Work­ing the Num­bers

The Washington Post Sunday - - Sunday Briefing -

It was a very good year for math wizard and for­mer Pen­tagon code-breaker James Si­mons. Ac­cord­ing to In­sti­tu­tional In­vestor’s Al­pha mag­a­zine, he earned $1.7 bil­lion in 2006, up from $1.5 bil­lion in 2005.

Si­mons man­ages Re­nais­sance Tech­nolo­gies, a fam­ily of hedge funds that gen­er­ates profit through com­put­er­ized trad­ing mod­els that find small and tem­po­rary mis­pric­ings on global fi­nan­cial mar­kets. One of his funds, the $6 bil­lion Medal­lion fund, had an im­pres­sive 84 per­cent re­turn last year.

Even more im­pres­sive, how­ever, are the ridicu­lous fees Medal­lion in­vestors are will­ing to pay: 5 per­cent of their in­vest­ment each year, plus 44 per­cent of any profit. That means that even if Medal­lion man­ages to lose money for his in­vestors next year, Si­mons and as­so­ciates are guar­an­teed $300 mil­lion. And if they pro­duce a mod­est 10 per­cent re­turn, their take would top $550 mil­lion.

And then there are years like 2006, when Si­mons’s $1.7 bil­lion take works out to about $680,000 per hour for a 50-hour work week.

Does Si­mons de­serve such riches? It de­pends on what you mean by “de­serve.”

Af­ter all, he didn’t in­vent some­thing that dra­mat­i­cally im­proves the qual­ity of life or boosts busi­ness pro­duc­tiv­ity. He didn’t fund dy­namic new com­pa­nies or cre­ate many jobs. In fact, much of the “value” he cre­ated was likely off­set by losses in some other port­fo­lio.

But if by “de­serve” you mean the abil­ity to use large quan­ti­ties of other peo­ple’s money to make cap­i­tal mar­kets more ef­fi­cient, then Si­mons de­serves ev­ery penny.


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