Meet the Stock Market Scientists Behind the World's Most Successful Hedge Fund
The world’s most successful hedge fund in history isn’t located on Wall Street.
In fact, you won’t find any stereotypical “Wall Streeters” working there.
Instead, the fund is based in the Setaukets, a rural community on Long Island. It’s there, far from the hustle and bustle of Manhattan, for one simple reason: proximity to Stony Brook University.
This secretive financial fund’s billionaire founder, Jim Simons, began his career in academia. After earning a PhD in mathematics, he went on to teach math at MIT, Harvard, and Stony Brook. Eventually, he founded Renaissance Technologies, a hedge fund manager that uses mathematical and statistical principles to wring money out of the market.
Unlike Goldman Sachs or Morgan Stanley, Renaissance doesn’t hire business school MBAs to research stocks. Instead, the firm’s 50-acre campus on East Setauket is jam-packed with mathematicians, statisticians, computer scientists and physicists. About a third of the firm’s 300 employees have doctorates. Any ties to Wall Street are downplayed.
The firm has been called “the best physics and mathematics department in the world.”
It’s a strategy that was – and still is – totally unlike anything any other hedge funds are doing.
Instead of the cutthroat work-till-you-drop culture that many other hedge funds are known for, Renaissance is known for having a university-like atmosphere and promoting intellectual curiosity to find profit opportunities in the markets.
It’s a model that works.
Renaissance’s Medallion fund has retuned more than 35% each year over a 20-year span. It’s been so successful that most of the firm’s $65 billion in assets under management belong to employees of the firm, not outside investors. (The fund stopped taking new money from outside investors in 1993.)
And, in the process, Dr. Simons has become one of the wealthiest men in America, with a fortune estimated by Forbes at $18 billion.
But you’ve probably never even heard of him or Renaissance before. That’s because the strategies Renaissance uses are a closely-guarded secret.
“Of course I’m not going to tell you the various predictive signals — Unless… No, I’m definitely not,” he joked at a speech he recently gave at MIT.
Here’s what Bloomberg Markets got out of him in a story written about ten years ago…
“What kind of instruments does [Renaissance] trade? Everything.”
“How many strategies does it use? A lot.”
Simons has admitted that Renaissance’s researchers have explored whether sunspots and lunar phases influenced the financial markets – but he wouldn’t say what they found.
But all those non-answers actually do reveal one critically important takeaway about Renaissance Technologies’ approach to the markets…
Renaissance let the data speak for themselves.
“At just about any other big financial firm, the idea of pitching sunspots as a potentially viable factor in the market would get you laughed out of the room – but not at Renaissance,” our own quant Jonas Elmerraji explains.
That’s a much bigger deal than it sounds.
“It’s shocking how much bias and superstition play a role in how everyone (professionals and amateurs alike) interacts with the financial markets,” Jonas continues.
Former Wall Street trader turned author Turney Duff gave a great example in a recent CNBC article:
“When I was at the Galleon Group, we always closely watched the 2-3 p.m. trading hour. If the market sold off in that time, it usually meant that the market would close on a positive note. We would be buying stocks at 3 p.m. for a stronger close. There was no statistical evidence to support this — it worked until it didn’t.”
That’s not uncommon.
Wall Street was built on superstition and anecdotal evidence, after all.
Until now, the types of quantitative, research-driven strategies that have made Renaissance Technologies successful have been off-limits to anyone who couldn’t afford to invest in a hedge fund or didn’t have a graduate-level statistics or math background.
“That’s why, about five years ago, I set out to bring that sort of scientific rigor to Agora Financial with a project I’ve been working on in secret,” Jonas continues. “After millions of simulations and substantial development costs, it’s finally ready for prime-time.”
It all boils down to a trading signal called a K-Sign.
If you’ve been following along at home for the past several weeks, you already know how our real-time beta test of this new indicator has worked out: We’ve booked gains on every closed trade so far during the 2017 test period.
To learn how you can start booking data-driven market gains like these, I urge you to watch this presentation today.