The Man Who Solved the Market

How Jim Simons Launched the Quant Revolution

by Gregory Zuckerman ⚡

If, like me, you thought you had a vague idea how the market worked then The Man Who Solved the Market is an absolutely eye-opening read.

The Man Who Solved the Market tells the story of the secretive mathematician and business owner Jim Simons and his creation of Renaissance Technologies and the industry leading Medallion Fund.

This is first and foremost a story about how mathematicians (or quants as they're known), came to dominate the world of finance, leading the charge with early mathematical methods such as Markov Chains and early machine learning methods to create automated trading systems that came to dominate the market.

Elsewhere, statisticians were using similar approaches—called kernel methods—to analyze patterns in data sets. Back on Long Island, Henry Laufer was working on similar machine-learning tactics in his own research and was set to share it with Simons and others. Carmona wasn’t aware of this work. He was simply proposing using sophisticated algorithms to give Ax and Straus the framework to identify patterns in current prices that seemed similar to those in the past.

Like me, you were probably raised on the idea that the stock market was rational and understandable, but it seems reality is a little more complex and a little more abstract. Over the last few decades, the market has become the plaything for complex algorithms that are able to make money through identifying and making use of trends that would be unobservable to a regular person.

We’re right 50.75 percent of the time . . . but we’re 100 percent right 50.75 percent of the time,” Mercer told a friend. “You can make billions that way.

You might recognise that name, Mercer. Robert Mercer was a key employee at Rentec and made hundreds of millions from the performance of the employee-only Medallion Fund. Millions that he subsequently used to fund Breitbart News, Cambridge Analytica, Brexit, Trump and more.

According to Bloomberg[1] the Medallion Fund has averaged annualised returns (after fees) of ~70% since 1988. Assuming a single $1,000 deposit in 1988, with that rate of return and no subsequent deposits an investor would now have ~$23,679,115,947. For comparisons sake, in the UK right now you can expect a return up to 1.4%[2] for a savings accounts.

With the recent rise of the Flash Boys, it's clear the market is in the grip of machine based trading, where that leaves the casual investor like you and me remains an open question.

  1. The Unsolved Mystery of the Medallion Fund’s Success ↩︎

  2. Top Savings Accounts ↩︎