Sixty-six percent per year average returns (before fees) over thirty years. With no down years. Yes, you read that right. That’s the spectacular track record for Renaissance Technology’s Medallion fund that author Greg Zuckerman lays out in his investigative book on the legendary mathematican and Renaissance founder: Jim Simons (“The Man Who Solved the Market“).
This is a pacy and well written book that offers plenty for the investing and market “geeks” but is also an enjoyable read and easy enough to plough through and polish off in just a couple of sittings.
We discussed this book on our podcast Investment Uncut:
I actually resisted this book for quite a while. It sat on the shelf for ages. I know how these books often work -the journalist sets out to write a particular story that they know will resonante, and writes that story whatever the facts actually say. And I was worried about an oversimplified “maths genius solves the market and makes loads of money” narrative as we know that’s too simple. Many smart mathematicians have operated in the markets, many have run funds, hired hundreds of PhDs. Many have very good track records. None have annualised at 66% for thirty years without even a single bad year. And anyway, the market isn’t a “problem” to be solved in that sense – there are a load of different ways to succeed and make money (and to lose it). I wondered – was Greg Zuckerman really going to get close to what’s really going on here?
Well the answer is … not totally (as you might expect, there’s a lot of secrecy around what they do) but probably just enough to avoid the naive narrative and keep me happy.
The result is a very readable book that canters though a 50-year period at a pretty quick clip, sometimes entire decades summarised in just a few pages. But that keeps you interested.
And for those that don’t already know, there’s a whopper of a twist in the tail coming about three-quarters of the way through. No spoilers here, but it has to to with the 2016 US election.
One thing that struck me was the similarity in many ways to the founding story of Bridgewater Associates as told by Ray Dalio in his book principles. The early timeline looks very similar with a decade or longer of grinding away with moderate success before things really exploded in the 1990’s. I suspect that isn’t a co-incidence as the confluence of computing power, data and knowedge may have them (and others such as DE Shaw) the same tailwind.
Does the book get the markets bits right? Again, there’s enough there but it’s never going to be comprehensive. The picture painted in the early years (70’s and 80’s) of what we would now call a fairly standard trend-following (“CTA”) type fund trading across a big range of futures contracts and commodities – including all the more exotic stuff like coffee, orange, hogs etc. The fund wasn’t big then, certainly not by today’s standards, partly due to the limitations of what it was trading.
A big breakthrough came with the addition of two men from IBM’s speech recognition team in the mid 1990’s: Bob Mercer and Peter Brown. Fascinatingly, they spotted that using the probabilistic techniques applied to language processing (given what came before, what’s most likely to happen next) was a good framework for trading the markets. They had also at the time grown disillusioned with the speech recognition business (that’s interesting in itself, given where that tech’s got to today). They were able to create an equity trading model that worked and vastly increased the fund’s capacity.
Did I read anything that really set these apart from the other quantiative investing firms I’ve seen? Frankly, no. So that remains a bit of a mystery, but I did find one clue in a podcast interview with AQR founder Cliff Asness. He is convinced that limiting the size of the Medallion fund (initially to $5bn, later $10bn) was the key. Looking at the track record of the larger funds that Renaissance ran, they (apparently) look more like an AQR.
Overall, great book, well worth a read. I’m going to check out Zuckerman’s other investing books too. Get in touch and let me know what you thought!