How Renaissance’s Medallion reached moneymaking apex
Secretive hedge fund schools competition
NEW YORK: Sixty miles east of Wall Street, a spit of land shaped like a whale’s tail separates Long Island Sound and Conscience Bay. The mansions here, with their long, gated driveways and million-dollar views, are part of a hamlet called Old Field. Locals have another name for these moneyed lanes: the Renaissance Riviera.
That’s because the area’s wealthiest residents, scientists all, work for the quantitative hedge fund Renaissance Technologies, based in nearby East Setauket. They are the creators and overseers of the Medallion Fund — perhaps the world’s greatest moneymaking machine. Medallion is open only to Renaissance’s roughly 300 employees, about 90 of whom are PhDs, as well as a select few individuals with deep-rooted connections to the firm.
The fabled fund, known for its intense secrecy, has produced about $55 billion in profit over the last 28 years, according to data compiled by Bloomberg, making it about $10 billion more profitable than funds run by billionaires Ray Dalio and George Soros. What’s more, it did so in a shorter time and with fewer assets under management. The fund almost never loses money. Its biggest drawdown in one fiveyear period was half a percent.
“Renaissance is the commercial version of the Manhattan Project,” says Andrew Lo, a finance professor at MIT’s Sloan School of Management and chairman of AlphaSimplex, a quant research firm. Lo credits Jim Simons, the 78-year-old mathematician who founded Renaissance in 1982, for bringing so many scientists together. “They are the pinnacle of quant investing. No one else is even close.”
Few firms are the subject of so much fascination, rumour, or speculation. Everyone has heard of Renaissance; almost no one knows what goes on inside. (The company also operates three hedge funds, open to outside investors, that together oversee about $26 billion, although their performance is less spectacular than Medallion’s.) Apart from Simons, who retired in 2009 to focus on philanthropic causes, relatively little has been known about this small group of scientists — whose vast wealth is greater than the GDP of many countries and increasingly influences US politics — until now. Renaissance’s owners and executives declined to comment for this story through the company’s spokesman, Jonathan Gasthalter. What follows is the product of extensive research and more than two dozen interviews with people who know them, have worked with them, or have competed against them.
Renaissance is unique, even among hedge funds, for the genius and eccentricities of its people. Peter Brown, who co-heads the firm, usually sleeps on a Murphy bed in his office. His counterpart, Robert Mercer, rarely speaks; you’re more likely to catch him whistling Yankee Doodle Dandy in meetings than to hear his voice. Screaming battles seem to help a pair of identical twins, both of them PhD string theorists, produce some of their best work. Employees aren’t above turf wars, either: a power grab may have once lifted a Russian scientist into a larger role within the highly profitable equity business in a new guard vs old guard struggle.
For outsiders, the mystery of mysteries is how Medallion has managed to pump out annualised returns of almost 80% a year, before fees. “Even after all these years they’ve managed to fend off copycats,” said Philippe Bonnefoy, a former Medallion investor who later co-founded Eleuthera Capital, a Switzerland-based quantitative macro firm. Competitors have identified some likely reasons for the fund’s success, though. Renaissance’s computers are some of the world’s most powerful, for one. Its employees have more, and better, data. They’ve found more signals on which to base their predictions and have better models for allocating capital. They also pay close attention to the cost of trades and to how their own trading moves the markets.
But as computing power becomes ever cheaper and competitors sharpen their skills, will Medallion continue to mint money?
Quants seem like saviours to investors disappointed with how mere mortals have managed their money of late. In 2016 clients plugged $21 billion into quant hedge funds, while pulling $60 billion from those that do everything else. One noteworthy quant shop, Two Sigma, managed just $5 billion during the financial crisis and has seen assets jump to $37 billion. Even old-fashioned traders such as Paul Tudor Jones and Steve Cohen are adding to their computer scientist ranks in hopes of boosting returns.
Renaissance’s success ultimately lies with the people who built, improved upon, and maintain Medallion’s models, many of whom met at IBM in the 1980s, where they used statistical analysis to tackle daunting linguistic challenges.
Simons is already well-known: math genius, professor at MIT and Harvard, recipient of the Oswald Veblen Prize in geometry, and co-creator of the ChernSimons theory. He was also a code breaker for the Institute for Defense Analyses (IDA), where he worked finding messages amid the noise.
The goal of quant trading is similar: to build models that find signals hidden in the noise of the markets. Often they’re just whispers, yet they’ll help predict how the price of a stock or a bond or a barrel of oil might move. The problem is complex. Price movements depend on fundamentals and flows and the sometimes irrational behaviour of people who are doing the buying and selling.
Although Simons lost the IDA job after denouncing the Vietnam War in a letter to the New York Times, the connections he made through his work in cryptography helped create Renaissance and, a few years later, Medallion. Over the next decade, while chairing the math department at Stony Brook University, Simons dabbled in trading commodity futures. In 1977 he left academia for good to try his hand at managing money.
Initially he bought and sold commodities, making his bets based on fundamentals such as supply and demand. He found the experience gut-wrenching, so he turned to his network of cryptographers and mathematicians for help looking at patterns: Elwyn Berlekamp and Leonard Baum, former colleagues from IDA, and Stony Brook professors Henry Laufer and James Ax. “Maybe there were some ways to predict prices statistically,” Simons said in a 2015 interview with Numberphile. “Gradually we built models.”
At their core, such models usually fall into one of two camps, trend-following or mean-reversion. Renaissance’s system had a foot in both. Its results were mixed at first: up 8.8% in 1988, its first year, and down 4.1% in 1989. But in 1990, after focusing exclusively on shorter-term trading, Medallion chalked up a 56% return, net of fees. “I was confident that the models would work better,” says Berlekamp, who returned to academia in 1991 and is now a professor emeritus at the University of California at Berkeley. “I didn’t think they would be as good as they were.”
Eventually the scientists went so far as to develop an in-house programming language for their models rather than settle for a numbercentric option such as ASCII, which was popular at the time. Today, Medallion uses dozens of “strategies” that run together as one system. The code powering the fund includes several million lines, according to people familiar with the company. Various teams are responsible for specific areas of research, but in practice everybody can work on everything. There’s a meeting every Tuesday to hash out ideas.
In the early 1990s, big annual returns became the norm at Renaissance: 39.4%, 34%, 39.1%. Prospective investors clamoured to get into Medallion, but the company didn’t pay them much heed — or coddle clients for that matter. Bonnefoy recalls dialing a Manhattan phone number to hear a recording of the monthly returns; Renaissance’s legal department doubled as unhelpful customer service representatives. To this day the company’s website, rentec. com, looks like it dates from the Netscape era. In 1993, Renaissance stopped accepting new money from outsiders. Fees were also ratcheted up — from 5% of assets and 20% of profits, to 5% and 44%. “They raised their fees to exorbitant levels and were still head and shoulders above everyone else,” said Bonnefoy, who, along with every other outsider, was finally booted from Medallion in 2005.
Encouraged by Medallion’s success, Simons by the mid-’90s was looking for more researchers. A resume with Wall Street experience or even a finance background was a firm pass. “We hire people who have done good science,” Simons once said. The next surge of talent — much of which remains the core of the company today — came from a team of mathematicians at the IBM Thomas J. Watson Research Center in Yorktown Heights, NY, who were wrestling with speech recognition and machine translation.
In the early days of tackling these problems, computer scientists teamed with linguists and tried to code grammar. At IBM, a group including Mercer and Brown reasoned the problems would be better solved using statistics and probabilities. (Their boss, Frederick Jelinek, liked to say, “Whenever I fire a linguist, the system gets better.”) According to scientists who worked at the research centre then, the team fed reams of data into its computers. Documents from the Canadian Parliament, for instance, were available in both English and French, which none of the scientists spoke.
“Speech recognition and translation are the intersection of math and computer science,” says Ernie Chan, who worked at the research centre in the mid-1990s and now runs quant firm QTS Capital Management. The scientists weren’t just working on academic problems; they were also developing theories and writing software to implement the solutions, he said. The group’s work eventually paved the way for Google Translate and Apple’s Siri.
Industry insiders wonder how the firm will handle its next succession. Take an anecdote from an invite-only conference earlier this year. An audience member asked a panel of quant managers, “Who would be your dream hire?” After a bit of nervous laughter, one of them gave his honest answer: Jim Simons.
Renaissance is the commercial version of the Manhattan Project. They are the pinnacle of quant investing. No one else is even close. ANDREW LO FINANCE PROFESSOR, MIT SLOAN SCHOOL OF MANAGEMENT