Jim Simons, the Mathematician who solved the stock market, and his close ties to Nepal

This is an opinion piece. Sharesansar does not endorse a specific investment strategy over another.

For an average investor, the stock market feels like an arena for Finance geeks with thick glasses. However, the international investment scenario is slowly being overtaken by another group of geeks - quants.

Quants are investors who use quantitative investment strategies. If the term sounds strange to you, picture technical analysis. For investors in Nepal who scoff at technical analysts, quants are an even raw, fundamentally-isolated, and nerdy group of investors.

How Quants make money

Let us first address the big elephant in the room: Quants do not use fundamental analysis. They care very little about what the company does in 5 years and further. Some quantitative strategies even use high-frequency trading (HFT), meaning they buy and sell shares within a fraction of a second. Although this fact can't be digested by NEPSE investors who have to wait 3 days or more to get the shares they buy, HFT accounts for 50–60% of U.S. equity trading volume.

Quants believe that the stock market has a definite pattern. Although not all movements fall in a neat pattern, there are numerous patterns that can be found within a stock chart. These patterns are incredibly difficult to be detected by the human eye. However, investors use powerful computers to crunch years of data and deduce a strategy that works in the future.

Note how the description of the quantitative strategy sounds so vague and generic. This is because the top investment firms which use quantitative analysis do not disclose their algorithms. This is done to avoid competition and hence, preserve profits. In fact, computers have become so advanced that even operators sometimes do not understand how their system makes money.

Note that this reliability in Artificial Intelligence makes some investors concerned about the future of the stock market. Some even blame algorithms for bringing financial crises, like the Black Monday event. But that is a topic for some other article. Today, let us just introduce you to the world of quants.

Does this group of investors really make money?

If we look at the investment firms that make the most money, they must be managed by some old fundamental analyst. Right?

Wrong.

The average return of Bridgewater Associate, a firm managed by the legend Ray Dalio, over the last 28 years has been 11.5% per year. Berkshire Hathaway, owned and managed by Warren Buffett has posted average annual returns of 17.1% since 1985.

Now, let us look at a fund managed by a man who employs computers to make money for him.

For more than two decades, a firm by the name Renaissance Technologies has employed mathematical models to analyze and execute trades, many automated. Renaissance uses computer-based models to predict price changes in financial instruments. These models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions.

Medallion Fund, the main fund of the firm, has earned over $100 billion in trading profits since its inception in 1988. This translates to a 66.1% gross return or a 39.1% average net return between 1988 - 2018.

Compare the less-than 20% returns of Ray Dalio and Warren Buffett with 66.1% gross return of the Medallion Fund.

Who is Behind Renaissance Technologies?

Jim Simons is the founder of Renaissance Technologies. Simons is an American mathematician and billionaire hedge fund manager. His fund uses mathematical models and algorithms to make money in the securities market.

Due to the consistently high investment returns of Renaissance and its Medallion Fund, Simons is popularly known as the "greatest investor on Wall Street". As of writing this article, Forbes reports his net worth as $23.5 billion dollars. In comparison, the GDP of Nepal, an entire country, is $30.64 billion in the year 2019.

According to Investopedia, In 1955, Simons was accepted into MIT and majored in mathematics. Upon graduating, Simons studied at the University of California at Berkeley for his doctorate in mathematics. After just one year, he received his doctorate at the age of 23 in 1961. Thereafter, he went on to teach mathematics at MIT and Harvard. The Institute for Defense Analyses (IDA) recruited Simons in 1964, where he played a key role as a code breaker during the Vietnam War.

By 1978, Jim Simons had conquered mathematics, figured out code-breaking, and built a world-class university department at Stony Brook University. He founded Renaissance Technologies in 1982. Simons then filled the fund with programmers, mathematicians, physicists, and cryptographers.

Long story short, his group of Ph.D.'s. mathematicians and programmers helped him create the most successful fund in the history of investing. Today, Renaissance Technologies is so successful that investors have held the fund tight despite the fund charging higher fees than the industry average. Furthermore, the fund is now closed for outside investors. Only Jim Simons and his intimate group of investors reap the benefits of Jim's extraordinary profits.

Author's comment: Since the inside-details and performance are only known to a select few, some speculate that the fund actually gives higher returns than estimated.

Jim Simons and his ties to Nepal

Jim Simons has already retired from the firm he founded. Nevertheless, he still plays a role at Renaissance and benefits from its funds.

Jim Simons is an avid contributor to philanthropic causes, donating billions for causes he feels strongly about. Nick Simons, son of Jim Simons had briefly worked in Nepal. Nick was passionate about the medical field. Sadly, Nick drowned at age 24 while on a trip to Bali in Indonesia in 2003. In his memory, The Simons (Jim and his wife) have become large donors to Nepalese healthcare through the Nick Simons Institute.

The Nick Simons Institute is a non-governmental philanthropic organization whose aim is to enhance rural healthcare services. Initially, it was registered as a Private Limited Company. On 17 August 2015, it was registered with the Lalitpur District Administration Office and has now been operating as an NGO.

The organization's mission is to innovate solutions in rural healthcare - through training and hospital support - and to advocate for their scale up with the government of Nepal.

Concluding Comments:

Simons has excelled at whatever he did in his life, from mathematics, code-breaking, teaching, to investing, and finally, philanthropy.

This beautiful soul, who works and speaks slowly today because of his old age, has certainly lived his life to the fullest.

With the tiniest hope that Jim Simons himself will someday read this article while on a break from his philanthropic work in Nepal (The Nick Simons Institute is located in Lalitpur), the author apologizes for any misrepresentation of data. The data about Renaissance Technologies and its fund is taken from the most credible sources on the internet. Nonetheless, any misrepresentation will be amended as soon as possible.