Mystery behind Jim Simons’ successful quantitative investment
Experts tend to talk about random walk theory and efficient market hypothesis to insist that technical analysis in the stock markets cannot be trusted.
The former infers that the past movement of a stock price cannot be used to predict its future fluctuation, while the latter states the financial markets are efficient so that prices already reflect all the information.
But there are some successful technical analysts who raked in profits in the financial markets. And “The Man Who Solved the Market” delves into legendary quantitative investor Jim Simons.
Simons was originally a mathematician in the United States and later set up a quantitative hedge fund named Renaissance Technologies. His net worth is now estimated at around $25 billion.
Set up in 1988, Renaissance’s Medallion fund has chalked up average annual profits of up to 66 percent through the summer of 2019, before investing fees.
Author Gregory Zuckerman said that Simons could not predict the future stock price precisely. Rather, the quant revolutionist focuses on predictable human habits and market inefficiencies.
“The firm’s success is a useful reminder of the predictability of human behavior. Renaissance studies the past because it is reasonably confident investors will make similar decisions in the future,” he said.
“The gains Simons and his colleagues have achieved might suggest there are more inefficiencies and opportunities for investors than generally presumed,”
Encouraged by the successes of Jim Simons and a few others, creative investors are now trying to find money-making correlations and patterns in very unconventional ways.
They even analyze the tones of executives on conference calls and traffic in the parking lots of retail stores to bet on how the stocks of the companies will move.
However, the author warns against any naïve optimism about quant-based investment, especially by amateurs.
Long Term Capital Management once recorded outstanding returns through quantitative investment. But the hedge fund with so many famous mathematicians and Nobel prize winners collapsed during the financial turmoil in the late 1990s.
“For all the advantages quant firms have, the investment returns of most of these trading firms haven’t been that much better than those of traditional firms doing old-fashioned research, with Renaissance and a few others the obvious exceptions,” he wrote.
“The firm (Renaissance) only profits on barely more than 50 percent of its trades, a sign of how challenging it is to try to beat the market – and how foolish it is for most investors to try,”
In specific, Simons and his team have been right 50.75 percent of the time to gain multi-billion dollars every year.
But nobody knows its future _ what if Simons has been right over the past three decades, but his predictive model will fail from now on. That’s why quant investors cannot rest on their past laurels.