The Compound and Friends - Secrets of the Greatest Hedge Fund of All Time (with Josh, Michael, and Greg Zuckerman)

Episode Date: November 9, 2019

Josh here - we had Greg Zuckerman of the Wall Street Journal up at the Compound to talk about his new book, The Man Who Solved the Market - the first ever deep dive into Jim Simons and his legendary firm Renaissance Technology. Renaissance has pulled over $100 billion in trading profits out of the markets since its founding decades ago, in a highly secretive approach that combines mathematical equations with cutting edge technology.  Zuckerman conducted over 400 interviews with current and former employees of the firm and even spent a few days with Simons himself - despite the fact that he didn't want this story told or the book written.  You can get The Man Who Solved the Market here:  https://amzn.to/2WM6BAY 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, it's Josh Brown. Welcome to Live from the Compound. I'm here with Michael Batnick as usual and our special guest, Greg Zuckerman. Greg wrote a book that I think is the best business book of the year. We're going to talk about the greatest hedge fund of all time and you guys are really going to love this. Stick around. Let's see what's going on. Okay, first of all, Greg, thanks so much for coming in. Great to be here. Before we get into the book, which is amazing, just a little bit on your background quickly. You're Wall Street Journal. You've been writing about quants specifically and finance in general for how many years? I've been in the journal 23 years.

Okay, that's longer than I thought. Yeah, no, and I'm a buy-side guy. It's not necessarily quants, but guys and women making money, losing money, personalities on the street. I kind of am a sports guy. So a lot of home runs and strikeouts. That's sort of my specialty. Okay. Well, let me tell you something.

This is the book that has never been time, Renaissance Technologies, and specifically the story of how Jim Simons pulled over $100 billion out of the markets, which nothing else compares, right? Like Buffett, Soros, they don't even come close. In terms of returns, no one comes close. And in terms of personalities, they're kind of, you could argue, pioneers because they've got this approach to markets. This is very distinct from everybody else. And they paved the way for this quant revolution that everyone is sort of trying to understand and embrace today. Can we be specific in terms of returns? Like what were grosser fees? What did he do over this almost 30-year period?

Right. So you got to remember he charges a lot. But before fees, 66% on average since 1988. Oh my God. It's ridiculous. It's preposterous. So one of the things among many that was interesting to me was, so was it 5 and 40 that he charged or something hilariously ludicrous?

5 and 44. 5% management fee on the whole fund and then 44% of the annual profits. Right. So after fees, his returns are only 39%. That's it? Yeah. So the 5% is not just because they're pigs, but they are using so much manpower and computer power that the management fee was going to cover the operational costs.

I mean, there's a little bit of piggishness probably too. They started off with the 5% years ago when they needed that. They worked out how much their computers, their expensive costs, it was about 5% of AUM at the time, and they just sort of kept the 5% ever since. I mean, it's important to know that they, we're talking about the key funds, it's called the medallion funds, and that's the one that's, it's capped at $10 billion. So they've got other funds that do well, but not as well as this one. This is the key one that's been going on since 1980. And my understanding is it's almost all or all employee money at this point. They've sent back excess capital to investors over so long that there's nothing left. Yeah, there's no outside money. There may be some outside family money, but even friends are kind of

disgruntled because over time, Simons kicked them out of the fund too. Even people that kind of stuck with him at the beginning, there was a little bit of frustration that, hey, why are we getting kicked out? But they made a decision that anything above $10 billion, they can't make these crazy returns. So they had to kick people out. Okay, so let's get into the story of how they've been able to do this. So Jim Simons is essentially pursuing a career in mathematics. He gets involved with government work,

doing code breaking. Is he at the NSA? It's a non-for-profit called IDA in Princeton that reported up and helped the NSA. Okay. But then like on the side, he's kind of screwing around with stocks and he catches the bug. And then at some point he realizes the most fun he could have and the highest use of his skills is not government work or teaching. It's actually running money and trying to solve the market. Yeah, so Simons is a fascinating guy

because he is a mathematician, a geometer to be specific, and he's a groundbreaking guy. Even if he had never invested or traded a dime, he'd still be worthy of a book, I think, because he did fascinating, important things

in the world of mathematics, kind of groundbreaking stuff. And then, as you suggest, he was a codebreaker for the government fighting Russians in the Cold War. This is in the 70s at the height of the Cold War. Yeah. And did some interesting work there. It's also not public. I write a little bit about it in the book. So he was a guy who always was an academic and a real groundbreaking mathematician. And yet he had these impulses, these kind of interests outside of academia and mathematics,

trading. He traded all his money he got from his wedding, and it was a real rush. He enjoyed it, as you kind of suggest. So he always had this kind of one foot in that world of academia and one foot in the real world, as it were, and doing kind of trading and trying to make money. Some of the more hilarious anecdotes about those early days is Simon's running to Merrill Lynch to like a human broker and not being satisfied with the speed with which he can operate or he can get information from them about what's going on. And it just reminds me of like everyone when they start trading. So I thought that was kind of fun to read. It's interesting to say that because one of the things I found so surprising

in my research is Simon's is a lot more like you and I than you would think. You would think he's this quant and it's all scientific. And they have that approach and they are quants. But he also has to fight those instincts like you and I. Seeing a stock or gold going up or going down. Hey, shouldn't we be doing something? And there is a lesson there that you have to kind of fight those.

Even Jim Simon has to fight those instincts. So that's what I was most surprised about. He's not like one of these people who is so mathematic that they can't relate to people. To me, as the founder of a firm, like so much of what he goes through is about managing people and recruiting talent. It's not just like figuring out these formulas. It's like herding all of the people who are going to ultimately produce this astonishing track record. That was the biggest revelation to me is that Simons was really more of like the architect and not necessarily the investor. He relied a lot on Mercer and Brown to really spearhead the investment efforts.

So he was – as much as this book is about performance, it's also about personalities. And management. I completely agree on how to deal with interesting, colorful, often difficult employees and how to recruit, how to hire. So a lot of what he does is hiring talent, kind of best player available kind of thing as opposed to I have a slot and I need to find somebody for that slot. He hires some of the top scientists around the world and says, you know, go to it, guys. Go figure out how to make money. And as you suggest, he was never kind of in the trenches building the algorithms, but he was aware of them and he helped them and encouraged them and gave advice and asked good questions. But right, he was sort of the architect of this all. And a lot of the book is about some of these colorful,

interesting mathematicians and scientists who work for him. There's some really interesting pivotal moments in the book where the firm is running money based on the mathematical strategies. And there's just like such apathy toward, well, what's the reason this works on the part of the mathematicians? But Jim seems to have that inclination to want to know, okay, I get that it works, but I have to know why. And then there are these moments where he wants to override the math because he's got a hunch about, let's say, oil prices in the 70s, for example. So it's really interesting. You look at this guy He's the most successful hedge fund manager of all time And even he struggles with

All right, we have a process But I want you to add 10% oil futures Because I'm worried about Saudi Arabia or whatever Right, so that was early on And over the last few decades They really haven't strayed from their models He got over it But in periods of crisis, you're right.

He does pull back. And sometimes it's others. He overrides the views of others. Some of the scientists are like, trust the models, Jim. Trust the models. And yet he's got that instinct. And sometimes it works and helps them. So he was able to do that within the fund.

But with his personal money, sometimes he did trust his intuition. I don't want to give any spoilers, but I thought that was just mind-blowing. I totally agree. So I'll get into it a little bit. Basically, this guy has built this quant powerhouse, the greatest money-making machine in financial history. And it's based on being a quant and algorithmic trading and the scientific approach. And yet, late last year, when we all remember the market was crashing, he's on vacation with his wife. And yet, late last year, when we all remember the market was crashing, he's on vacation with his wife. And I write about it in the book. And he panics like you and I would panic. And he calls his wealth manager. This was December. It was December.

Yeah, exactly. It's amazing. And he's like, show me be buying some protection here. And no one realized this rich irony. Here's Jim Simons is panicking or at least adjusting to the market. And the market bottom the next day. Right. And his advisor luckily of the next day. Right. And his advisor luckily said, you know, let's wait a little bit here. But it just shows like it's a lifelong. Imagine being Jim Simons' financial advisor.

Yeah. Yeah. And also, a lot of these guys, Simons and others, they invest in non-quant investments. You would think they'd only stick with quant and there's only one approach. But they're not above considering other approaches and seeing success. So we see Simons today, he's worth 20 something billion. 23, yeah. Okay, so $23 billion, but he left- How old is he now? He's 81. Okay, so he left academia late in life. He was not a billionaire until he was what, 50 something?

Yeah, he really was kind of struggling and trying to figure it out in his late 40s. So in the late, and trying to figure it out in his late 40s. So in the late, it's hard to remember, but late 80s until 1990, it wasn't clear he was going to stick with even trading. It's called Renaissance Technologies because they had these kind of outside VC-like investments. And some of his only employees were like, our returns aren't very good.

This is 1989. Is Jim going to stick with this thing? So yeah, a couple points along the way in the arc of this story, it could have gone bad for him. We were talking before we press record, there were so many what ifs in this book. This was not a smooth ride to success. There was a lot of times where they could have turned it off or if they didn't find the bug in the system, this could have gone very differently.

Yeah. So until 1994, they were pretty successful. They were managing about $800 million, commodities, currencies, bonds. And people within the firm were like, that's great, Jim. We're making a lot of money. That's enough for us. And Jim said, no, we got to figure out equities. We got to figure out stocks because you can't manage lots of money, billions of dollars,

unless you're going to play in the stock market. They got too big for the commodity markets, and they had to figure out stocks to scale and meet his ambition. It was his ambition more than anything. He wanted to kind of change the world in some ways, make billions, and then use it to influence society to some extent. And they couldn't figure it out. And they hired different people, and they were super smart, and they had different approaches.

They couldn't figure out equities. And you suggest, if they hadn't, and that turning point was 1996, and that's Bob Mercer and that's Peter Brown, and they get a lot of credit for that, and Jim gives them the credit. If they hadn't been able to figure out equities, and there was a bug involved, as you say, and if they hadn't found the bug, they would have been known as kind of a good hedge fund like many other,

but not the greatest of all time. The man who found the bug, the analyst, was almost axed previous to that discovery. David Magerman, yes, and almost axed later as well. Just an amazing story. So many things had to have fallen on the right side of the fence for the whole thing to have worked. One of my favorite chapters is you kind of give the reader the context of who the other investment industry giants were while Jim was putting this together. So if I say right now, I'm a quant and I'm managing money based on formulas, people go, all right, that's great, you and everyone else. But in the 70s and 80s,

you talk about guys like Soros and Druckenmiller who are doing incredibly big macro trades, not trading in and out, but coming up with what's about to happen in the world and how to profit. Then you talk about what Peter Lynch had been able to do at Magellan for Fidelity, grew his fund to $16 billion. So in the context of the people who had been successful at that time, Simons and his crew must have looked like a freak show. Yeah. They chose an unpopular approach to investing. If you remember at the time, even the early 90s, I mean, George Soros and Stanley Druckenmiller did the British pound bet, which was the greatest of all time at the time in 1992. So in that early 90s period, you've got Soros, you've got Peter Lynch calling up companies,

checking out legs. His wife likes a certain pantyhose. So it was thematic and stories. Yeah, and talking to companies. Jim Simons never picked up a phone to call a company. He wouldn't even know what cash flow is, how to calculate it. He doesn't know any about this stuff. So for him to choose this different approach and stick with it and be confident, right,

he was sort of this outlier and people scoffed. People didn't give him money early on. We're talking the early 90s and it's not so long ago. Didn't Bob Mercer make a joke about maybe they wouldn't own a company, whether it was Chrysler or one of the car companies, and it actually was in the portfolio? Yeah, that's a good memory. Yes, so he had some big meeting with a big investor at the time. This was when they were starting in outside funds. And he was giving an example of how their system operates.

And the example was a stock that no longer existed. And everyone in the room was like, dude, don't you know that this, I think it was Chrysler, had been acquired already. He's giving Chrysler as the example. But the point being, he didn't you know that this, I think it was Chrysler, had been acquired already. He's giving Chrysler as the example. But the point being, he didn't even know companies and businesses and where the economy is going. And he didn't care. And none of them really care within the firm.

They do a very different approach. It's all patterns. It's all short term. It's not high frequency. But it's something very distinct from what everybody else is doing. very distinct from what everybody else is doing. So you mentioned some of the earlier quants who maybe even predated Renaissance technology. You talked about David Shaw of the now well-known firm D.E. Shaw. You talked about Ed Thorpe.

What was this from? Princeton Partners? Yeah, yeah. Or Princeton Newport Partners? Princeton Newport, yeah. So are those your next books? Porter. So are those your next books? Is there new territory or have you now caught the white whale and you need to pivot to something else? Honestly, I'm still recovering from this one. So we'll see about the next one. I've got some ideas, but Thorpe wrote a really good book of his own.

A Man for All Markets. Exactly. And I've spent time with him and he's a great, great guy and super smart. So I'm not sure I want to do his story necessarily, but yeah, this was the story. The Jim Simon story was kind of the one that was out there for me as a writer. This is what I do, write about buy side, how individuals make a lot and lose a lot. So this was the guy I always wanted to write about. I wasn't sure I could pull it off. Congratulations.

This was huge. I mean, we really loved it. It's almost up our, it's almost like it was written for us. All the behavioral stuff in there, all the building a business stuff. Like if you're an entrepreneur, there's a lot in here for you.

If you're a trader, needless to say, I just feel like the audience for this is so wide. Even if you're not necessarily into finance, it's sort of read like fiction. You know what? I have my wife often in mind when I write these things, and she doesn't have that much interest in finance. So I tried to make it relevant to the quant and mathematician, too, because it's a lot about math and about the history when he was an academic. So I tried to make it relevant to those guys, but also make it entertaining enough for the average reader.

And you make an interesting point about management skills, and I think it's relevant to all kinds of people. By the way, the firm is bi-coastal for most of its life. It's out East Long Island and then they have people in California. For a while, yeah. Nowadays, that's common. But back then, that was hard to pull off. Yeah. They were groundbreaking in a lot of things, not just in investing. Who's playing Simons in the movie? Sean Connery. Bring him out of retirement.

That's interesting. I like that. So I want to ask you what the response has been. Do you know whether or not Jim has read the book? Is he willing to read it? Jim and I have a complicated relationship. He didn't want you to do it to begin with. He didn't and still doesn't as of recently.

Well, it happened. Yes. Even a few months ago, we kind of expressed unhappiness. But he's a generous guy. We spent over 10 hours together. He's been very patient explaining some mathematical and other themes and lessons for me.

So I can't speak for him. I hope he liked it, but I didn't really write it for him to like it or not. I tried to tell the truthful story. He's not going to look great in some of these parts of the book. But overall, an amazing philanthropist and investor. Right. So listen, I just want to congratulate you again.

Let me make sure people know what this thing looks like. You're going to see it in stores everywhere. Make sure you order it. It comes out. This is going to go up November 5th. Is that publishing date? Publishing date, November 5th, yes. It's pretty exciting.

So you're going to make the rounds. Sure. You're going to have your work cut out for you. Glad to be here first, though. We're thrilled to have you, and we love the book. We're going to try to sell thousands of copies for you. Appreciate it. And congratulations on getting all these people to talk, and it's just an incredible feed.

So anyway, listen, where can people follow you? I think I'm at G. Zuckerman. At G. Zuckerman. I think so, yeah. people to talk and uh you know it's it's just an incredible feed so uh anyway listen where can people follow you think i'm at g zuckerman at g zuckerman i think so yeah all right follow the man on twitter buy the book we're gonna have links to both uh in the show notes and uh we'll see you soon