The Exchanges

Q And was there anything that you picked up that happened for the guys who really figured out equities at Renaissance?

A Well, it took outsiders. It took this group of individuals from IBM, Bob Mercer, who went on to fame and fortune as a big backup for Donald Trump and the hard right, and his colleague Peter Brown, and they too weren't really focused on getting rich at the time. They were just at personal turning points in their lives and needed something new, and he came over to work with Simons, and they were tasked with figuring out equities. They had earlier brought over a guy named Robert Fry, and He was a Morgan Stanley veteran, and they had made some progress. It was almost like they had, on paper, their system, their equities trading system should have worked. It seemed to be a system that was quite promising, but when they applied the trades, it never did, and they were getting quite frustrating, as I suggested. Really, the key was this younger, really unlikely programmer named David Magerman, Who was on his last leg. He had messed up over and over again at the firm. No, he was really unpopular for a lot of good reasons. And he was late at night trying to figure out what the problem was. And he found this glitch. He found a screw up on the part of Bob Mercer, who was a super duper programmer, but he had messed up. There's a number that wasn't updating. It was an S&P 500 number that was static. And it was really more their hedging and their offsetting trades and It just was messing every…

AI assessment note: “he found this glitch. He found a screw up on the part of Bob Mercer”

Q So then there's the other side, which is, yes, they've made these extreme amounts of wealth and as a result can Spend it and do things that impact the world, as you mentioned Jim originally wanted to do. Why don't you walk through how that evolves, particularly with Jim and Bob Mercer?

A The first half or two-thirds of the book is Simon's, and then how he and his colleagues made a lot of money, but then the last part is what they did with it. And because they're very different personalities, they did very different things with it. So early on, Jim Simon's Was affected. He rode around the country with his friends and was affected by seeing difficult circumstances people in our nation were living under, minorities especially, and it affected him, and he became a left of center. I won't necessarily call him progressive or liberal, but he's a left of center guy, and he supports left of center politics. He also became very active in philanthropy in terms of universities, autism research. He is the biggest funder of autism research, and frankly, They may come up with, I don't know, like a cure, but maybe treatment in the next number of years, and it'd be large part due to Jim Simons. I really think that he may go down and be remembered as much for some of these philanthropies as other things. He's behind math and science education. He subsidizes math teachers in New York City and New York State, gives them 10,000, or I think 15,000 dollars each, the top ones, and so that they don't leave to go to private industry places like Renaissance. A little irony there. So he was doing that kind of stuff, but others had other passions. So Bob Mercer, who became the co-CEO of th…

AI assessment note: “So Bob Mercer, who became the co-CEO of the firm, is a conservative guy.”

Q Do you think in the work you did on that book, there were signs that you might have been able to figure out from his personality or otherwise that he'd be subject to that type of change?

A At the end, I sort of raised questions about The gold. He got into gold at the end, and what is gold worth? It's hard to put a valuation on that, and that's clearly not an asymmetrical trade. But no, I don't think he's not one of these guys that throws his money around and is comfortable with risk. So it wasn't like there was some telltale sign there of somebody who was going to change his approach, but he's human. So when someone writes a book called The Greatest Trade Ever about what you've done, and you know, it does pretty well and all that, and People give you all kinds of credit. You start thinking, maybe I can master pharma stocks and gold stocks and bank stocks. So no, nothing that I, in hindsight, I could see that suggests that he was going to have poor returns for the next decade.

AI assessment note: “So no, nothing that I, in hindsight, I could see that suggests”

Q like Jim giving the team six months to figure out equities or He's gonna shut that down, and then he said if he shut it down, it probably is a much smaller fund, and the equity model being this, like, problem in the code. Where are the other examples that you saw of, you know, Renaissance easily not being able to be the subject of this book that you wrote?

A That was one of my fears writing this book. They've got these returns, 66% a year before fees. Only 39% after fees, yeah, after their five and 44 fees. So my fear was, Where's the drama here? Where's the tension? Where are the setbacks? And then the relief to me, not necessarily to the people internally, is that there were, as you suggest, these really difficult points where it could have gone either way. So specifically, there were many times before this, but in 2007, the quant quake. So if you think about it, if you or I, or, you know, a traditional type of fundamental investor, if you're losing a lot of money Rapidly over several days. It's scary for sure, but you at least know why, you know, this bet went awry, and you kind of have a sense for why usually. It's scarier when you don't know why you're suffering remarkably dramatic losses, which is what happened in that August period, and one can say, well, yeah, ok, it was just like a week, so big deal, but That's not how it felt internally, because again, they were losing hundreds of millions of dollars suddenly for no apparent reason. It happened also in 2000 when the NASDAQ had that turn. They didn't know why they were losing money. It's a scary feeling to be suffering so much, losing so much so quickly. You, you think it could be, that's it. We're done. It just could go on. Why shouldn't it? Because we have no idea why we…

AI assessment note: “So specifically, there were many times before this, but in 2007, the quant quake.”

Q So in those early years, There probably weren't as many people. You had Barr Rosenberg back then. There were a few other quants. There weren't as many people doing it. Was it their mathematical modeling in the early years, plus this data that was just an advantage, or were there also these kind of special insights that we may not know what they are, but were present back then?

A There were other people like Ed Thorpe doing it as well. You have to give those people credit, but Simons and his colleagues were quite early, And Henry Laufer was the key guy. So he was a mathematician, a very quiet, humble, really super smart, well respected, and almost acclaimed in that field. And he's the one who came up with different approaches, things like days of the week, comparing what trades worked on what days of the week, what patterns are out there. Do you get in Friday before the close and get back out Monday? Sometimes you do, sometimes you don't. Which markets do you do it? Correlations between different things like gold and silver. Pat, during the day, they started looking at the day in different bands, and they started with larger bands, they got all the way down to five-minute bands. So does the 32nd band on a Tuesday usually go up in this investment while the 34th goes down? And they were looking for patterns that most others couldn't figure out, and that's partly because they were mathematicians who had a sense for the structure and developing models that could, on their own, eventually do trading.

AI assessment note: “they were looking for patterns that most others couldn't figure out”

Q I mean, and this is, we're talking the mid and late eighties when no one was talking about predicting how much capital were they managing back then?

A It wasn't much. It was maybe about 50 or so million dollars. If that they went up and down, they made a lot of money sometimes with this macro kind of trading gold and silver that they lost a lot of it. So sometimes there'd be more money. And frankly, It's called Renaissance Technologies because he was focused on other things at the same time, including venture capital, and he did some interesting venture capital type investing on the side, and it wasn't clear which direction the firm would go. It wasn't even clear they were going to be a trading firm until I would argue, 1990 when there was a, a turning point and they, they got a better sense of how they should be trading and more short term orientation. They went from 8020 Long-term to short-term, and they flipped it around, eighty-twenty short-term. So they went back and forth. There were a lot of fits and starts, and frankly, that was one of the surprises of my research. I thought, with this kind of trading record, they'd sort of figured out early on, the early quants, but, and now off to the races, but it wasn't like that.

AI assessment note: “It was maybe about 50 or so million dollars.”

Q and cracked the code on the equity market, It seems like the perception is that Jim is the brains. You know, you've described it as he's this great leader and manager of people. To what extent do you think his mathematical genius impacted each of the sort of signals that went into the trading strategy, and how much was it just he hired a couple people who figured it out?

A So another reaction on Amazon, not that I obsess over it, not at all. One of the reactions is, well, Greg, it says the man who solved the market, but half the book is about these other guys. It's not all about Simons. And yes, that is true. In some ways I was surprised that he didn't come up with the algorithms most of the time, but he's great at asking questions and prodding and pushing. And have you considered this? You might want to try this approach. So people internally say his genius is managing genius and getting people on the same page. And I've kind of suggested to people internally play devil's advocate to some extent. Well, geez, he gets paid a billion and a half dollars a year today for not doing anything. And back then he was making a fortune. Maybe doesn't deserve it given that he didn't come up with most of these algorithms. And they say, you know, these are cutthroat people as much as anywhere else. They say, no, no, no. He deserves what he's the twenty three billion that he's racked up because he created the culture and the recruiting and he asked the right questions. And because of Little things along, I write in the book, little things like risk management and getting out of the prime brokers that were in danger at the right time, dealing with clients when things were difficult positions. So he can do the math and he is a quant and he understands the approach…

AI assessment note: “I was surprised that he didn't come up with the algorithms most of the time”

Q Yeah. And so do you have a certain perspective or set of beliefs about the asset management industry?

A Sure. They've evolved over time. I sort of went into this business, I guess, to some extent, looking up to the storied investors, and I put them on a pedestal to some extent. And over time, I've become much more cynical. Partly because, well, their returns have gotten worse. The market's become more competitive. I mean, you know, with the stuff, it's harder to get a information advantage. They charge way too much. I'm getting older, so that's part of the cynicism as well. So some of those principles are that people charge way too much, but people are generally not bad people on Wall Street. I think there's an assumption from others outside that everyone's out to do bad things. I wrote a book earlier about the financial Crisis, the meltdown in 2008. And you know, most people assume that the banks were out to screw the homeowners. And I don't think that's the case. I'm not saying they're not blameless. So I've become more cynical. I do also appreciate the talent on the street. And generally speaking, you want as a society, you want talented people allocating capital where it should be. So we have an advantage over others. I've traveled and I've written different books and such. And we as a nation have a little Competitive advantage over others because of these capital markets.

AI assessment note: “Over time, I've become much more cynical. Partly because, well, their returns have gotten worse.”

Q outside the industry and say, wow, these guys are different from almost everybody else. Inside the industry, you know, you mentioned DeShaw or Two Sigma. There are other quants that presumably are trying to attack markets in the same way, and yet Renaissance has had dramatically more success. Did you get a chance to talk to some of those other funds and get a sense of what might be different?

A Yeah. So let me give a couple of reasons. First is, let's be clear about quants. So I'm a writer. I work at the Wall Street Journal. I write about the buy side and lately I've been writing about quants, but even I coming into this, I sort of painted this brush quants, you know, it's this big industry. There's so many different types of approaches to quant as many of your audience will be aware. And it was made clear to me. So things like AQR, they're just so different from what Renaissance does. And quite frankly, There aren't that many firms that do what they do. And when I, to be specific, I'm talking about medium frequency type trades, not high frequency, not factor investing, not other approaches that other quants do. You do have, as you suggest, like a two sigma, a few others. Dshaw does it a little bit medium, but first off, they don't have as much competition as you would think for various reasons. You know, AKR guys there get wealthy doing their approach and whatever. Everybody does it a different way. They've got clients who We don't want the black box approach. Their clients want to know why they're winning and losing, that kind of thing. So A, the competition isn't quite as great as you might think. B, the talent level is just different. And up and down Wall Street today, everybody's got PhDs. Everybody talks about their PhDs. I joke in the book about how it used to …

AI assessment note: “So let me give a couple of reasons. First is, let's be clear about quants.”

Q What is your favorite hobby or activity outside of work and family?

A I'm a sports guy, so even my writing is all home runs and strikeouts. Not all. A lot of what I do is home runs and strikeouts. So I wrote two books with my two sons about sports stars who overcame challenges in their youth, and we may do another one, and it's a hobby that we try to inspire young people, and we give speeches. I'm giving one to some underprivileged children in a week or so. Yeah, we go and meet superstars and ask them about Racism, and sexual abuse, and physical abuse, and poverty, and how they dealt with it, because I think there are lessons for me, selfishly, and for my kids, I really want them to learn, and for other young people, so those books, we love doing those, and I watch sports, and I play softball, I play basketball, so that's kind of my passion.

AI assessment note: “I watch sports, and I play softball, I play basketball, so that's kind of my passion.”

Q Well, let's turn to someone who that clearly hasn't happened to and certainly may not just because of this terrific book you put together. Why don't we start with your perspective on Jim Simons and his path through his career?

A Sure. So Jim Simons is a fascinating individual. Even if he had never invested a dime in the market, I would argue he's still worthy of a book because before he started trading full-time in 1978, he was one of the most acclaimed mathematicians, especially as a geometer over the past 50, maybe even a hundred years. His work today still gets citations all the time. It has impact lots of areas, physics elsewhere. And he's just an interesting individual. He broke code for the government, so I'm skipping around here, but basically grew up middle class, Boston suburb, got a PhD at Berkeley in mathematics, went to MIT before that, then he taught at MIT and Harvard, and he's an interesting guy because on the one hand, he's a mathematician, and later he's a quant, so he can do that side of things, but he's also got these interests and passions in the real world. Unlike many of the people that I dealt with, and I did a lot of research for this book and talked to all kinds of mathematicians from back in the day, and they kind of looked down on him when he said, oh, in not to 78, I'm going to quit academia to go trade, but Simons doesn't care, and he didn't care what people think then and today, but more importantly, he's unique because, again, he's the academic, he's a quant, but he's also, he loves money, and he's not ashamed of that whatsoever. He always was kind of looking to trade on …

AI assessment note: “before he started trading full-time in 1978, he was one of the most acclaimed mathematicians”

Q What was it about the way they were investing in the equity markets that worked?

A I think the answer is that they invested then and also today in a very different way than most everybody else. Their goal is to find relationships among equities. So today, and it's not so dissimilar from what it was back then, today it's about four or 5000 stocks that are long, four or 5000 stocks that are short. They'll look for groups of relationships between this group and And another group between this group and an index between a group and a factor model. So they don't even know the companies involved. They find that distracting. It's one of the lessons that I've learned is how we can all get caught up in the narrative. They don't get caught up in any narratives. They don't even know what they're doing at this point. Now we're skipping ahead a little bit, but even back then, the idea was to find relationships among stocks as opposed to predicting where any would go. It's not pairs trading. It started off as pairs trading, but it's much, much more sophisticated level. But, you know, to simplify it and dumb it down, it's something like pairs trading, but now it's every kind of, it's not equities. It's not like Ford versus GM.

AI assessment note: “Their goal is to find relationships among equities”

Q Did you start in your path as a journalist?

A As a journalist. So I stumbled into this career. I should have thought about it earlier, but I didn't. So I basically grew up in Providence, Rhode Island, obsessed with markets and investing and business. Although my father was an academic and my mother didn't really know that much. So I'm not sure where I got it from. I remember looking at like a Skippy peanut butter jar and the back of it, and it wasn't like Skippy corporation. It was owned by like Procter & Gamble or something. I'm like, wait, what? There's not like every company, you know, Smuckers and everyone's. So I love the interesting idea of putting companies together and brands, and I started thinking about that, and in camp growing up, I would have my counselor bring Barron's back on a day off so I could read that, and I was reading Business Week. I would go to my local bank. We didn't get the Wall Street Journal at home, but my local bank did, so I would sit in the lobby there. So I was always into business, and I always thought I'd go work on Wall Street. I went to a good liberal arts school, went to Brandeis University, and did well, traveled a little bit, Went to work on Wall Street, and I couldn't get a job. I didn't know anyone. I hadn't worked like summers or anything. It was a bad time in the industry. If you remember back, this was 1989, and it was like the reverberation of the crash, and I just wasn't qual…

AI assessment note: “So I stumbled into this career. I should have thought about it earlier”

Q done. So the people there, the 330 people may have access to the code, but you have this guy who's an educator by heart, who's turned to crack the code on the market. Do you think at any point in time as a book in his will someday, there will be a better understanding of what actually they've done, even if it's only the competitive quants who can understand it?

A See, my argument is that there's no secret. It's a group of advantages they have over everybody else. And I do write in the book about things like how they hide their signals. They trade in ways where they try to make what they do hard for others to follow. They have a different understanding of trading and the relationships among equities and such. So I understand this need or this desire for like some huge, big Not reveal as to how, why they're so much better, but I don't, we talk to people internally. They do have signals that go back that are tried and true that they think are going to continue to work and they hide those signals and they try to trade in a way that people can't pick up on. And I'd love to hear more details about that. And I get into a little bit in the book, but I still think it's sort of these small important advantages in terms of the talent, in terms of the management, in terms of getting people to work together, in terms of The importance of data, and they do have better data than everybody else. People are catching up. It's not as much an advantage anymore, but they've got stuff going back to the 1700. That's accurate and gives them patterns that people don't necessarily see. So in terms of people giving stuff away, no, I mean, Simon's didn't want me to write this book. Even a few months ago when we were like at the printer, he legitimately kind of ask…

AI assessment note: “He might do something of his own someday... He ain't gonna tell you his best signals.”

Q some of these great stories. And the first is something you'd mentioned earlier, which is when Simon started trying to raise outside money in the early nineties, this strategy just wasn't popular. There was this kind of contrarian streak that he had. You talked about, well, Peter Lynch was popular and George Soros was popular. To what degree does that streak of contrarianism filter through both Jim and the organization?

A They are outsiders. It's the paradox that's behind my book. It should not have been Jim Simons and this group of mathematicians and scientists who figured out investing should have been somebody like me who, who is obsessed with investing. And it's not to say that I'm any good at it. And the journal has all kinds of restrictions, so I don't really trade, but somebody who was interested in markets from birth, someone who read, you know, Buffett, Adam Smith , I remember growing up. Graham, you know, the classics. They don't know those guys read the classics about investing. It should not have been Jim Simons and these groups. Some of these people internally aren't even sure about capitalism. They're libertarians. There are all kinds of quirky people who I've met who work there today, and over the years, fascinating. Some are liberal, some are hard right, so being an outsider, maybe it does help, and maybe this different approach, you needed to have a different approach. I mean, it's true of all my work. I find that All these outsiders time and time again succeed. You know, I wrote a book about the energy revolution, and it's called The Frackers, and it should have been BP and Exxon and all those guys that found all the oil in this country. It wasn't. Those guys had given up on America. They were offshore and Asia, and it took some unlikely characters, and John Paulson was unlikel…

AI assessment note: “Some of these people internally aren't even sure about capitalism. They're libertarians.”