Working the Numbers
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.