100 of them are worth more than $5 million. The remaining at least worth $1 million. Despite being employees they aren’t free from the exorbitant fund charges.
From what we’ve seen so far it is clear that competing with Medallion is next to impossible. Primarily because it is a herculean task to assemble a team of the world’s greatest minds and get them to work in the stock markets and ensuring they have the best systems in place.
That’s all for this post on the World’s Greatest Fund by Jim Simons. Find out here! If you found this interesting be sure to check out the book “The Man Who Solved the Market” by Greg Zuckerman. We think now you can answer who is the greatest investor of all time. Let us know what you think about Medallion. Are quant funds the future of trading? Let us know if you think such a fund will work in the Indian markets. Happy Investing!
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Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.