As a
quantitative trader, I could not have been more excited for the new
book “The Man Who Solved the Markets” by Gregory Zuckerman which details
Jim Simons incredible story.
Jim Simons
averaged a 66% return over the past 30 years and a 39% return after his
5% management and 44% performance fee (pg 316 of book).
I plowed through the book and had, what I believe, are some major takeaways to share:
1. Edge is important; not the story of why it exists.
In other words, data mining is ok.
This is something I’ve long defended since the launch of
Build Alpha.
You do not need a hypothesis or explanation of why a certain
investing/trading edge exists if it is statistically relevant or
significant.
In my opinion,
it is possible we simply cannot comprehend why a pattern or edge exists
because it exists in a dimension too complex for our current
understanding. Therefore, we should not discard edges that we do not
understand.
This is why I (and
BuildAlpha)
search the market for edges and let the data tell us where the edge is.
Remove the human bias, false ‘truths‘ and the need to explain/justify
everything with a hypothesis or reason why it is happening. Many of
these patterns are ‘overlooked’ because they don’t have an explanation,
but have clearly been profitable for Renaissance!
Here are a few quotes to drive home takeaway #1:
“Simons and
his researchers didn’t believe in spending much time proposing and
testing their own intuitive trade ideas. They let the data point them to
the anomalies signaling opportunity. They also didn’t think it made
sense to worry about why these phenomena existed. All that mattered was
that they happened frequently enough to include in their updated trading
system, and that they could be tested to ensure they weren’t
statistical flukes”. (pg 109)
“Simons and his colleagues hadn’t spent
too much time wondering why their growing collection of algorithms
predicted prices so presciently. They were scientists and
mathematicians, not analysts or economists. If certain signals produced
results that were statistically significant, that was enough to include
them in the trading model” (pg 150).
“I don’t know why the planets orbit the sun. That doesn’t mean I can’t predict them” – Simons (pg 151).
“More than half of the trading signals Simons’s team was discovering were non-intuitive,
or those they couldn’t fully understand. Most quant firms ignore
signals if they can’t develop a reasonable hypothesis to explain them,
but Simons and his colleagues never liked spending too much time
searching for the causes of market phenomena. If their signals met
various measures of statistical strength, they were comfortable wagering
on them.” (pg 204).
“Volume divided by price change three days earlier, yes, we’d include that” – Simons (pg 204).
2. Everyone struggles with discipline and following their system. Even the Greatest of All Time (G.O.A.T)
Discipline is
key and the ability to consistently follow your system(s) can be the
difference between winning and losing. We all believe discipline becomes
easier if you have more reliable edges or have grown your account quite
a bit, but Jim Simons would probably argue that is simply not true!
BuildAlpha: In
Dec 2018, Simons (worth approx. $23B at the time) called his advisor
and wanted to override his systems (pg 308). The systems that have
created the most incredible track record in history.
In the “Quant
Quake” of 2007, Simons overrode his systems before the eventual rebound.
One employee was quoted as saying it cost the firm money (pg 260).
Moral of the story.. follow your system and trust your research!
Everyone struggles with this, but we must.
Note: Majority
of his career Simons was actually the one advocating to NOT override
the systems and may be a large part of his success. These were just two
small examples.
“Trust the model. We have to let it ride; we can’t panic” – Simons (pg 216
3. Surround yourself with a great team
This one
should be obvious, but no one becomes the G.O.A.T alone. Brady has
Belichick, Jordan had Pippen, Kobe had Shaq, Ruth had Gehrig, etc.
A large
portion of the book chronicles how Jim sought out help from brilliant
individuals, hiring them away from prestigious positions (science, tech
and academia) by offering to double their salary. I won’t go over every
individual, but a lot of chapters in this book are dedicated to the
spectacular individuals that helped create the incredible returns which
give Jim Simons the G.O.A.T title.
He recruited
great talent to his team. Surround yourself with those that are experts
in things you are not or inspire you to push past your limits.
Incorporate
different approaches to your own similar to how Simons did. Trading is a
lonely business at times.. you don’t need a hedge fund to build your
own team.
4. Build strategies using different data.
Sure price and volume are great but the book mentioned other areas of alternative data Renaissance found useful.
Here are some simple ideas the book mentioned:
– sentiment
– correlations and relative moves
– number of times a stock’s ticker appears in major publications (regardless of sentiment)
5. Edge doesn’t have to be big.
Renaissance
searched for “overlooked” edges and joked about a 50.75% win rate while
utilizing the law of large numbers to win in the long-run.
Often times we
get caught up searching for the holy grail or the perfect entry/exit
for our trading or strategy development. But even with all these PhDs,
RenTech was excelling trading a nearly 50% winning system to generate
such astronomical returns. Much more can be gained by combining and
adding unique smaller edges together than wasting time hunting for the
perfect holy grail strategy!
“We’re right
50.75 percent of the time… but we’re 100 percent right 50.75 percent of
the time. You can make billions that way” (pg 272)
Bonus:
Build Alpha:
Money isn’t the be all end all. He’s had tremendous tragedy in his
personal life. Remember to enjoy LIFE while on the financial quest we
are all on! The market isn’t going anywhere.I enjoyed the book and hope
you do/did as well.
