From R100 to R2.5 billion in 30 years

Jim Simons’ signature Medallion fund produced exceptional returns. A R100 investment would have grown to R2.5 billion in 30 years if you excluded fees.

Simons, who died at 86 this month, was a mathematician-investor who created the world’s greatest moneymaking machine at his secretive firm, Renaissance Technologies.

As he entered his 40s, Simons turned from academia to investing. He eschewed standard practices of money managers in favour of quantitative analysis.

He found patterns in data that predicted price changes. His technique was so successful that he became known as the Quant King.

At Renaissance, about 60 miles east of Manhattan in quiet East Setauket, New York, Simons avoided employing Wall Street veterans.

Instead, he sought out mathematicians and scientists, including astrophysicists and code breakers.

His employees ferreted out usable investment information in the terabytes of data his firm sucked in each day on everything from sunspots to overseas weather.

Over more than thirty years, his returns consistently trounced markets even as computer power became cheaper, and competitors tried to mimic his success.

Simons refused to explain how he produced more than four times the return of the S&P 500 Index in his most famous fund, Medallion.

However, he did lift the lid slightly in an interview, where he described in broad terms what they did.

He said the efficient market theory, which argues that markets are efficient and leave little room to make excess profits, is wrong.

“There are anomalies in the data, including the historical price data,” he said. In commodities, for example, there are trends. Betting on these trends will produce positive results.

As Simons and his colleagues delved into the financial data, they found more and more anomalies.

Although none of them were so large that you can make big profits quickly. However, putting together a collection of these small anomalies added up.

He added that their current trading system is elaborate and uses a great deal of machine learning. It is built to find things which are predictive.

However, there is more to it than predicting what may happen. The model should also account for trading costs and market movements because of the trades.

He said that minimising the volatility around the assembly of positions in the market requires sophisticated applied mathematics.

Simons said they mostly use statistics and some probability theory for their models.

Incredible returns of the Medallion fund

From 1988 through 2019, the fund generated astounding average annual returns, turning Simons and three colleagues into billionaires.

Over 30 years, the fund produced a compound annual growth rate (CAGR), excluding fees, of around 66%. This is higher than any other fund in history.

To put this in perspective, it means that a $100 investment in 1988 would have grown to $399 million by 2019 if you exclude fees.

In rand terms, a R100 investment in Jim Simons’ signature Medallion fund would have grown to R2.5 billion in thirty years.

The chart below shows the exponential growth of the Medallion fund over 30 years.