Born in 1938, James Harris Simons is an American mathematician and a billionaire hedge fund manager. He specializes in statistical analyses and systematic trading and he is known as the 'Quant King'. His fund, Renaissance Technologies, is implementing quantitative techniques, using algorithms and sophisticated models to trade market inefficiencies. As for 2019, and according to Forbes, his net worth was estimated to be $23 billion.

 

JAMES SIMONS TRADING TIPS

■ Looking for anomalous patterns

We search through historical data looking for anomalous patterns that we would not expect to occur at random. Our scheme is to analyze data and markets to test for statistical significance and consistency over time. Once we find one, we test it for statistical significance and consistency over time. After we determine its validity, we ask, ‘Does this correspond to some aspect of behavior that seems reasonable?’

 

■ Three criteria when selecting assets

We have three criteria: If it's publicly traded, liquid, and amenable to modeling, we trade it

 

■ Patterns are not completely random

Patterns of price movement are not random. However, they're close enough to random

 

 

■ About trading models

Our trading models actually tend to be contrarian often buying stocks recently out of favor and selling those recently in favor.

• Models can lower your risk. It reduces the daily aggravation.
• Of course, we can't show the model or tell people how we calculate our forecasts. That would be like Warren Buffett telling the world what stocks he's buying before he buys them.

 

■ Predicting the course of a comet is easier than predicting the course of Citigroup's stock

One can predict the course of a comet more easily than one can predict the course of Citigroup's stock. The attractiveness, of course, is that you can make more money successfully predicting a stock than you can a comet.

 

■ Predicting future success

Past performance is the best predictor of success.

 

■ Trading systems cannot remain stable

The system is always leaking, and we keep having to add water to keep it ahead of the game. 

 

■ About luck

In this business, it's easy to confuse luck with brains.

• Luck plays a meaningful role in everyone’s lives.
• Luck is largely responsible for my reputation for genius.  I don’t walk into the office in the morning and say, ‘Am I smart today?’  I walk in and wonder, ‘Am I lucky today?’
• At a certain point, the luck evens out.

 

■ Mathematics and science are two different disciplines

Mathematics and science are two different notions, two different disciplines. By its nature, good mathematics is quite intuitive. Experimental science doesn't really work that way. Intuition is important. Making guesses is important. Thinking about the right experiments is important. But it's a little broader and a little less deep. So the mathematics we use here can be sophisticated. But that's not really the point. We don't use very, very deep stuff. Certain of our statistical approaches can be very sophisticated. I'm not suggesting it's simple. I want a guy who knows enough math so that he can use those tools effectively but has a curiosity about how things work and enough imagination and tenacity to dope it out.

 

■ You need to build a system that is layered and layered

Many of the anomalies we initially exploited are intact, though they have weakened some. What you need to do is pile them up. You need to build a system that is layered and layered. And with each new idea, you have to determine, Is this really new, or is this somehow embedded in what we've done already? So you use statistical tests to determine that, yes, a new discovery is really a new discovery. Okay, now how does it fit in? What's the right weighting to put in? And finally, you make an improvement. Then you layer in another one. And another one.

 

■ We start with the data, not models

We don't start with models. We start with data. We don't have any preconceived notions. We look for things that can be replicated thousands of times. A trouble with convergence trading is that you don't have a time scale.

 

■ The thrill of finding a new predictor

And we’ve found lots of new predictors over the years. You find a new predictor and it’s really terrific. You run the simulation and you say ‘Oh my goodness this is a real statistical advantage to this particular predictor and it’s independent to the other ones.’ We’ve built up the system that way. I’ve found that very, very gratifying. The risk control things.

 

■ The best way to conduct research

The best way to conduct research on a larger scale is to make sure everyone knows what everyone else is doing.  The sooner the better.  Start talking to other people about what you’re doing.  Because that’s what will stimulate things the fastest.

 

■ The efficient market theory

The efficient market theory is correct in that there are no gross inefficiencies, but we look at anomalies that may be small in size and brief in time.

 

■ Trend-following system

Trend-following is not such a good model. It’s simply eroded. Statistic predictor signals erode over the next several years; it can be five years or 10 years. You have to keep coming up with new things because the market is against us. If you don’t keep getting better, you’re going to do worse.

 

 

■ James Simons (Systematic Trader & Fund Manager)

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