Jim Simons & Nonintuitive Signals

“But I like to ponder. And pondering things, just sort of thinking about it and thinking about it, turns out to be a pretty good approach.” – Jim Simons

One of my favorite reads this week was the profile in the New York Times of billionaire hedge fund manager Jim Simons of Renaissance Technologies.  Simons is a mathematical genius as you can tell from his short bio in the article:

Dr. Simons received his doctorate at 23; advanced code breaking for the National Security Agency at 26; led a university math department at 30; won geometry’s top prize at 37; founded Renaissance Technologies, one of the world’s most successful hedge funds, at 44; and began setting up charitable foundations at 56.

As I’ve shared in the past, intellect is not the sole determinant of investment or business success.  It takes much more than brains to be successful in the financial markets for as long as Simons has.  I thought these descriptions from those that know him were much more telling than his math background (emphasis mine):

“He’s an individual of enormous talent and accomplishment, yet he’s completely unpretentious,” said Marc Tessier-Lavigne, a neuroscientist who is the president of Rockefeller University. “He manages to blend all these admirable qualities.”

The secret? “He’s a very good people manager,” said Nick Patterson, a former Renaissance partner. “That’s not,” he added, “the stereotype of a mathematician.”

Simons also exhibits the humility that many in the top of their field share:

Dr. Simons credits his employees. “A good atmosphere and smart people can accomplish a lot,” he said.

This profile reminded me of Sebastian Mallaby’s book on the most successful hedge fund managers of all-time called More Money Than God.

In the book Robert Mercer, a portfolio manager from Renaissance, explains how the firm thinks about the possible strategies to employ using their quantitative investment approach:

In one simple example, the brain trust discovered that fine morning weather in a city tended to predict an upward movement in its stock exchange. By buying on bright days at breakfast time and selling a bit later, Medallion could come out ahead – except that the effect was too small to overcome transaction costs, which is why Renaissance allowed this signal to be public.

It used to be said that if a team from the original National Football League won, the market would head upward. As a matter of statistics, this relationship might hold; but as a matter of common sense, it is a meaningless coincidence.

“Some signals that make no intuitive sense do indeed work.” Indeed, it is the nonintuitive signals that often prove the most lucrative for Renaissance. “The signals that we have been trading without interruption for fifteen years make no sense,” Mercer explains. “Otherwise someone else would have found them.”

So it’s basically a reverse-reverse psychology form of investing. These signals work but don’t have a legitimate reason for working so other investors shy away from them so they continue to work. Fascinating stuff.

This is what you’re up against if you’re a short-term investor.  While there has been a big focus on high frequency trading in recent months, I think these quant firms are the biggest impediment to traders trying to consistently make money.  I’m not saying that it can’t be done, but it takes some serious discipline and even then you are competing against firms like Renaissance with an entire campus of PhDs and former code-breakers.

The competition for short-term profits will always be tough sledding which is why I think a longer term approach makes sense for the majority of investors out there.  There is no way to arbitrage good behavior over a longer time horizon.  That’s where most individual investors can find their sweet spot.

Read the entire Times article for more on Simons:
A billionaire mathematician’s life of ferocious curiosity (NY Times)

More Money Than God

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