Dr. James Simons, S. Donald Sussman Fellowship Award Fireside Chat Series. Chat 2. March 6, 2019

welcome everyone I think you're in for a real treat um first of all um I'd like to welcome you all to the MIT

Sloan um we're here today because uh this is part of this is the there's been award made for the S the um susman Fellowship which is given every couple

of years and it was funded um to honor um the achievements and um the opportunities Donald sasman has given to

a bunch of people in the fund management business he's also um somebody who was very much a Pioneer in the whole hitch fund uh

Arena um we have um it Donald for those who weren't here last week um runs Paloma partners and at Chinese private

Equity investment firm um and um is is very is is very much involved um you know with all things investing um to

this day this year we have um awarded the uh the fellowship to Jim Simons when in fact the award really is almost hours

for Jim having agreed to show up um uh Jim is an extraordinary man um genuinely extraordinary um it's very hard to

describe how extraordinary because um if you think about this you know every day he goes to work or when he did go to work uh it's a discovery and a battle

it's a competition it's like an athlete winning the Olympics pretty much every day that's probably the best analogy it's a fiercely competitive environment and anybody who knows Finance knows how

unbelievably difficult it is and how many people would like to eat your meal um Jim uh not only is a great mathematician and again those who were

here last week will know about this um but he's also what I describe as a real mench an extremely nice person who when I first met him which would have been around 1990 or

91 his fund was maybe 200 and Jim will correct Me Maybe 250 million which by then was fairly large but by today's standard it's very small uh had this

certain irreverence and confidence and directness and one of the things features that that makes Jim so very special and you'll notice that today he

gives extremely concise direct and unambiguous answers to any question you ask him um the other thing to note about Jim is for those who know some of the people who work for Jim or know some of

the history it's unbelievably difficult to manage intelligent people um and I don't know many people who do it as well as Jim does and it's

worse when there's a lot of money involved um Jim uh um uh one other thing to say there a few things I there's so many things to say but one of the things to say about Jim is that his track

record is so extraordinary that to most academics it's inconceivable and it's somewhat ironic that we're here at MIT in the and this

is probably the best Finance faculty in the world at least some my friends tell me um and um there's a there's a paradox here because Jim never hires Finance

guys or mbas or such or we he never used to and it's quite wonderful to have him speak to this audience I'm sure there other departments here as well um but it is interesting that you know you have

departments studying all kinds of features of the financial markets and um Jimmy does a away with Jim does away with publishing papers instead just

cracks them um so Jim um Andrew uh over to you thank you [Applause]

well I want to uh I want to start by joining Andre and my MIT colleagues and thanking Jim for joining us today and being here and um I have to say that uh

this is a a real pleasure and an honor for me because uh I think it's fair to say that Jim Simons and Renaissance Technologies is certainly the most successful quantitative investor in the

history of investing but perhaps actually you can drop the qualifier quantitative and uh so there's a real really interesting set of issues that we want to get to today before I do that

though I need to um uh lower your expectations of the interviewer because you know this three lectures that or three Fireside Chats that Jim has agreed

to uh uh mathematics money and making a difference only one of those M's is proprietary and confidential and that happens to be today's topic of money so

so Jim and I agreed on some ground rules I get to ask all sorts of nosy questions and he gets to say pass because it's confidential and I'm I'm sure that uh the audience will will have a chance to

ask those questions too and I'll have a chance to say no I won't answer so um Jamal I'm GNA ask you um if you don't mind to recount a bit of your

biography the way we did last week but instead of Tom's focus on your mathematics uh career i' like to turn it around and focus on your business and finance career so uh I'm going to start

at the very beginning um you were a very precocious mathematics student you mentioned last week that uh when you were two or three years old you were already doing the powers of two um were

you also precocious from a business perspective did you think about any of these issues um as a child as a child I thought I had no interest in

business which is not to say I had no interest in money but I had no interest in business and um but uh you know was a

little kid I had a friend who was very rich and I thought it's nice to be very rich I I observe that uh but just I just

focused on math and uh for quite a while so unlike Warren Buffett who had a newspaper route business or Bob meron who I think was trading stocks when he was 10 you had nothing to do with uh

with Finance uh nothing to do with Finance okay so uh when did you first get interested in business when you were at MIT you mentioned something about

that uh last week I'll have to call you back what could I say I hope that wasn't a margin call

if it had been I would have said the same [Laughter] thing so um when did you start thinking about business you mentioned as an

undergraduate you had some uh friends who were you know doing some business in Colombia well I I met some I I made

friends at MIT with two Colombian boys uh and uh they uh at a certain point uh started a business and in fact it was my

encouragement that they started that business and my father and I invested a small amount uh in that business which turned

out eventually uh to be a big success so what what possessed you to think about that I mean that takes a certain amount of initiative to actually what possessed me to think about that

particular investment was that I had when we graduated MIT uh three of us one of whom was the Colum

boy uh and his friend was in Bogata three of us uh rode motor scooters from Cambridge uh to

Bogata now we'd expected to go all the way to bues Iris but uh by the time we got to bogot we were exhausted so we we we stopped in Bogota and I and stayed

there a week or so and I saw this country Colombia and it was really a place that you could do anything I real I was told if you start a business a

manufacturing business and you're making something that was imported previously imported to Colombia the government would shut off those Imports and give you

clear road to to run so I I thought my friend should start some kind of business like that which they did but that

was my first interaction with money was when uh I I was a first year well I was a second year I went out to

Berkeley to finish my PhD I spent two years there and the first year early on uh I got married and uh we I had five I got

$5,000 worth of wedding gifts so I my wife and I decided Well I decided she but she was willing that we

should invest this and I uh I had a couple of stocks which for no good reason I thought might do well and uh so

I want open an account in San Francisco with with uh Merl Lynch I bought these two stocks I went home and for months they did absolutely nothing so they

didn't go down they didn't go up so I went back and I I said do you have anything that's a little more uh exciting

and he said yes he said you should buy soybeans maril Lynch thinks they're $2.50 now they're going to go up to

$3.50 what are you talking about soybeans I knew about stocks I didn't know about soybeans he say yes you could buy a contract there 5,000 bushes you

could buy two contracts you get a lot of Leverage and so on all right so I bought two contracts of soybeans and within a week it had gone

up quite a lot and I'd made several thousand dollar maybe two or three now that was exciting and uh I I came back

to the math department and I said to one of the older guys I told him what happened he said I said you have any idea what I should do he said absolutely sell it

immediately which was extremely good advice because within a day or two it had gone back down and it was bounced around and actually had a little loss I

closed out the position and then I thought well I should have taken a smaller position and then I could have held it

more and I did I bought one contract of soybeans and was going back and forth early in the morning to watch the

opening in Chicago because it was it was uh early in the morning in San Francisco when the Chicago open to trade these things and I was going back and forth

across the bay bridge watching the board and uh and then and I and I had a little profit at a certain point and I

realized I am either going to trade soybeans or write a thesis I was in the middle of starting to write a thesis and I could see I

can't do both at one at the same time so I sold that one contract for I think a very small profit and that was the last

time I traded anything for a number of years but I did write a thesis and uh got a job here in MIT as a result so so

just for clarification your first investment was a couple of stocks and then the second investment was soybean Futures contracts yeah and

these contracts as I recall are averaged like 25 or 50 to one is that right it's very highly leveraged I don't know high octane kind of invest yeah it was yeah

and your broker felt that you were you were a suitable investor for that uh as a graduate student well uh he didn't ask any questions oh

great he was just doing his job I came in I had enough money to buy this stuff so he right he figured it was all okay yeah and and so you had never invested before that you didn't have to take a

course in finance or business nothing okay great so now you're an assistant professor at MIT and it's pretty clear based on your thesis and the early work

that you did that you were going to have a very good career in math and you did so what got you interested in business at that same time because you continued

to have an interest in it didn't you continue having an interest an interest in business well when when I came back to teach at

MIT uh the first intercession I went down to Bogata to visit with my friends and told them I was coming and I won't leave until we have found a

business and they found one while I was there and decided to partner up and I knew they would they were very smart guys and they had a very good sense of

business which I I don't think I ever had and uh so they started this uh this business my father and I

invested a small amount and I had a borrow from everybody but I did and um so that was the the first the first thing and and

then there was there was not much I could do about it so I kept doing doing math and uh but I actually uh since I borrowed

some money uh I needed to pay it back and and it was uh there was a place in Princeton called The Institute for defense

analyses which uh was a very highly classified joint and it specialized in cracking Russian codes and protecting

our own so it was a uh under the opes of the NSA and they paid a lot for mathematicians so I applied to them and

and got a job and uh enjoyed the job and was able to start paying down some of my debts because they it paid maybe double

what I was getting at at MIT wow so uh so uh well and I like I like that place it it was it was interesting now you you talked last week about some of the work that you did

there uh but one of the things that I wanted to ask you and I didn't think it was appropriate to ask last week because the focus was on mathematics did any of the uh uh work that you were doing there any of the mathematical tools that you

were developing have any applicability to some of the work that you did later on in finance in a general sense yes now I

didn't get into Finance for 10 years after that I left there in ' 68 and really didn't get into Finance until the late

70s but uh I learned about computers uh I learned about you know the fun of coming up with some algorithm which might crack a code most of the

time it didn't but once in a while you were lucky and and uh I didn't know how to program it all and never did learn how to program it they had programmers but I like the idea of developing

algorithms seeing them put on the computer and seeing uh you know if it's if it's going to work so that

experience was very influential when I went into the hedge fund business and then gradually started to make it

systematic as well as opposed to uh to fundamental trading uh which we did at the beginning and and uh so anyway I was a

mathematician I was getting frustrated with some of the research I was doing I've worked on a problem for two years didn't get anywhere uh it's never been solved so

you could see it was a hard problem uh that's a good one too uh and um the South American Business had uh

was beginning to throw off some money so I had some money and uh I thought I would

uh start investing and uh and I had an interest in foreign currencies I don't know why but I did

and uh I read a lot about that so we started uh I started started and I got a partner investing in uh in foreign

currencies and uh that did very well I was this before uh you left for Stonybrook or oh no it

was after I left for I I'd been in Stonybrook for for uh six years by then okay you know I I I went to Stonybrook

in ' 68 and and it was 76 or 77 that we started doing this and but I thought we could I looked at the charts and they looked

like there was some structure to these historical charts that one could perhaps exploit so I hired the best crypto

analyst in the world guy named Lenny bom who uh you may have heard of uh the bom Welsh algorithm the EM algorithm

expectancy Max maximization uh he discovered that so he came to work with me and uh and we built

a little system even though I was trading fundamentally at the time uh you know seat of the pants sort of thing uh which

way there's a wind blowing um we developed this sort of primitive currency trading

system but uh we we didn't actually put it into practice uh because one day uh Lenny didn't show up for work until the middle of the

afternoon and I I should say that Lenny loved to read the broad tape there was this tape we called it was the D we called it the

Doomsday Machine because it just clicked it this broad tape would roll all day long giving the financial news of of the

world and he liked to study that he was supposed to be studying making systems but he liked to read that tape so he came in late and I said where you've been and he

said Margaret Thatcher has been sitting on the pound and it's has to go

up I said oh well I wish you'd come here this morning he said why I said cuz Margaret Thatcher just stood up

and Margaret Thatcher just stood up and the pound is way up he said how much is it up he I said well it's up at nickels 5 cents so far he said it's going to go

up 50 cents a dollar buy pounds we should buy pounds I said okay buy pounds sure enough it went way way up and that

was the last time Lenny wanted to look at any systems he just felt uh his good

intuition would be uh suitable and we'd make a lot of money and and we did we did doing fundamental trading we started

a fund called limy and uh the fees were uh 25% of profits no fixed fee which was

you know sort of a reasonable thing and with Lenny as my partner the first year the fund doubled after fees and the

next year year it multiplied by six after fees so it had well you know 2 * 6 is 12 so uh everyone had 12 times as

much money as they started with and it was it was fantastic and it was all fundamental Trading

still I felt that okay we can't we were lucky in in certain ways uh uh I I'll tell you

one good story about luck uh gold which was uh illegal to trade had

become legal to trade and the gold market gold prices were going up and we bought gold in the in the firm we bought gold we had a pretty big

position in fact Lenny and I split the position half of it belonged to him in some sense and half beat belong to me and uh it was at

$2.50 I mean and 20 $250 and got up to 300 400 500 550 I think I said Lenny you know I think we should sell this already he

said no no you don't know how far it'll go you don't know how far it'll go so I sold my half and it and it kept going up

and and one day it it reached $800 and that day I happened to be speaking to a friend of mine who was a stock broker but we were just I was just chatting

with him over the phone and I said what's new he said well what's new is this my wife went into my closet this morning and cleaned it out

of all my old gold cufflinks and tie clasps and she's now down uh uh selling it I said well dick I mean are you

having financial difficulties how he said no no but she's a jeweler which he was and she only had a stand in the Short Line I said the Short Line he says

don't you know there's lines and lines of people selling gold I said no but I'm very glad you told

me I hung up with him I picked up the phone which went right to the floor of the exchange and I got Lenny to come over and I said Lenny sell the gold he said no you don't know

how far it's I was the boss and I said sell the effing gold he said okay okay and he sold the

gold it was it was $810 or something like that the next morning we came in and it was $820 and he was so mad by the end of

that day it was $650 the market collapsed and went nowhere but down after that until it it got back

to $250 or 300 not not in a week but it it just collapsed now that was totally good luck I mean it was good that I realized if everyone is selling

something it may be a time to sell it yourself but uh uh but uh it it was uh it was luck it

was just it was just luck so we went we did well but I felt that this should be systematized there should

be a way to systematize it and I brought in another mathematician a very strong mathematician named Jim ax and uh to do fundamental trading but

he knew about that we had made this currency system and he looked at it and he got a good programmer into the firm and he realized

this system could work for all all Commodities really it was uh it was a pretty good system sort of so we started

trading that system and it did pretty well and he did research and improved it and improved it we were still

fundamental trading but that wasn't even going so well I had gotten interested in uh Venture Capital to some extent so

this memor company was also starting to invest in startup companies and uh and

uh axe was running this uh trading and at a certain point the uh investors in

limite they didn't like this liquid the uh uh Venture Capital they like the trading uh and uh so I decided to break

up the company Lim Roy and make a fund called Medallion jimax would run that fund and

we put the the uh uh the Venture stuff into a uh a liquidation only uh uh fund and actually it ended up doing pretty

well so now we had The Medallion fund and everyone invested in The Medallion fund from lioy and it did very well for about 6

months and then it started losing money and it was losing money steadily now he and his team had

developed a very complex system very complex system and it had I don't know many dimensions of in it one thing or another

and I said you know I have to understand what this system is actually doing and he said oh it's too tough we I can't explain it to you it had this Bell and

that whistle so I said come on I'm just going to project this into the two principal uh dimensions and see what it looks like and it was nothing but a

trending system plain and simple trending it had this these other little Geek Things whatever they were but it was basically a trending system and

trending which in in in commodities and currencies too which historically was a very strong uh thing had had in the last

several years just just sort of gone away with no reason to think it would ever come back so I said we're closing the fund

and uh he was very annoyed uh but I was the boss so we closed the fund and I told the investors we're going to spend we're going to to

do a study period and we're not going to trade at all of course we're not going to charge any fees oh at that point it was five

five and 20 it was 5% fixed fee and 20% of profits and uh and everyone stuck with us a few people redeem but everyone

stuck with us and for six months uh and we brought back someone who had left the firm it's a long story we brought back this other very good guy

ax left and he and I especially he he had some ideas of much shorter term trading uh not high frequency in and out

in five minutes but trading on a much shorter term and he developed a pretty good system and together I helped him and it

got better and after 6 months we went back in business only only systematic trading and from then

on we never looked back it was it was just went from strength to strength and uh I hired a lot of scientists w a lot

of computers and over the years the system got better and better and better so Jim we're going to focus on the Renaissance Medallion Fund in a few minutes but I I want to bring you back a

little bit because there are some interesting precursors that I think speak to the success that you enjoyed uh one is that um when you were at Ida uh

is that where you first met Lenny Bal was he there live down the street and as I recall his early work the Bal Welch uh algorithm was really designed to

estimate hidden Markov models that right which uh for many of you I think you know it's the precursor for a lot of the techniques that are used today including deep learning so it's an interesting

history to that in terms of what you uh what you encountered there yeah he he developed that algorithm with this guy named Lloyd Welsh which was supposed to ex uh

estimate uh hidden Markoff models whatever that is but there are a lot of parameters and you and it it was an algorithm which just kept climbing it

kept reestimating and reestimating and with each reestimation the expectancy of these particular parameters whatever they were got better better and it

changed the parameters and it got better however no one could prove that it worked no one could prove that it worked it clearly did you could start at any

place and all kind it definitely worked but how did you prove how could we prove it so I actually I worked on that a little while while I was at Ida

and uh trying to prove that this thing actually works uh that it climbs at every step but uh

I couldn't and anyway I left Ida and Lenny and his friend Petri finally figured it out and they wrote it was a

long paper it may have been two or three papers now today it turns out you I'm told you can prove that in just a couple of pages because that there was some

theorem of which they were unaware which would have made it short but but anyway there was the algorithm speech recognition it was very good for speech

recognition a whole lot of things yeah yeah so um I I'll get to The Medallion in a minute but I I want to just ask you two more things that lead up to The

Medallion fund one was you left Ida to join Stony Brook's math department and at the time Stony Brooks math department wasn't nearly as strong as it is now can

you tell us about that and U what motivated you and and what your experiences were there well I got fired from

Ida I got fired did I tell this in the last talk last time but I think it would be worth repeating because not everybody was here so okay so I always say getting fired once is it

could be a good experience you just don't want to make a habit of it you know but but I I did I got fired

uh okay the head of this place ID who was in Washington DC uh uh which was a was a big organization

and one of its units it was this small unit in Princeton he was name was Maxwell Taylor some of the older folks in the audience might remember that name and uh he wrote

an article lead article in the New York Times magazine section about how we're winning in Vietnam we're doing great we have to stay the course and so on this was

1968 and uh I did not have the same opinion as he and I wrote a letter to the times the first sentence of which was not everyone who works for General

Taylor uh subscribes to his views or something like that and I gave my views which was as you get out of there and as fast as we can and nobody said anything

you know nobody said anything they could have tried to lift my security clearance but there would be no reason for

it a few months later a guy uh claiming to be a a Stringer for news Newsweek magazine said he's doing an article on people who work for the defense

department and a repose to the war and he's having trouble finding anyone uh in that category could he interview me I was 29 years old no one had ever asked

to interview me before so I was very excited and uh he said well okay so how are you responding to this uh I said

well at Ida you're supposed to do at Le spend at least half your time on their work but you could also spend

up to half your time on your own work and I had been doing a lot of math uh in that period so I said so my attitude is

my policy is until the war is over I'll do only my own work and then when it's over I'll do an equal amount of time doing only their work and so that'll all

balance out so that's what I said then I went back to the office and I decided I better tell my boss that I gave this interview would have been more

intelligent if I had told him before I gave the interview because he would have said don't give any interviews but uh he said 'well what did you say I said 'well I said about the half and the half and

so he said okay he went into his inner office and called Maxwell Taylor and he came out in five minutes and I said well you're fired I

said I'm fired fired I said you can't fire me my title is permanent member permanent member and he said well you know the difference between a

permanent member and a temporary member I said no he said is a temporary member has a contract but I was a permanent member and I didn't have a

contract so I left of course I had to leave and uh I had to look for a job I had three kids but I was certain I would get a pretty

good job because I had just done some actually quite important mathematics and it was uh I've been giving talks and so on so I knew I'd get a good

job but as a professor somewhere but Stonybrook came along and offered me the position

of being chair of their math department and it was a weak Department with one or two exceptions and they wanted us build it up and they'd been

trying for a long time to find a older distinguished person to come as chair and they couldn't find anybody but they found me and uh I thought this would be

really fun I'd like to build something and uh so I took the job and uh the university

had a lot of money at that time which it doesn't have so much today it had a lot of money uh Rockefeller was the governor

and he loved the State University so uh I I hired a lot of great people it was a wonderful experience I did a lot of mathematics during those first few years

myself it was a very very productive time so that's so then what led you to start doing your currency trading because you at some point you left Stonybrook to do currency trading full

time I left Stony Brook first I went halftime and then I left all together and was in the training business yes and so what what led you to do that

that why did you well because I I as I said I was uh stuck on a problem uh I had come into some money I was trying

that out I liked it and I thought well I'll just have a new career my father was very opposed to it he said look you have tenure you have this wonderful job

they can't take it away from you I did have a contract that in that sense and uh why do you want to take this risk but I I thought it would work I thought it

would work out and I was pretty confident and so in your fundamental trading for currencies can you share with us how you did it what I mean it

was totally non-quantitative would you sayt and so did you did you use for example technical analysis people argue the charting I didn't do any technical

analysis I I I read all the newspapers uh The Economist there was a lot of writing uh I just paid a lot of

attention to to currencies and in these Curr currencies had just been tradable uh in the open market because some some countries still had fixed

currencies fixed to the dollar and you couldn't uh well you could trade it but it it it it was fixed but

uh so it was it was just fundamental fundamental stuff and uh it worked it worked reasonably well I would say worked reasonably well

um and uh so so but that was it but but the problem with a a business like that is

I'd walk in one day everything was going my way oh I'm a genius the next day I'd walk in everything was against me oh I'm

a dope it was a very stomach wrenching business whereas with a system that you can develop okay you have a system you you

do the computer says to do you have a made a historical study of the system that you're using and it

worked with a very high probability this system was going to work and uh so I I'm was much more satisfied with that

approach and uh and we hired scientists and so on to build these systems and improve them okay so now let me talk about The Medallion fund so you know

when I teach in direct ref Finance I usually start with a single equation on the board and the equation is mathematics plus money equals finance and I would argue that The Medallion

fund pretty much epitomizes that because the system that as you described has yielded just extraordinary returns and at this point the track

record is confidential but you did give an interview uh one of your very few interviews that you gave in 2000 to how Lux and so I want to just read to you what was written at that time about The

Medallion track record uh Simons by contrast just keeps getting better consider his performance over the past decade uh and this is

between 1988 when it was launched and 200000 since its Inception in March 1988 Simon's Flagship $3.3 billion Medallion

fund has amassed annual returns of 35.6% compared with 18 % for the S&P during that same that was after fees that was after fees and at that time the

fees for The Medallion fund at its peak was five and 44 so 5% fixed fee and 44% of the

profits so that that track record uh yielded 2,478 point6 per return over the 11

years from 98 to uh sorry 88 to 99 and the next best Fund in the hedge fund databases at the time was the Soros

fund the quantum fund which was only 1,7 110% oh so so and but that was of 2000 so um first

question how's the track record been since then because nobody knows for sure I know a few and a few other people know

uh the track recet has continued good we we I don't know if at that time we'd already raised the fees to 5 and44 first we raised them to 5 and

36 and then uh the investors all complained but they just wanted to have more how can I get more and uh then 5

and44 and there was still a very good return at 5 and44 so no one wanted to redeem but we realized that there was a limit to how much we could

manage we understood the uh you know system and uh you know it could manage a certain amount but it couldn't man

manage huge huge amounts you know trillions uh hundreds of billions certainly couldn't manage that kind of money so we decided to and because we were making so

much money uh the fund was growing internally first we uh prevented any Outsiders from

no new investing uh investments from Outsiders except for the employees and then uh we decided to buy

in The Outsiders that was in 03 I think 0304 and ' 05 by the end of ' 05 uh we had bought out all the outside

investors and it was just owned by owned by the uh employees and it did grow to

some extent uh but because it did and it could manage that much but at a certain

point it's been it's been uh capped off and uh we started and in that same year ' 05 we started some funds for the

public which have done very nicely uh and they have no uh uh clash with Medallion they they're much longer

term expectations but uh those funds have done very nicely and uh so at the moment there's a that there's 45 billion

in those funds being managed and uh but The Medallion fund has always stayed The Medallion fund has stayed at a certain size which I won't share yeah but it's

not as big as 45 million yes can can you share with us how many employees you have yeah we have 310 or 20 or something like that yeah

counting everyone we have a lot of scientists uh we we really you know you have to in a business like this just

keep making things better keep improving the system because other parts of it are going to wear out after a while people

people will catch on to this or they'll catch on to that so you you just have to like in any business in any business you just have to make things better and better and better because that's what

everyone else is trying to do and uh so so we hire the best scientists we can uh people have said to me oh well you you know you're you're not doing the

world a favor these people could be doing great scientists you know for uh they'll make all this money and then they'll give it's a charity I'm not worried that it's going to ruin the

world by having uh good scientists working at Renaissance but we do have good scientist working there and uh and that's

been that's been the model the model has been first hire the smartest people you possibly can that's a

sensible uh uh principle work collaboratively let everyone know what

everyone else is doing now some firms that do have these systems they have little groups of

people this is ours and this is theirs and and they'll get paid accordingly and so on to how their system

goes we have one system and once a week There's a research meeting if someone has something new to

present it gets presented it gets chewed chewed up and and and looked at from everyone has a a chance to the code is

there they can run the code and see what they think is does this really work and so on so it's a very collaborative Enterprise and and I think that's the

best way to accelerate science is people working together and uh so that's that's that and uh we have great

infrastructure wonderful infrastructure so people can get right to work uh we've had people come in start to work and say my God I'm doing this after after three

days I've never been in any place where you could get up and running so quick so uh it's well organized and we have great

people so you know obviously much of what Renaissance does is confidential and uh in particular the even the people that you have uh are confidential but I

think it's fair to say that um if you looked at the quality of the colleagues you have they are probably among the top scientists in their field in many

different fields is that fair to say well I don't think there's anyone who would well okay I'll tell you a

funny story uh we had a uh we have a Renaissance a colloquium uh every week San comes and

gives a talk a scientist and and it's open to the public and um one day an astronomer young astronomer came in a friend of his already worked at

Renaissance and and this guy came and and he gave a very good talk he gave a very good talk and I took him aside afterwards says you know your friend is

here and uh you would like working here you would like working here we would like to have you work here and he said well it sounds very appealing but I'm

right now I'm in a project that I science project that I really want to complete before I think about doing anything else so he won the Nobel Prize

he won the Nobel Prize he was one of the two teams that learned that the Universe instead of decelerating was actually

accelerating and it was it was big news and so I think he made the right decision you know most people would but that's the

question rather have a Nobel Prize so uh so he's the only scientist of Nobel Prize quality that we almost got and and

I don't think anyone else in the firm is probably that good although some of them have been terrific I I uh some of them I

don't know they don't give Nobel prizes in mathematics but um but they do in physics of course and we have a lot of people who are physicists experimental

physicists do well astronomers do well uh they look at a lot of data and analyze it and that and that's what we do analyze data so that leads me to my

next question how do you manage all of these incredibly talented people often with really huge egos you you talked about collaboration but uh having

been a a chair of a department and you're having been a chair of a department uh it's not always easy to get big OS to collaborate

well a department chair does not have that much power right uh and I'm sure and any professors in

the audience know that uh you don't have to do what your department OB he says you have to teach this class okay you teach this class but as far as your

research goes uh you can do what you want um so uh but we did at Renaissance say you know

we' like you to work over in this area or work over in that area but uh but nonetheless so there are groups there are groups that work on different things

and and in the research area but because they see what's going on every week in everyone else's group they can sometimes and often do make a suggestion hey you

know what we're doing over here I think could affect what you want to do over there the the the way people are paid

everyone gets a a piece of the profits and uh but they're judged it's not what did you accomplish this year you know I'd have every year

people come in would come into to me and say you know I made so much money for the company my work made so much money for the company last year I I deserve a big rise I said oh yeah well that was

that was good work didn't it derive from so and so's work he says yeah yeah but we we I I really made it better and I said well and didn't you work with Joe

and Susan on this yes yes I I agree I I did I did that so I said you know if I added up all the money that everyone who

comes in here tells me they made for the company this year it would be five times as much as as the company made so uh you

know uh but we look back on three years four years five years how have they've done and they'll get raises accordingly um

and um and that's the way it works and people are well no one's perfectly happy with everything and I can't say there's no one who thinks he should be paid more

which is human nature but uh everyone's pretty happy it's a it's a very happy place yeah it's a very happy place so this this leads me to the the final point that I wanted to make about The

Medallion fund and what what you built over the years so you must know that that you and your colleagues at Renaissance have been an inspiration to many many Quant ative investors many

students here many faculty myself included and the favorite topic among quants getting together for beer or or

stronger um is how do you do it and why is it the case that even to this day there's nobody close to Renaissance and so I have my own conjecture that I'd

like to run by you and and get you to react to it and my conjecture is a little different it's not about the systems it's not about any particular

magic formula or or uh algorithm but rather being at a management School uh I guess I'm biased I actually think it's about the management

specifically I think it's the combination of the fact that you actually ended up being a very good prop Trader uh first before you even thought

about the mathematics you actually became a good Trader and then with that intuition of what it means to make money and lose money you ended up being a good

people picker and you ended up building around you an extraordinary team and that team has grown based upon the culture that you created you just mentioned that at the end of every year

you have these awkward conversations with people who can adjudicate among these very big egos except somebody that commands the respect of anybody so do you agree or disagree with that

character ation more or less I mean it was it was certainly good to have done fundamental

trading to you know just understand the mechanics of markets and so on uh of course we don't do that people don't do

that and I have to say I left Renaissance U when I was 72 so that was almost 9 years

ago and the management there uh just carried on we had some great

leaders and uh we haven't Mr a beat uh they've done just as well maybe better than they would have if I had stuck

around but I felt uh it was time for the younger people to take over I was had started spending more of my time with

our foundation which is a top IC of next week's uh

encounter and uh so I thought okay what it was two people who were co- uh executive I don't know I don't remember

what that title was but they had a very high title and gradually I had given them more and more uh responsibility so when I left

uh it was it was just fine and uh and I always keep pushing them to hire very smart young people and that's

I think my biggest contribution I'm the chair and we meet every every month and so on but just hiring great young people

into the U into the into the business is is the best thing you can do and your tenure as chair of Stony Brooks math department prepared you for that in some

ways yeah sure so I want to turn to a few miscellaneous topics now and again feel free to tell me that uh not interested in them as

early as 2003 Renaissance Technologies raised concerns about the birdie made off Ponzi

scheme um H how did you get uh wind of that and what motivated you to to even say anything to the SEC

we had had money invested with ma off for a long time not not the firm but uh relatives of

mine uh our foundation had an investment uh with uh with moff uh and I knew him a little

bit and he was really amazing he he kept coming up with with these very very steady returns very steady Returns come rain or

so at a certain point I said this guy has to know something that we don't know in fact he he certainly knew something that we didn't

know I had all the uh the uh tickets the the what do you call it the confirmations for going back years so I asked one of the guys in the at

Renaissance well in the company I was Renaissance that to look analyze these trades that he was doing and uh tell me

what you learn what what's a secret so this guy went to work and here was his

conclusion well when they put on a position they if they're buying something they generally get a very good price maybe the low of the day if

they're buying maybe the high of the day of they're selling but most of the time they're not putting on positions they stick with the position that account he

said for maybe 10% of their profits they claim they have t- bills sometimes and so was interest but 80% of the profits was a complete mystery it

was a complete mystery now what they did was let's

see they would put on a big position according to the tickets uh W with uh stocks which would the

collection of which would be approximately the S&P and then they would buy a a uh a put

or a call to protect themselves against uh uh outside moves well from what we understood they

had a huge amount of money under management so you would think when they put on these puts or calls or whatever it was it would it would move the market

actually in in those things but we could see no no evidence of that they said they were putting on these puts and

calls but you look at the put and call Market there was no evidence of any such activity

so uh I I thought well let's let's get out of this thing uh even Medallion had a little bit invested in it Medallion

had extra cash at that time and we had put it with so we sold it and uh and then nothing

happened and uh several years went by one of my relatives called me and said you know do you still like made off and I said

well I can't tell you to take your money out of it because he's been going for a long time and he he keeps on going and he's he must know something I I don't I

said I took my money out but I I couldn't advise someone to take their money out it never dawned on me that it was a Ponzi scheme I didn't know

what the heck he was doing doing but I just didn't like the looks of it so uh we couldn't understand what he was doing so that's why we got out 5 years

later uh the crap hit the fan and uh he was he was outed and uh and it was well

everyone knows what happened next so uh and a actually they look back six years for any profits that you may have made

so we our foundation had to had to give back some money to the uh to people who

had lost it uh but uh it was it was just uh the craziest thing the craziest thing in the world made off so the irony is

that the fake track record that made off posted was actually not as good as the real track record The Medallion fund that's true that's true so well it was Prett PR steady I have to say that it

was a it was a pretty pretty it was pretty steady but it was uh and then the the uh I don't know SEC

started investigating us because some people had said look these Renaissance people we don't know what they do either because of course no one knew exactly what what maida did and and of course we didn't tell people what

we were doing they couldn't see our portfolio they couldn't see anything uh by that time I think we had already

given all the money back to the investors so I could say well look we we can't be doing anything wrong because it's all our own money so so we we we're

not we giving back all the money to the investors but uh they did uh study us and work us over for a while and uh of

course they couldn't find anything bad um and then they went home right but but uh it was as a result of of made up that we were so examined by the SEC right so right around that time of course was the

financial crisis and that probably precipitated maid off's unraveling um what do you make of the financial crisis in the

aftermath you talk about 2008 yeah well it should never have happened it should never have

happened the uh there were these uh mortgage back Securities had been created they' always existed mortgage back Securities but

very fancy ones were getting created and uh they had all kinds of this and that and and so on and so forth

and in the old days the rating agencies their customers were the buyer of bonds the bond rating

agencies so they wanted to do right by their customers but at a certain point and then you'd get a report every week or a newsletter or something like that

but with the internet coming along people were sharing this who didn't subscribe so the rating agencies decided okay we're not going to charge the

buyers of the bonds we're going to charge the sellers of the bonds now if you think about it that's a conflict ICT of interest because they really want to get the bond have the bonds sold so

maybe they won't be so tough in in rating them and that's what happened the stuff was sold which you'd have to

be a uh and and stamped AAA and you know people were getting mortgages no docks you'd walk in you'd get a

mortgage uh how much money do you have oh I have $100,000 and how much money do you make oh I make $200,000 okay fine we'll give you this

much of a mortgage well they didn't even ask for Doc for do for documents in many cases or or your income tax forms or and

why were the banks being so lenient because they could sell them to people who would package up these these

mortgages and put them they would B ultimately end up as a morage back security stamped double a

AAA so everything had just become very LAX and uh and bare Sterns for example which was

a firm that we had always had great confidence in they were very conservative uh

outfit they almost went down the drain because of this uh fortunately they didn't we had money with them and as soon as it looked like they were going

to be in trouble uh we bailed out and got out 3 days before they folded then we were working with um Leman

Brothers we had a lot of money with Leman Brothers but this this is Medallion and so on we had a lot of money with lean brothers and some of our outside funds also

did but it was beginning to look not so good for them and uh I I called up the head of Leman

brothers and said you know dick we're going to have to take some of our money out I'm going to have to take half of it out uh I'm I'm uncomfortable with that

much being with you and he said okay fine so we did that and then things were looking worse

and worse and we had some insight into his into their balance sheet and we knew it was stuffed with these a lot of the assets with these mortgage back

Securities and I called him and I remember I was driving and I said dick we're going to have to take out the rest of the money and he said oh he said I thought

you called me to buy these new bonds that were issuing they're over subscribed but for you I'll you know I'll give give you a a piece and I said

um well I I I don't want to buy your bonds but I'll wait a few days and see how they sell before I take the rest of

the money out and uh a few days went by then the list of buyers of these bonds came out and it was the most

unsophisticated group of of you know an obscure teachers retirement fund no no reputable

big outfit was buying these bonds and said I call them said okay we're taking the rest of the money out and that was

three months I think before uh lemman lemman collapsed so but if the rating agencies had done their job this would not have

happened and but no one wanted wanted to blame the rating agencies because who's ever heard of rating a I mean the news papers want to blame the banks right

right they want to blame the big players uh but it was it was you know maybe not quite as simple as I'm saying

but it was a mortgage back collapse and these Bonds were rated improperly that that's what happened so um let me now since we're getting uh short on time I want to make sure

there's plenty of time for audience questions um so maybe we can open it up and um and while we're looking for our questions raise your hand and then U Kelly and Italy will pass a a mic to you

um while we're getting our first question um maybe that guy was the first one with the white shirt to hold up his hand [Laughter] so

yeah hi I'm miles I'm a junior at Harvard um I was wanting to ask so over the years obviously the the general markets have changed with the Advent of more computer technology has that

shifted your view on fundamental versus quantitative investing I mean earlier you seem to kind of point to the fact that at the end of the day fundamental investing is very Wishy waffy and based on intuition do you think that that is always true or do you think there are

people that truly have an advantage in in fundamental investing that people have uh in doing fun is it possible to do yes I mean obviously Renaissance is

is quantitative but are you always proquant over fundamental or do you think there's room for fundamental invest I think there look look at Warren Buffett he's had a great career and I

don't think he has a computer on the premises ex except maybe to count his

money uh but uh no uh very it's a perfectly legitimate way to invest then I guess what are the skill sets that differentiates a good fundamental

investor from a good quantitative investor say it again what what are the different skill sets that separate a good fundamental from a good quantitative investor oh I think it's a it's a world of difference

uh I think a good uh fundamental investor let's say in a company he wants to evaluate the management have a have a sense of the human beings that are

running this thing he wants to have a sense of uh where the market might be going uh and uh it

it's you know it's a set of skills and some people are are very good at it uh quantitative stuff is a is a different

set of skills and uh which suited me and uh so does that answer your question close

close enough yeah um Mr Simons um as quants with increasingly powerful tools seek out inefficiencies in the markets to exploit

and we keep exploiting them until there's nothing left to exploit that'll overcome transaction cost are we destined to slowly Drive ourselves out of business and if so how

long do we have who is we we quants oh we qu as we keep seeking the inefficiencies to exploit and thereby diminishing them well that's a good

question uh yes inefficiencies do eventually get traded out if they're discovered uh but the market is not

static it's Dynamic things change and therefore there's room I think for new inefficiencies to

materialize and uh so uh I I think it's never going to be you know uh all inefficiencies are out of it there's

nothing to discover on the other hand you know so far we we've managed to you know our our returns have been

more or less stable for a long time so but we we keep finding new things and throwing out things that that are no longer

working do new things emerge as quants are looking for new things so that quants are exploiting other quants I have no

idea okay well she's giving out the phone hi um what's your favorite

algorithm what's my favorite algorithm I'll tell you my favorite algorithm my favorite algorithm is something that I uh worked out when I

was at the institute for defense analysis and it has to do with uh it has to do with solving a certain classical problem in

the field and I solved it but it's class pafi it is I solved this problem and

they made a special purpose machine at NSA and I heard that 30 years later it was still they was still using this special purpose machine to implement

this this algorithm so that's that's my favorite algorithm and it's classified so U there's a guy right there

well hi you you'll get your turn hi uh right here um I was wondering what I was wondering um what you did

over time to kind of protect your intellectual Capital you had a lot of people working for you how did you keep everybody uh rowing in the same direction um and how did you protect

kind of this the special yeah it's a good question it's a good question well everyone uh signs a forever non-compete uh a uh no not a forever

non-computer for forever non-disclosure and uh after you've been there a couple years uh there's a non-compete agreement that you're

invited to sign and pretty much everyone does because there's a lot of money that's uh out of your bonus a certain amount is held

back uh for a while and then uh invested in Medallion actually and then you get it over time but uh so there's always you always have a lot of money on the

table which you've not yet gotten received which keeps people from running off we've only had one incident

a couple of Russian guys uh left and uh stole some of our secrets and uh well we had a lawsuit

against them and so on and so forth and um and well they're not in business anymore and the system that they had

made off with is now pretty Antiquated so we're not worried about that but uh it's a very good question but the main reason people don't want to leave it's

it's a very nice atmosphere it's it's fun to work there people get paid a lot of money uh there's no doubt about that

and uh it's fun so we we've had people retire and but they with the exception of those two Russians they've never gone into any investment

business they've just retired and I don't know done this and that one guy went up to the broad Institute and

became uh a terrific uh scientist genetic scientist working for broad so um I I think if if turnover is very

important important in any company and if a company has a a great deal of turnover there's something there's something wrong and uh and you noce

something right uh if turnover is very low of course one thing that could be right is you're paying too much but uh but uh but

it's good to have low turnover and and that's what Renaissance has hi at the beginning of your talk you mentioned that you wanted to understand

how the system that was presented to you you want to understand how it works and at another point you also mentioned that once you have the system it's all about like making it better and better so my

question is the balance between those two because as you try to make your system better and better there is the risk of H making it more complex to a point that you don't understand it

anymore how do you balance improving your model and keeping it simple enough to understand it actually

well uh that's a good question it's completely understandable because uh you can

uh understand it if if you wanted to spend a week uh doing nothing but understanding the system it's all written down and and so it it's

perfectly understandable there are a lot of you know predictive signals there's there's a lot of stuff going on it is

very complicated but it's not not understandable so we understand it hi mat I I work with Andre Stan can

you stand up I'm sorry yes so you mentioned continuous improvements of the systems um I wonder is medall enough to

day the core of it at least similar to what it was 10 or 20 years ago or has Medallion sort of reinvented itself over that time to be completely different things you know I didn't my ears aren't

so good could you understand what he asked yeah so is The Medallion of today uh pretty much the same as it was 10 or 20 years ago or has it reinvented itself

oh it's continuously Reinventing itself I think there are some parts of it that would probably have been there for 10 years or maybe even 20 years uh but

that's less and less as as new as new uh things come along so uh uh like like I said you you just have to

keep you just have to keep running people will discover some of the things that you've discovered then they'll get traded out uh so you have to keep coming up

with with with more and more things and uh we have a a great computer system and

and and you know and great scientists are out very good ones so that's the answer hi

Jim so you mentioned during the beginning phases of The Medallion there was a short period of time when you guys weren't doing so well I'd like to ask

did any point in time did you doubt yourself and if so how did you will s to continue and eventually succeed well in that period Well we we

shut it down uh I wasn't certain but I did feel uh that we could improve it to the point

where uh we were happy to continue trading so uh and i' I've

never doubted that things would keep working uh reasonably well um I think you know we've been lucky to

a certain ex you know luck has plays quite a role in life and uh a lot of people don't you know if a

guy's uh business fails he says oh it was bad luck if a guy's business succeeds he says oh I'm you know I'm a hard worker and naturally it succeeded

but uh there luck everyone so so far we've been pretty lucky but um I haven't been I haven't been very

worried you know there are times when when a month goes by we don't make money one month there it's very rare we don't make money in a month but once in a

while that happens and then I well it's what but it's it's all it's always come back okay

would there there's a woman right there I'm looking at you who didn't you didn't you raise your hand all right well we'll see if we can

get you uh what I find interesting is Dr low I know that you're big on behavioral finance and uh Dr Simmons it seems like when you talk about your past you talk

about your gut instincts and you kind of just pass it off as you know I I felt this way but I was wondering if you had more I don't know if your internal

Compass is a little bit better than most in guiding you through tough decisions like the last person asked again I couldn't understand too well I'm sorry the Acoustics in this room are not great

um I think that the uh she was asking about um the role of human behavior uh in quantitative investing that the fact fact is that you do have some kind of a gut instinct about when a system is

working or underperforming what role does that play this intuition and judgment uh in thinking about these strategies well I mean if you see

something that's that's steadily losing you don't that does not take intuition to determine that something is

wrong and you ought to stop doing that uh but uh well intuition you know

scientists uh some scientists have pretty good intuition scientific intuition um how how does that happen in

math you might say hey this this operation worked over there maybe it'll work over here uh I'll give it a

try uh so as people come into the firm they learn what has worked uh and sometimes say oh well if we perturb that a little bit it could

work even better or stuff like that some people you know have better scientific intuition but I think it's scientific intuition it's not Market intuition that

the the uh guys who who work there uh uh are are using so we're just about out of time uh so I want to have it one last question

and then we're going to wrap up with a couple comments uh would you say that fundamental approach in your investment modeling is primarily inductive

reasoning based or deductive by nature in other words data driven to come up with your models or more logic driven to come up with your models well we

certainly are logical uh it's hard to work without logic uh there's a lot of data um

sometimes one might come up with a number of things and just try them all out and see if one of them if

one of them works now the danger of that is uh if you're trying enough things something's going to work but you have to be sure that uh the statistics are

still in your favor you know uh if there was so much data that even though we tried a million things uh and one of them worked the

probability of that was very very slim and therefore you probably okay so uh you know we do try try a bunch of stuff

and uh I I don't know if that answers your question but okay so so Jim um in wrapping up I'm going to ask you two quick questions related one is that you

um moved from Stony Brook to doing trading because you were working on a problem that you were struggling with and to this day it's still unsolved you went back to working on it it's a tough

problem I imagine did you encounter any unsolved Finance problems that uh that you uh think about and struggle with unsolved Finance

problems well doesn't seem like there are't any given the track record of Medallion well I think there's a lot of people who will worry about how they're going to pay their rent uh which is

perhaps an unsolved problem as far as their concerned yeah um I don't know what an unsolved financial

problem really means but um okay have you had any financial problems a whole a whole bunch I would love to get access to the

Renaissance uh research staff to have them working with us on it but the the last question is for all of the uh future quants in the audience any advice

about uh how they ought to approach this field and and career I think any potential Quant should just not get into the business we don't need to have a a whole lot of people in this business but

okay well on behalf of uh MIT Finance what what advice could I give you it's just you know uh work hard hire

good people and uh it's not easy to to get into the business because you need big databases and a lot of computers and

stuff like that to uh to even start up but you know uh if if you have an idea and you can test it out and think it's

good uh you know more power to you that's all I can say well Jim on behalf of all of us here at MIT we want to thank you so much for sharing your

wisdom with us and I think that um your career in finance is just extraordinary and it's been uh an incredible inspiration to many many people and will continue to be inspiration but what I

want to tell everybody is what might be even more inspiring is what you're going to talk about next week because not only have you made tens of billions of dollars for investors and billions for

yourself but you've also given away a tremendous amount of money for philanthropic purposes and we're going to hear about that next Wednesday so I urge all of you to come back and here

the the the third and the 3m's uh of money uh um uh sorry mathematics money and making a difference so thank you very much great