World's Most Successful Hedge Fund Manager Ever Reveals Some Of Medallion's Secrets

Two years ago, when profiling the world's most successful hedge fund in history, Bloomberg stared like this:

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 Ph.D.s, as well as a select few individuals with deep-rooted connections to the firm.

The fabled fund, and we are of course talking about Renaissance Technologies' employees-only Medallion fund, known for its intense secrecy and "black box"-like mystery of what actually goes on there, has produced about $55 billion in profit over the last 28 years, 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. Just like Berie Madoff, the fund almost never loses money. Its biggest drawdown in one five-year 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.”

Yet while many have tried to emulate and reverse engineer Medallion's success, nobody has come close to the inner workings of the world's most successful money machine.

At least until Wednesday, when fabled code-breaker and Renaissance founder, Jim Simons spoke at MIT, at the second of three talks about his iconic career; 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.

Simons launched Renaissance 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 said in response to a question from a reporter.

As discussed here extensively in the past, while Renaissance manages money across a handful of funds, the in-house only Medallion evokes the greatest mystery, and as Bloomberg notes, 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.”

What was more unique, is that the traditionally media-shy Simons offered a some clues into what sets Renaissance apart:

At the core of the company, which employs about 300 people, Simons said "is a great computing system, good scientists and low turnover." 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." Some, like former co-CEO Robert Mercer may not find it that much fun to work there, but that's why he recently quit the firm.

According to Simons, the East Setauket-New York company 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.

Sharing some more details into the company's "secret sauce", Simons said that the Medallion strategy is continually being reinvented, though some parts have remained for as many as two decades. 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, and generate far smaller returns than Medallion.. 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, quoted by Bloomberg, 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.

Below we publish a video recording of the first part of Simons' three part presentations, discussing the role of mathematics in money.