The most successful investor you’ve never heard of?

Published in The Sunday Times on April 17th 2022

Jim Simons is probably the wealthiest and most successful investor you’ve never heard of. Simons, a noted mathematician, whilst trying to crack codes at the Institute for Defense Analyses, used his spare time to research and ponder the world of global finance.  To say he has been successful is a gross understatement. Forbes ranks the enigmatic hedge fund manager at 28th on its rich list with a net worth of $24 billion (as of September, 2021).

A wonderful book about Simons with the undisguised title, “the man who solved the market”, chronicles the rise of Simons and Renaissance Technologies, the hedge fund he founded. Known as the ‘Quant king’ he pioneered a quantitative approach to investing. Underpinned by massive amounts of data, he has been able to consistently identify and profit from patterns in the market, generating eye-watering returns.

Renaissance is in a league of one when it comes to harnessing computer science and vast data sets to invest successfully. Don’t buy the book as a “how to” as it spills little secret sauce. Unsurprising, as its continued success depends on its operational opacity.

This secrecy has spawned fascination in investment circles with Simons. He’s extremely private. In a rare interview referenced by the Financial Times, he likened his secrecy to Benjamin, Animal Farm’s wise old donkey, saying: “God gave me a tail to keep off the flies. But I’d rather have had no tail and no flies. So, that’s kind of the way I feel about publicity.”
 

Comparing Buffett & Simons 

Writing about investment success usually features a mention of Warren Buffett. Buffett is legitimately referred to as the most successful long-term investor, having doubled the S&P 500’s 10 percent average annualised return for the last fifty-seven years. The astonishing thing is that Simons’ performance leaves this in the penny seats. 

Simons looked at the stock market in the same way that he approached maths. As an abstract intellectual system. He wasn’t interested in earnings or fundamentals. So, in that respect, comparing Buffett and Simons is a little like contrasting the talents of Tiger Woods and Roger Federer. Brilliant in their own fields, but irrelevant to compare. But there is a comparison worth making.

In the thirty-year period from 1998 to 2018, the annual return for the Medallion fund, run by Renaissance, was a hardly credible 66 percent before fees (based on 30-year span from 1988 to 2018). That’s 39 percent per annum after fees – which are a staggering 5 percent annual fixed fee and 44 percent performance fee (that’s not a typo ). You won’t find it easy to corroborate these numbers. They are in the book, but such is the secrecy that surrounds Renaissance, very little exists online about its track record. 

Renaissance track record

Since 1988, the Medallion fund is estimated to have created over $100 billion in wealth.   But the vast majority of that wealth has accrued to Jim Simons and his partners. Renaissance stopped accepting new money from outside investors in 1993 and since 2005 it has been managing money for insiders only in the Medallion fund. Why give away the family silver, I guess? 

The chef must eat his own cooking

It still manages outside money, but in different vehicles to the Medallion fund. Which has created problems for Renaissance. In 2020 the Medallion fund had one of its best years ever, surging 76 percent, according to the Institutional Investor magazine. Outside investors had to settle for less – a lot less in some cases. Two of its worst performing funds had considerable drawdowns in 2020. It’s good to see a chef eat his own cooking, but not when he’s dining off a completely separate menu.

Buffett is ranked 5th on the Forbes list, with a net wealth over four times that of Simons. The only thing separating Simons' net worth from Buffett is time. Buffett started a lot earlier and has been doing it a lot longer (he is 91 after all). 

Buffett is at least eating off the same menu

However, it’s worth contrasting both in terms of investment structure. Buffett's fortune has come not through growing an investment management business, but from his own share in the value of the funds he manages. John Kay, former Financial Times columnist, some years ago laid out a very interesting thought experiment (I’ve updated his numbers). Suppose Buffett had adopted a more conventional investment management structure, charging the 2 percent management fee and 20 percent of performance common in private equity and hedge funds. How much of the $125bn wealth Buffett has today would have been the property of Buffett the manager - Buffett Investment Management - and Buffett the investor - the Buffett Foundation? 

The answer is astonishing. At "2 and 20", the split is $120bn for Buffett Investment Management and $5bn to the Buffett Foundation. The effect of compounding at 14 percent, rather than at 20 percent, is to reduce the accumulated pot by over 95 percent. As a result of the structure of Berkshire, the wealth created by it has accrued to a much wider set of investors.

I’m all for alignment of interests when it comes to picking a manager to invest with, even if that involves a performance fee. But the chef must dine off the same menu. Berkshire’s best years may well be behind it but give me this structure any day.

Market Data: Calendar year returns

Gary Connolly is Investment Director at Davy. He can be contacted at gary.connolly@davy.ie or on twitter @gconno1.