Simons: book smarts better than Street smarts


Renaissance founder James Simons, the 69 year old former MIT and Harvard Math professor, likes to keep things in the academy of higher learning, and higher returns. This noble search for veritas has produced a few years of $1bn+ take home pay, which is some tenure track. Does Simons even dip into the Wall Street talent pool? No, according to his keynote address at the International Association of Financial Engineers annual conference in New York:

We hire physicists, mathematicians, astronomers and computer scientists and they typically know nothing about finance. We haven't hired out of Wall Street at all.

Is this proof that the machines, or at least the cyborg quants (that kid who never talked in your freshman dorm, who you only saw in the hall bathroom, and not to shower) have won? Arguably the most successful hedge fund in the world completely ignores Wall Street (and the US, as most new hiring is done from the international talent pool), and even gets away with asking people to drop their drawers when investing.
Renaissance has varying fee structures but is most known for the 5 and 44 gouging in the $6bn Medallion Fund, which we still think counts as gouging, just on principle, despite the post fee 33% annual returns in the 15 years prior to 2004 (at least according to marketing materials - what happened in 2005 anyway?). We don't begrudge it, we know the returns are still nuts, and if people will pay it, Simons is more than entitled to jack those fees up, but 5 and 44 sets that disturbing precedent for the cocky hedge fund manager who's had a couple of good years (in this market - real tough...) and starts charging an insane amount (then takes a bath in the next market correction). Hedge fund fees are going up across the Street (along with the minimum liquid net worth requirement from $1mm to $2.5mm), making hedge funds even more inaccessible to the mid-level rich, opposed to the very rich.
The 2005 vintage RIEF fund, which consists of 3,000-4,000 mostly long positions on any given day has lower fees, and a reported capacity of $100bn (imagine $5bn a year just in management fees, or at least $2bn+).
Renaissance hedge fund: Only scientists need apply [Reuters]



Jim Simons, Bob Mercer Even Better At Printing Money Than We Thought

Also: Bob Mercer even weirder and crazier than previously reported.

The Smart Indexes Are Even Worse Than The Dumb Ones*

You may have heard that the Dow hit 13,000 today before subsiding to a shameful 12,965.69. You may not have heard this, or cared, because the Dow is for morons, being a price-weighted index of thirty semi-random companies that, gah, aren't even "industrial" any more.** There are alternative theories but those theories are wrong: Joe Weisenthal in defense of the Dow has been noting its very high correlation with other, broader, more sensible indexes. I see this as further undermining the Dow's legitimacy. If it's very different methodology were leading to some kind of meaningfully different result, then we could perhaps argue that it's adding value in some kind of way. But instead what's going on is that the Dow's creators are hand-picking which stocks to include in the index specifically with an eye toward constructing an index that mirrors the other, better indexes out there. Apple and Google, for example, aren't in the Dow and aren't doing to get in any time soon because their very high share prices would skew the index in weird ways. This just goes to show that the Dow's creators already "know" the right answer (from looking at the S&P 500 and the Wilshire 5000) and then are trying to assemble an index to create the predetermined result. Maybe! An alternative theory is maybe suggested by [Occam's razor and] this piece from the Journal this weekend about index funds that I just loved and so am now going to inflict on you at unnecessary length: