The Algorithm Behind Jim Simons's Success

Reflections on a Wall Street legend.

Jim Simons, the legendary quant and founder of hedge fund Renaissance Technologies, passed away this past week. “In every field, there’s only one person whose competitive advantage is 'I’m smarter than everyone else,” Morgan Housel once mused. “In finance, for the last 20 or 30 years, that person has been James Simons.”

If that’s the case, what can we mere mortals learn from Simons’s life? A lot, it turns out, but perhaps not what you’d expect.

Unless you’re a quant, the valuable lessons are about how Simons did what he did (and why), not what he did specifically. While a book containing Renaissance’s secretive algorithms would be an instant bestseller, its value would vanish almost immediately as a horde of competitors exploit the same inefficiencies.

The lessons of Simon’s life on, the other hand, are timeless.

During a 2022 talk, Simons outlined five principles that are woven through the fabric of his life:

1. Be guided by beauty.

Simons lived life on his own terms. The math prodigy became a code breaker for the NSA before chairing the Math Department at Stony Brook. He then abandoned his career in academia to build a hedge fund. Simons’s life unfolded in an unpredictable yet remarkable way because he followed his curiosity to interesting problems.

But can a hedge fund, or any business, be beautiful? Simon believed so. He said his work had an ‘aesthetic component’.

Getting the right kind of people, approaching the problem, and doing it right … it’s a beautiful thing to do something right.

The aesthetic quality was finding elegant solutions to difficult problems — like getting a bunch of hyper-intelligent, high-ego people to collaborate and beat the market.

Simons’s answer to the complexity of markets was not math, just like Buffett’s answer was not “value investing.” Simons was a systems builder and Renaissance prospered because of the talent he assembled and the culture he created. Simons the mathematician was in the people business — his second principle:

2. Surround yourself with the smartest and best people you possibly can.

At Renaissance, and previously at Stony Brook, Simons’s success depended on finding talent, people “smarter than you,” and persuading it to join. “I like recruiting,” he recalled to David Rubenstein in How to Invest. “My secret to success was finding good people.”

Finding good people and creating the right conditions and incentives to foster collaboration:

My algorithm has always been: you get smart people together and you give them a lot of freedom. Create an atmosphere where everyone talks to everyone else, they're not hiding in a corner with their own little thing, they talk to everybody else. And you provide the best infrastructure, the best computers and so on. And make everyone partners. That was the model that we used in Renaissance.

How many founders and managers hire people smarter than them and “let them do their thing”? Insecurities, bureaucracy, and short-term thinking quickly get in the way.¹

Speaking of insecurity, I found it remarkable that Simons quit his successful academic career at age 40 to start messing around in markets. Simons was an accomplished mathematician but a beginner in markets. It wasn’t a flashy beginning either, working out of a “dreary Long Island strip mall, next to a women’s clothing boutique and two doors from a pizza joint.” Talk about taking career risk. Talk about principle number three:

3. Don’t run with the pack. If everyone is trying to solve the same problem ... don’t do that. Do something original.

He started out trading based on fundamental signals. “We’d read the newspapers, tickers, news wires, and come to conclusions,” he recalled. Simons believed there were statistical anomalies to be exploited and wanted “models that will make money while I sleep.” However, it took him a decade before he found a winning combination of strategy, talent, and technology.

Along the way, he had his share of doubts: “Sometimes, I look at this and feel I’m just some guy who doesn’t really know what he’s doing.” Hence principle number four:

4. Don’t give up easily. Stick with it. Stick with it not forever, but really give it a chance to get where you’re going.

How many people have that kind of patience, persistence, and confidence?

One thing that stuck with me from Gregory Zuckerman’s biography, The Man Who Solved The Market, was the churn among Simons’s partners in the early years. Researchers and traders came and went while Simons doggedly built his business.

Simons was focused on the long-term value of building a system connecting talent, strategies, and capital. “I’m doing all the trading, and he’s just dealing with the investors,” a frustrated early partner complained, misunderstanding a key driver of value creation.

When another key employee left, he didn’t push to keep his capital in the fund. “I thought we were one of many,” he recounted. “If I thought there was some secret sauce, I would have made sure I could stay invested in Medallion.” It took many years of learning, experimenting, and building relationships before Simons had the most valuable secret sauce on Wall Street.

That secret sauce was more than a collection of ‘subtle anomalies,’ it was a combination of talent, data, technology, institutional memory from past research, and a stable capital base of employee capital at the main fund — Gregory Zuckerman wrote a good summary of the various ingredients to Renaissance’s success.

Importantly, Simons couldn’t have predicted that there even would be a secret sauce. While he was looking for inefficiencies and patterns, he alone couldn’t solve the puzzle. He needed other smart people to compound his own curiosity.

When Sandor Straus became obsessed with collecting more granular historical pricing information, Simons didn’t tell him to spend his time on an effort with a more immediate and visible payoff. He let Straus indulge in his curiosity.

Straus and his colleagues created and discovered additional historical pricing data, helping Ax develop new predictive models … Some of the weekly stock-trading data they’d later find went back as far as the 1800s, reliable information almost no one else had access to. At the time, the team couldn’t do much with the data, but the ability to search history to see how markets reacted to unusual events would later help Simons’s team build models to profit from market collapses and other unexpected events, helping the firm trounce markets during those periods. — The Man Who Solved the Market

You don’t know what you don’t know, and you don’t know what obscure interest will lead to an invaluable insight later on. Leverage the curiosity of other smart people — employees or friends — to find the right questions to ask.

Simons’s final principle was to “hope for good luck,” which he called “the most important principle.” Simons undoubtedly got very lucky at work and kept its role in mind. “People underestimate [luck’s] importance except when things go badly,” he told Institutional Investor. “Then they’re very happy to ascribe it to bad luck, which it may be, of course.”

One has to recognize that luck plays a meaningful role in everyone’s lives. You get born to decent parents in a good part of the world, and you’re way ahead of the game. In my case, I was lucky to collaborate with some very good people when I was doing mathematics. I was also lucky in my choice of partners at Renaissance.

While Simons certainly lucked out at birth, he also worked hard to find and drive the algorithm that fueled his success — something we can all emulate.

“I did a lot of math, I made a lot of money,” he reflected on his life, “and I gave almost all of it away.² That's the story of my life.” And what a life it was.

Thank you for reading,

Frederik

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More on Jim Simons and Renaissance:

Bloomberg: The Code Breaker (2008)

Institutional Investor: The secret world of Jim Simons (2000)

A conversation with Renaissance Technologies CEO Peter Brown

2022: A conversation with Jim Simons: Mathematics, Common Sense and Good Luck

Trung Phan’s twitter thread on Renaissance

Erik Hoel: RIP to the man who beat the efficient market hypothesis

1. Graham Duncan defined it as a version of an infinite game: “finding people who are better than me at doing something, then, doing what I can to help them construct their platform so that they can thrive while operating in their zone of genius.”

2. Simons signed the giving pledge and gave billions to Stony Brook and his foundation to fund scientific causes — a contemporary version of creating Ozymandias.