Jim Simons Reveals Clues to Medallion Fund's Unrivaled Run

(Bloomberg) -- Sometimes being too good can attract the wrong attention.

That’s one insight famed mathematician and quantitative hedge fund pioneer Jim Simons delivered at the Massachusetts Institute of Technology on Wednesday at the second of three talks about his renowned career.

Jim Simons Reveals Clues to Medallion Fund's Unrivaled Run

Simons, 80, is one of the world’s richest people, worth $16.6 billion, according to the Bloomberg Billionaires Index. He launched Renaissance Technologies after leaving academia and in 1988 started the Medallion Fund, which through last year generated an unrivaled annual average return of about 40 percent, according to calculations by Bloomberg.

“That’s net of fees,” Simons pointed out in response to a question from a reporter.

While Renaissance manages money across a handful of funds, Medallion evokes the greatest mystery. It employs trading strategies to predict price changes in global markets that over three decades no one on Wall Street has been able to replicate. That’s why the U.S. Securities and Exchange Commission came calling after the Bernard Madoff scandal broke in 2008, Simons said.

“They did study us,” said Simons as he spoke about his career in money management. “Of course, they didn’t find anything.”

Simons doesn’t speak publicly very often, and it’s even rarer for him to discuss the firm’s strategies or culture.

Big Paychecks

Not surprisingly the talk, which followed last week’s conversation about mathematics and precedes next week’s on philanthropy, attracted an overflowing crowd that included MIT investing chief Seth Alexander. Andre Stern of the U.K.’s Oxford Asset Management introduced Simons.

The former code breaker, who lost his job at the Institute for Defense Analyses in the late 1960s for publicly opposing the Vietnam War, wore his signature khakis and loafers with no socks despite the frigid temperatures outside. He kept a pack of Merit cigarettes in the breast pocket of his sports coat.

Simons offered a few clues into what sets Renaissance apart.

At the core of the company, which employs about 300 people, is a great computing system, good scientists and low turnover, he said. Employees, who get a piece of the profits, sign non-disclosure agreements when they are hired and non-compete contracts after a couple of years on the job.

“It’s fun to work there,” Simons said in a question and answer format led by MIT professor Andrew Lo, who started the quant fund AlphaSimplex Group. “People get paid a lot of money.”

The company in East Setauket, New York, never stops improving its models as it tries to stay a step ahead of the competition, which has flourished in recent years as quant firms attracted more assets than traditional, fundamental shops. Simons stepped down as head of the company in 2010 but remains as non-executive chairman. He said he meets with the company monthly, encouraging management to keep hiring good, young scientists.

Medallion Reinvented

The Medallion strategy is continually being reinvented, though some parts have remained for as many as two decades, he said. Initially launched as a systematic, trend-following fund that traded in commodities markets, it was losing money after the first six months. So the fund was completely revamped.

Still, the company realized after about 15 years that there were limits on how much Medallion could manage without pushing markets too much, Simons said in a conversation after the talk. So Renaissance finished booting outside investors in the fund in 2005, and since then has sought to limit its size.

While Simons refused to say how much Medallion has in assets, Bloomberg calculations put it at about $10 billion. Simons did say there is about $45 billion in the firm’s other funds, which are still open to outside investors. They employ longer-term trading strategies, so the funds haven’t delivered the same level of returns as Medallion.

“Yes inefficiencies do get traded out, but the market is dynamic,” Simons said in response to a question from the audience. “There’s room for new inefficiencies to materialize. We keep finding new things and throwing out old things.”

After his talk, students descended on the former mathematician who had broken ground in the field decades ago, winning the American Mathematical Society’s Oswald Veblen Prize in Geometry in 1976. In the middle of the scrum, Simons vaped, producing a cloud of smoke as he answered more questions.

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