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Mathematics and computation

Mathematics and computation

Money from maths

09 May 2020
Taken from the May 2020 issue of Physics World. Members of the Institute of Physics can enjoy the full issue via the Physics World app.
Jim Simons (second from right) at the opening of the New York Genome Center in 2013.
Modern-day Medici: Jim Simons (second from right) at the opening of the New York Genome Center in 2013. Simons is on the centre’s board of directors and has donated tens of millions of dollars to it. (Courtesy: Mary Altaffer/AP/Shutterstock)

Meet Jim Simons – mathematician, “quant”, billionaire, philanthropist and a unique kind of genius. After completing his PhD at the age of 23 from the University of California, Berkeley in 1962, he spent the next few years doing everything. He broke Russian codes; he became a department chair and built a world-class mathematics programme at Stony Brook University; he left to start his own company – and eventually became not just one of the richest men in the world, but perhaps the greatest investor in history – a modern-day Medici.

Simons is the subject of a new book – The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution – by Gregory Zuckerman, a senior writer at the Wall Street Journal. Zuckerman spent a few years trying to interview the extremely reluctant Simons, while turning to professional friends and colleagues who themselves weren’t quite sure what to make of him. Simons was a mathematical prodigy of sorts, earning his bachelor’s degree in maths from the Massachusetts Institute of Technology in just three years and his PhD from Berkeley in just three more. In his 20s he joined the Institute for Defense Analysis and secretly broke Russian codes but was fired six years later for his letter in the New York Times complaining of a waste of funds fighting the Vietnam War.

At 30 Simons became chair of mathematics at Stony Brook University in New York, where he built a strong programme, especially in differential geometry. There he began work with mathematician Shing-Shen Chern, and in 1974 he and Chern published their work, now known as Chern–Simons theory. The research has key implications for quantum field theory, condensed-matter theory, as well as gravity and superstring theories.

But Simons always had a compulsion to make money. He left academia at the age of 40 to found what ultimately became the hedge fund Renaissance Technologies (Ren-Tech), which invests in financial instruments such as stocks, options and commodity futures. RenTech has since had unparalleled success, with its Medallion fund achieving a flabbergasting average return of 66% a year from 1988 to 2018, representing $105bn in total trading profits. Investors are so willing to invest in the fund that they accept management fees of 5% a year, plus 44% of annual profits, after which the fund still provided an average annual return of 39%, the most of any hedge fund.

How did Simons do this? With mathematics, and by hiring very smart people such as IBM computer scientist Robert Mercer, Elwyn Berlekamp, an electrical engineer who taught at Berkeley, and “always angry” mathematician James Ax. In The Man Who Solved the Market, Zuckerman describes their complicated personalities, and the trials and tribulations of the company they and Simons brought to fruition. Each became richer than they ever could have imagined.

How did Simons achieve this unparalleled success? With mathematics, and by hiring very smart people

Using every piece of market data they could get their hands on, the scientists looked for patterns, regularities and correlations. Of course, market traders and technicians had been doing that – or trying – for centuries, but Simons and his men brought new techniques such as kernel regression methods, stochastic differential equations and hidden Markov models. Eventually they built a very complex algorithm that ran autonomously, the results of which even they didn’t fully understand sometimes. Essentially, they trade on behaviour, not economic fundamentals.

RenTech created the field of investing now known as quantitative trading, which blossomed on Wall Street in the 1990s and continues today. Wall Street hired scientists, mathematicians and engineers, who were employed as “quants” or quantitative analysts to bring rigorous modelling to the trading business, spring-boarding the computerized trading that dominates today’s markets. In the US, about 90% of trades are now done by computers, and about as much in the UK.

But Simons and RenTech did it first and still do it best. Their computers trade hundreds of thousands of times per day, and they win just over half the time. “We’re right 50.75% of the time…but we’re 100% right 50.75% of the time,” Zuckerman quotes Robert Mercer telling a friend. “You can make billions that way.”

While their trading has undoubtedly brought them great wealth and opportunities, it also has some troubling aspects. Today, Simons is worth over $20bn. He and his wife created the Simons Foundation, funded autism research, and gave eight-figure donations that established the Simons Institute for the Theory of Computing at the University of California at Berkeley and the Simons Center for Geometry and Physics at Stony Brook University.

But Simons and RenTech have also been involved in a protracted legal dispute with US tax authorities, who say the hedge fund owes $6.8bn in taxes because, they claim, the company illegally filed short-term capital gains as long-term gains. (The tax difference in the US is just shy of a factor of two.) In 2017 leaked documents regarding the super-rich showed that Simons had stashed more then $8bn in Bermuda, a haven from US taxes.

Simons has also donated $2.7bn to philanthropic causes over his lifetime, including $11m to Hillary Clinton’s 2016 presidential campaign and much more to other progressive causes. His partner Robert Mercer, together with his daughter Rebekah, has offset that with heavy donations to right-wing causes in the US, including Breitbart News and Donald Trump. In the UK, Mercer had his data analytics company Cambridge Analytica help Nigel Farage and the Leave campaign during the Brexit referendum.

Zuckerman spins a sharp narrative, and The Man Who Solved the Market is an absorbing look into a world that essentially manages to grow money on trees. I would have liked more on some of the maths involved, but Zuckerman is a financial journalist, not a science journalist, and RenTech keeps its techniques a closely guarded secret. But it’s no secret that Simons’ company has indeed solved the markets.

  • 2019 Penguin Portfolio, 384pp £23.25hb
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