The book The Man Who Solved The Market By Gregory Zuckerman is a book about quant traders. It is about the Renaissance fund run by Jim Simons and Robert Mercer.
I wanted to read this book for many reasons. I heard about the Renaissance Technologies from the book Life After Google by George Gilder, and then I saw this book in the book store so I wanted to read it. I also was interested in the topic after reading More Money Than God. I haven’t finished that book yet, but I plan on finishing to get more information about the most successful hedge funds.
George Gilder does not believe that Renaissance Technologies contributes anything to society because they are just an algorithmic trader. They don’t trade on value. They only trade on information and models.
This book covers the whole history of Jim Simons and how he came to build the most successful investment fund the world has ever seen. Most of the book is pretty dry material.
It will build a huge backstory about a character around Simons, and then that person will immediately leave the story to never return again. It really does build up the story of Jim Simons from beginning to end. There is a lot of detail about Jim Simons academic career, but I’m not sure that was really necessary. It also provides a ton of background on the methods and models used by Jim Simons and his fund.
Some of those models and trading techniques are
- Smart beta
- Factor investing and style investing
- Stochastic models
- Markov chains – where the next even depends on the last event
- Gann analysis
- Kernel models
The Search To Solve Equities Markets
The fund became really successful with futures at first and that’s what kept them going, but Jim Simons was obsessed with conquering the equities market. The reason he wanted to get into equities is because there was more information and more liquidity than futures market. Renaissance Technologies noted that they didn’t make money from price moves. They made money from people’s reactions to price moves.
The firm didn’t become really successful until they brought on Robert Mercer and Peter Brown. They were both key in changing Renaissance Technologies into a quant fund that could conquer the equity markets. The first method they used was pairs trading but that became outdated.
Another key thing that the book points out is that the most successful fund in the firm is primarily for employees.
Teams are important
The Renaissance Technologies company is made up of a bunch of really smart people with unique personalities. Oftentimes, these types of firms don’t succeed. All you have to do is look at all the investment companies that went out of business during Renaissance Technologies’ time. However, Renaissance found a way to stay intact and work together for the most part.
I think there are definitely some lessons that could be learned from how this was accomplished. It would have been nice to learn more about leadership’s management style and values. The book makes it seem like everything was managed loosely and people did whatever they wanted. If that was true, I don’t think Renaissance would have been as successful as they were.
Influences Behind Jim Simons
Another reason I like this book is because it speaks of the influences for Jim Simons and others. They all read about Ed Thorp and Claude Shannon. Ed Thorp is said to have started the first quant fund. He also wrote a book Beat the Dealer which all of the people at the fund read. This was how to beat casinos, but many people used that as motivation to beat the markets. It seems that all mathematicians that enjoy making money try to build winning gambling systems at first and then move onto the markets.
Claude Shannon was the founder of information theory. Information theory is the belief that information can change the future. More specifically, the theory is that entropic events and inventions are what truly create progress. George Gilder would content that Jim Simons and Robert Mercer don’t contribute any entropic benefit to society. However, you can look at what they do from many angles. They provide a consistent return on large amounts of capital which many people find beneficial.
Political Involvement
The book ends with stories about Robert Mercer’s controversial involvement in the Trump campaign. Him and his daughter were heavily involved in advising the Trumps. They also invested in Cambridge Analytica which was a data firm that used facebook information to help reach people during the election. Data can influence a lot of things in today’s society if used right.
Robert Mercer had to step aside because his political involvement was impacting the firm’s ability to raise money and keep money.
Math & Computer Science
This book highlights the importance of math and how math can contribute to society. The deadliest combination seems to be using math to pursue financial gain. Most mathematicians use math for more technical things like theories or other sciences.
The combination of math and computer science is also a deadly combination. You can automate your way to financial gain. However, the backbone of the Renaissance fund was the employees coming up with ideas for how the market worked. They used their technology to search for patterns. Once it found a pattern, the people developed the theory as to why this might be true and used that to build their system and code.
Another thing to keep in mind is that it wasn’t only machines that did all this work. Renaissance Technologies had a lot of employees that worked around the clock. They had to have theories and test those theories in order to get these systems to work. They will also need to fine tune this as variables in the market and society change.
It might seem like an easy concept to just build something that looks at historical information and trades successfully on it, but you have to remember that Wall Street copies each other. If somebody is doing something successfully, then all the other Wall Street firms copy them. Renaissance Technologies had to disguise their activity through various methods to prevent insiders from copying everything they did.
They also had to be careful about employees trying to steal all their information and replicating it. You have to remember the fund runs on code not a secret process. They openly shared this code with everyone at the firm. There were some instances of employees taking the code and trying to replicate it, but it didn’t occur in large enough scale to ruin their techniques. They also sued employees that tried to steal and replicate the code.
Final Lesson
The biggest lesson from this book in my eyes is don’t give up on your dreams. There are many times where Jim Simons should have failed, and he didn’t. He also built a team of weird personalities and was still able to succeed.
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