The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution

by Gregory Zuckerman

D. E. Shaw and LTCM also had drifted into markets the firms didn’t fully understand or had little experience in—Danish mortgages! Online banking!

Then came true trouble for Magerman and his colleagues. The tech bubble burst on March 10, sending shares plummeting, with little news to account for the shift in sentiment.

A month later, the Nasdaq would be down 25 percent, on its way to a full 78 percent drop from its peak. Medallion faced inexplicable losses. It lost about $90 million in a single day in March; the next day it was $80 million more. Nerves began to fray—until then, Medallion had never lost more than $5 million in a day.

Brown froze. Medallion’s losses now approached $300 million. Brown was distraught, even fearful. He looked at Simons, desperate for help.

“We have to let it ride; we can’t panic.”

once-trusted strategy was bleeding money. It was a rather simple strategy—if certain stocks rallied in previous weeks, Medallion’s system had taught itself to buy more of those shares, under the assumption the surge would continue. For several years, this trending signal had worked, as the fund automatically bought Nasdaq shares that were racing still higher. Now the system’s algorithms were instructing Medallion to buy more shares, even though a vicious bear market had begun.

By the fall of 2000, word of Medallion’s success was starting to leak out. That year, Medallion soared 99 percent, even after it charged clients 20 percent of their gains and 5 percent of the money

invested with Simons.

Just as impressive, Medallion had recorded a Sharpe ratio of 2.5 in its most recent five-year period, suggesting the fund’s gains came with low volatility and risk compared with those of many competitors.

Simons’s team appeared to have discovered something of a holy grail in investing: enormous returns from a diversified portfolio generating relatively little volatility and correlation to the overall market. In the past, a few others had developed investment vehicles with similar characteristics. They usually had puny portfolios, however. No one had achieved what Simons and his team had—a portfolio as big as $5 billion delivering this kind of astonishing performance. The accomplishment opened the door to new possibilities.

On Wall Street, traders often are most miserable after terrific years, not terrible ones, as resentments emerge—yes, I made a ton, but someone wholly undeserving got more!

Simons had an unswerving belief in logic, rationality, and science. He had played the odds in his trading, fighting a daily battle with chance, usually emerging victorious. Now Simons had suffered two tragic, unpredictable accidents. The events had been outliers, unexpected and almost inconceivable. Simons had been felled by randomness.

Simons struggled to comprehend how he could have so much good fortune in his professional life, yet be so ill-fated personally. As he sat shiva in his New York City home, Robert Frey, the Renaissance executive, drew Simons close, giving him a hug. “Robert, my life is either aces or deuces,” Simons told him. “I don’t understand.”

He turned crusty, even ornery, with colleagues and others.

“He saw the death as a betrayal,” a friend says. Dealing with intense pain, Jim and Marilyn spoke about purchasing a large part of St. John, moving to the island, and disappearing.

Alexey Kononenko. By then, Kononenko’s behavior had become a true distraction. He regularly ignored assignments from Brown and Mercer. When they scheduled a meeting to discuss his uncooperative behavior, Kononenko didn’t show up.

(Someone close to Kononenko disputes how he and his actions have been portrayed by others who worked with him.)

Wielding polished silverware, the executives dug into juicy steaks while sipping delicious red wine. The small talk died down as Simons turned serious.

“We can fire these guys,” Simons said. “But if they leave, they’ll compete with us and make our lives harder.”

As Magerman listened to the arguments, he tensed up. He couldn’t believe what he was hearing. Kononenko’s team had tried to get Brown and Mercer fired. They had forced Simons to take a pay cut and gave everyone a hard time, upending the collaborative, collegial culture that helped Renaissance thrive. Simons saw potential in Kononenko? Magerman wasn’t standing for it.

“This is disgusting!” he said, looking at Simons and then at Brown. “If we

don’t shut them down or fire them, I...

2004, Medallion’s Sharpe ratio even hit 7.5, a jaw-dropping figure that dwarfed that of its rivals.

Simons had another, more personal reason to seek a new project. He continued to struggle with intense, enduring emotional pain from the sudden death of his son, Nicholas. A few years earlier, Simons had seemed eager to retire from the trading business; now he was desperate for distractions.

If Medallion managed much more money, Simons, Henry Laufer, and others were convinced that its performance—still tied to various short-term price fluctuations—would suffer. The size limit meant Medallion sometimes identified more market aberrations and phenomena than it could put to use. The discarded trading signals usually involved longer-term opportunities. Simons’s scientists were more confident about short-term signals, partly because more data was available to help confirm them. A one-day trading signal can incorporate data points for every trading day of the year, for instance, while a one-year signal depends on just one annual data point. Nonetheless, the researchers were pretty sure they could make solid money if they ever had a chance to develop algorithms focused on a longer holding period.

Simons was approaching seventy years of age and he thought it wouldn’t be a bad idea to sell some of his equity in the firm, though he wasn’t willing to tell anyone.

A year later, with the new fund already a few percentage points ahead of the broader stock market, investors started lining up to hand their money over. Soon, they had plowed $14 billion into RIEF.

Some prospective investors seemed most excited by the prospect of meeting Simons, the celebrity investor, or his secretive staffers, who seemed blessed with magical trading abilities.

he’d stop and point out scientists and mathematicians as they went about their daily routines, as if they were exotic, rarely seen creatures in their natural habitat.

Dwyer’s tour usually concluded back upstairs in Renaissance’s computer room, which was the size of a couple of tennis courts. There, stacks of servers, in long rows of eight-foot-tall metal cages, were linked together, blinking and quietly processing thousands of trades, even as his guests watched.

As the small talk got under way, Simons began making odd motions with his right hand. The foundation executives had no clue what was happening, but nervous RIEF staffers did. When Simons was desperate for a smoke, he scrabbled at his left breast pocket, where he kept his Merits. There was nothing in there, though, so Simons called his assistant on an intercom system, asking her to bring him a cigarette.

“Do you mind if I smoke?” Simons asked his guests.

Before they knew it, Simons was lighting up. Soon, fumes were choking the room. The Robert Wood Johnson representatives—still dedicated to building a culture of health—were stunned. Simons didn’t seem to notice or care. After some awkward chitchat, he looked to put out his cigarette, now down to a burning butt, but he couldn’t locate an ashtray. Now the RIEF staffers were sweating—Simons was known to ash pretty much anywhere he pleased in the office, even on the desks of underlings and in t...

Finally, Simons spotted the frosted cake. He stood up, reached across the table, and bu...

the icing. As the cake sizzled, Simons walked out, the mouths of his guests agape. The Renaissance salesmen were crestfallen, convinced their lucrative sale had been squandered. The foundation’s executives recovered their poise quickly, however, eagerly signing a big check. It was going to take more than cho...

It turned out that Sullivan, who had six children from multiple marriages over forty years, was fielding financial requests from his kids and was having difficulty deciding how to treat each fairly. Simons sat silently, considering the dilemma before offering a Solomonic answer in just two words. “Eventually, equal,” Simons said.

When asked how someone so devoted to science could smoke so much, in defiance of statistical possibilities, Simons answered that his genes had been tested, and he had the unique ability to handle a habit that proved harmful to most others. “When you get past a certain age, you should be in the clear,” he said.

Brown was almost as smooth and capable with investors, but Mercer was another story. RIEF’s marketers tried to keep him away from clients, lest he laugh at an unexpected point in a conversation or do something else off-putting. One time, when neither Simons nor Brown was around to greet representatives of a West Coast endowment, Mercer joined the meeting. Asked

how the firm made so much money, Mercer offered an explanation. “So, we have a signal,” Mercer began, his colleagues nodding nervously. “Sometimes it tells us to ...

Instant silence and raised eyebrows. Chrysler hadn’t existed as a company since being acquired by German automaker Daimler back in 1998. Mercer didn’t seem to know; he was a quant, so he didn’t actually pay attention to the companies he traded. T...

By the spring of 2007, it was getting hard to keep investors away. Thirty-five billion dollars had been plowed into RIEF, making it one of the world’s largest hedge funds. Renaissance had to institute a $2 ...

was built to handle $100 billion, but not all at once. Simons made plans for other new funds, initiating work on the Renaissance Institutional Futures Fund, RIFF, to trade futures contracts on bonds, currencies, and other assets in a long-term style. A new batch of scientists was hired, while staffers from other parts of the company lent a hand, fulfilling Simons...

Four years earlier, researchers Pavel Volfbeyn and Alexander Belopolsky had quit Renaissance to trade stocks for Englander’s hedge fund, Millennium Management. Furious, Simons stormed into Englander’s office one day, demanding that he fire the traders, a request that had offended Englander.

Amid the hostilities, Volfbeyn and Belopolsky set up their own quantitative-trading system, racking up about $100 million of profits while becoming, as Englander told a colleague, some of the most successful traders Englander had encountered.

At Renaissance, Volfbeyn and Belopolsky had signed nondisclosure agreements prohibiting them from using or sharing Medallion’s secrets. They had refused to sign noncompete agreements, though, viewing the firm as underhanded for slipping them in a pile of other papers to be signed, according to a colleague.

One of the strategies Volfbeyn and Belopolsky employed was even called “Henry’s signal.” It seemed more than a coincidence that Renaissance used a similar strategy with the exact same name developed by Henry Laufer, Simons’s longtime partner.

It seemed nothing could stop Simons and Renaissance.

Peter Brown was so cocksure that he placed a bet with a colleague: If Medallion scored a 100 percent return in 2007, Brown would get his colleague’s new, Mercedes E-Class car.

On the way home from the Bermuda trip, as staffers lined up to board the

return flight, someone suggested they clear the way for a pregnant woman. Some Renaissance scientists refused. They didn’t have anything against the woman, but if she truly wanted to board early, she logically would have arrived early, they said.