The Man Who Solved the Market

Description

NEW YORK TIMES BESTSELLER

Shortlisted for the Financial Times/McKinsey Business Book of the Year Award

The unbelievable story of a secretive mathematician who pioneered the era of the algorithm–and made $23 billion doing it.

The greatest money maker in modern financial history, no other investor–Warren Buffett, Peter Lynch, Ray Dalio, Steve Cohen, or George Soros–has touched Jim Simons’ record. Since 1988, Renaissance’s signature Medallion fund has generated average annual returns of 66 percent. The firm has earned profits of more than $100 billion, and upon his passing, Simons left a legacy of investors who use his mathematical, computer-oriented approach to trading and building wealth.

Drawing on unprecedented access to Simons and dozens of current and former employees, Zuckerman, a veteran Wall Street Journal investigative reporter, tells the gripping story of how a world-class mathematician and former code breaker mastered the market. Simons pioneered a data-driven, algorithmic approach that’s swept the world.

As Renaissance became a market force, its executives began influencing the world beyond finance. Simons became a major figure in scientific research, education, and liberal politics. Senior executive Robert Mercer is more responsible than anyone else for the Trump presidency, placing Steve Bannon in the campaign and funding Trump’s victorious 2016 effort. Mercer also impacted the campaign behind Brexit.

The Man Who Solved the Market is a portrait of a modern-day Midas who remade markets in his own image, but failed to anticipate how his success would impact his firm and his country. It’s also a story of what Simons’s revolution will mean for the rest of us long after his death in 2024.“Captivating.” —New York Times
 
“A compelling read.” —The Economist
 
“Reads like a delicious page-turning novel.” —Barry Ritholtz, Bloomberg
 
“One of the most important stories of our time.” —Financial Times
 
“Zuckerman brings the reader so close to the firm’s inner workings that you can almost catch a whiff of the billionaire’s Merit cigarette.” —Brandon Kochkodin, Bloomberg

“A gripping biography of investment game changer Jim Simons… readers looking to understand how the economy got where it is should eat this up.” —Publishers Weekly

“Worthwhile reading for budding plutocrats and numerate investors alike.” —Kirkus

“Immensely enjoyable.” —Edward O. Thorp, author of A Man for All Markets
 
“An extremely well-written and engaging book . . . a must read, and a fun one at that.” —Mohamed A. El-Erian, author of The Only Game in Town
 
“Leave it to the Wall Street Journal’s Greg Zuckerman to lay open the golden mysteries of quantitative investing. With this fine, humane, and eye-opening book, he’s well and truly broken the code.” —James Grant, Grant’s Interest Rate Observer

“Page-turning tale…bravura storytelling.” —Gary Shteyngart, author of Lake SuccessGregory Zuckerman is the author of The Greatest Trade Ever and The Frackers, and is a Special Writer at the Wall Street Journal. At the Journal, Zuckerman writes about financial firms, personalities and trades, as well as hedge funds and other investing and business topics. He’s a three-time winner of the Gerald Loeb award, the highest honor in business journalism. Zuckerman also appears regularly on CNBC, Fox Business and other networks and radio stations around the globe.

Introduction

You do know— no one will speak with you, right?”
I was picking at a salad at a fish restaurant in Cambridge, Massa­chusetts, in early September 2017, trying my best to get a British mathematician named Nick Patterson to open up about his former company, Renaissance Technologies. I wasn’t having much luck.
I told Patterson that I wanted to write a book about how James Simons, Renaissance’s founder, had created the greatest moneymaking machine in financial history. Renaissance generated so much wealth that Simons and his colleagues had begun to wield enormous influence in the worlds of politics, science, education, and philanthropy. Anticipating dramatic societal shifts, Simons harnessed algorithms, computer models, and big data before Mark Zuckerberg and his peers had a chance to finish nursery school.
Patterson wasn’t very encouraging. By then, Simons and his representa­tives had told me they weren’t going to provide much help, either. Renais­sance executives and others close to Simons—even those I once considered friends—wouldn’t return my calls or emails. Even archrivals begged out of meetings at Simons’s request, as if he was a Mafia boss they dared not offend.
Over and over, I was reminded of the iron-clad, thirty-page nondisclo­sure agreements the firm forced employees to sign, preventing even retirees from divulging much. I got it, guys. But come on. I’d been at the Wall Street Journal for a couple of decades; I knew how the game was played. Subjects, even recalcitrant ones, usually come around. After all, who doesn’t want a book written about them? Jim Simons and Renaissance Technologies, ap­parently.
I wasn’t entirely shocked. Simons and his team are among the most se­cretive traders Wall Street has encountered, loath to drop even a hint of how they’d conquered financial markets, lest a competitor seize on any clue. Em­ployees avoid media appearances and steer clear of industry conferences and most public gatherings. Simons once quoted Benjamin, the donkey in Ani­mal Farm, to explain his attitude: “ ‘God gave me a tail to keep off the flies. But I’d rather have had no tail and no flies.’ That’s kind of the way I feel about publicity.”
I looked up from my meal and forced a smile.
This is going to be a battle.
I kept at it, probing defenses, looking for openings. Writing about Si­mons and learning his secrets became my fixation. The obstacles he put up only added allure to the chase.
There were compelling reasons I was determined to tell Simons’s story. A former math professor, Simons is arguably the most successful trader in the history of modern finance. Since 1988, Renaissance’s flagship Medallion hedge fund has generated average annual returns of 66 percent, racking up trading profits of more than $100 billion (see Appendix 1 for how I arrive at these numbers). No one in the investment world comes close. Warren Buf­fett, George Soros, Peter Lynch, Steve Cohen, and Ray Dalio all fall short (see Appendix 2).
In recent years, Renaissance has been scoring over $7 billion annually in trading gains. That’s more than the annual revenues of brand- name cor­porations including Under Armour, Levi Strauss, Hasbro, and Hyatt Hotels. Here’s the absurd thing— while those other companies have tens of thou­sands of employees, there are just three hundred or so at Renaissance.
I’ve determined that Simons is worth about $23 billion, making him wealthier than Elon Musk of Tesla Motors, Rupert Murdoch of News Corp, and Laurene Powell Jobs, Steve Jobs’s widow. Others at the firm are also billionaires. The average Renaissance employee has nearly $50 million just in the firm’s own hedge funds. Simons and his team truly create wealth in the manner of fairy tales full of kings, straw, and lots and lots of gold.
More than the trading successes intrigued me. Early on, Simons made a decision to dig through mountains of data, employ advanced mathematics, and develop cutting- edge computer models, while others were still relying on intuition, instinct, and old- fashioned research for their own predictions. Simons inspired a revolution that has since swept the investing world. By early 2019, hedge funds and other quantitative, or quant, investors had emerged as the market’s largest players, controlling about 30 percent of stock trading, topping the activity of both individual investors and traditional investing firms.2 MBAs once scoffed at the thought of relying on a scientific and systematic approach to investing, confident they could hire coders if they were ever needed. Today, coders say the same about MBAs, if they think about them at all.
Simons’s pioneering methods have been embraced in almost every in­dustry, and reach nearly every corner of everyday life. He and his team were crunching statistics, turning tasks over to machines, and relying on algo­rithms more than three decades ago— long before these tactics were em­braced in Silicon Valley, the halls of government, sports stadiums, doctors’ offices, military command centers, and pretty much everywhere else fore­casting is required.
Simons developed strategies to corral and manage talent, turning raw brainpower and mathematical aptitude into astonishing wealth. He made money from math, and a lot of money, at that. A few decades ago, it wasn’t remotely possible.
Lately, Simons has emerged as a modern- day Medici, subsidizing the salaries of thousands of public- school math and science teachers, working to cure autism and expand our understanding of the origins of life. His efforts, while valuable, raise the question of whether one individual should enjoy so much influence. So, too, does the clout of his senior executive, Robert Mercer, who is perhaps the individual most responsible for Donald Trump’s presidential victory in 2016. Mercer, Trump’s biggest financial supporter, plucked Steve Bannon and Kellyanne Conway from obscurity and inserted them into the Trump campaign, stabilizing it during a difficult period. Companies formerly owned by Mercer and now in the hands of his daughter Rebekah played key roles in the successful campaign to encourage the United Kingdom to leave the European Union. Simons, Mercer, and others at Renaissance will continue to have broad impact for years to come.
The successes of Simons and his team prompt a number of challenging questions. What does it say about financial markets that mathematicians and scientists are better at predicting their direction than veteran investors at the largest traditional firms? Do Simons and his colleagues enjoy a fun­damental understanding of investing that eludes the rest of us? Do Simons’s achievements prove human judgment and intuition are inherently flawed, and that only models and automated systems can handle the deluge of data that seems to overwhelm us? Do the triumph and popularity of Simons’s quantitative methods create new, overlooked risks?
I was most fascinated by a striking paradox: Simons and his team shouldn’t have been the ones to master the market. Simons never took a single finance class, didn’t care very much for business, and, until he turned forty, only dabbled in trading. A decade later, he still hadn’t made much headway.
 Heck, Simons didn’t even do applied mathematics, he did theoretical math, the most impractical kind. His firm, located in a sleepy town on the North Shore of Long Island, hires mathematicians and scientists who don’t know anything about investing or the ways of Wall Street. Some are even outright suspicious of capitalism. Yet, Simons and his colleagues are the ones who changed the way investors approach financial markets, leaving an industry of traders, investors, and other pros in the dust. It’s as if a group of tourists, on their first trip to South America, with a few odd- looking tools and mea­ger provisions, discovered El Dorado and proceeded to plunder the golden city, as hardened explorers looked on in frustration.
Finally, I hit my own pay dirt. I learned about Simons’s early life, his tenure as a groundbreaking mathematician and Cold War code- breaker, and the volatile early period of his firm. Contacts shared details about Renais­sance’s most important breakthroughs as well as recent events featuring more drama and intrigue than I had imagined. Eventually, I conducted more than four hundred interviews with more than thirty current and former Renaissance employees. I spoke with an even larger number of Simons’s friends, family members, and others who participated in, or were familiar with, the events I describe. I owe deep gratitude to each individual who spent time sharing memories, observations, and insights. Some accepted substan­tial personal risk to help me tell this story. I hope I rewarded their faith.
Even Simons spoke with me, eventually. He asked me not to write this book and never truly warmed to the project. But Simons was gracious enough to spend more than ten hours discussing certain periods of his life, while refusing to discuss Renaissance’s trading and most other activities. His thoughts were valuable and appreciated.
This book is a work of nonfiction. It is based on first- person accounts and recollections of those who witnessed or were aware of the events I depict. I understand that memories fade, so I’ve done my best to check and confirm every fact, incident, and quote.
I’ve tried to tell Simons’s story in a way that will appeal to the general reader as well as to professionals in quantitative finance and mathematics. I will refer to hidden Markov models, kernel methods of machine learning, and stochastic differential equations, but there also will be broken marriages, corporate intrigue, and panicked traders.
For all his insights and prescience, Simons was blindsided by much that took place in his life. That may be the most enduring lesson of his remarkable story.

*Mercer no longer is Renaissance’s co‑CEO but he remains a senior employee of the firm. 

US

Additional information