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The Mathematician Who Cracked WallStreet

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 titanic1    244


Top hedge fund managers come in all shapes and forms, but the arrival of quant traders – mathematical geniuses wielding highly advanced computer algorithms to analyse and trade the markets – brought a new, eccentric breed to the party. And the “Quant King” – as Forbes magazine dubbed him – was Jim Simons. In 2006 he was hailed as being the “World’s Smartest Billionaire” by the Financial Times, and is listed, along with his wife Marilyn, as the top billionaire donor in New York. Yet, the secretive nature of Wall Street’s most generous man means that although he is well-known, he remains something of an enigma.

Unlike traders who worked their way through the investment banking system, the quants were coming from an academic background. And, according to Scott Patterson’s book about the group, The Quants, they were a pretty eccentric bunch who all seemed to know one another. Using highly advanced mathematics, they built models of the markets, and developed tools to exploit many previously undreamt-of opportunities.

A Mathematical Genius

Jim Simons was one of the leaders of this pack, and like many of his fellow quants, Jim Simons is a mathematician first, and a trader second. Having worked as a codebreaker for the US Defence department in the 1970s, Simon’s genius for pattern recognition was to prove useful indeed when he put it to use on the markets.

Widely considered the father of Financial Signal Processing, Simons founded a “black box” hedge fund, Renaissance Technologies, in New York in 1982. Today, it has over $20 billion under management, and Simons himself is reported to be worth a cool $12.5 billion. He retired as CEO of Renaissance in 2009, although he still has some involvement in it.

Born to a Jewish family in Massachusetts, Simons was a mathematical prodigy who attained a degree in maths from MIT and a Ph.D. in Philosphy and Mathematics from Berkeley. After leaving university, he began to work for the military as a codebreaker, and teach mathematics at MIT and Harvard. Then, in 1968, he became chairman of Stony Brook University’s math department, and did some work for IBM in 1973 on data encryption technology.

He made a major mathematical breakthrough in 1976, winning the American Mathematical Society’s Oswald Veblen Prize in Geometry. His work resulted a revolutionary new geometric form known as Chern-Simons theory, part of the basis of string theory.

His move from academia into the business world came in 1978, which led him to establish a hedge fund management firm trading in commodities and financial instruments. His firm, Renaissance Technologies, used highly computer-based mathematical models to predict price changes in easily-traded financial instruments. These techniques require a huge amount of data to be gathered, and using algorithms to seek out non-random movements from which predictions could be made.

Unlike most hedge fund firms at the time, Renaissance employed people from a range of non-financial backgrounds, including statisticians, mathematicians, physicists, and signal processing experts. The firm’s most famous fund is the exclusive Medallion fund, which only contains personal money from the executives at the firm.

Despite crossing over from academia into business, he retains the respect of his academic peers, including top theoretical physicist Edward Witten, who said: “It’s startling to see such a highly successful mathematician achieve success in another field”. Simons has also earned accolades from within the financial services industry, having been named as the Financial Engineer of the Year by the International Association of Financial Engineers in 2006. In 2005, he was the top-earning hedge fund manager in the world.


Transcript of Interview:

Chris Anderson: You were something of a mathematical phenom. You had already taught at Harvard and MIT at a young age. And then the NSA came calling. What was that about?
Jim Simons: Well the NSA -- that's the National Security Agency -- they didn't exactly come calling. They had an operation at Princeton, where they hired mathematicians to attack secret codes and stuff like that. And I knew that existed. And they had a very good policy, because you could do half your time at your own mathematics, and at least half your time working on their stuff. And they paid a lot. So that was an irresistible pull. So, I went there.
CA: You were a code-cracker.
JS: I was.
CA: Until you got fired.
JS: Well, I did get fired. Yes.
CA: How come?
JS: Well, how come? I got fired because, well, the Vietnam War was on, and the boss of bosses in my organization was a big fan of the war and wrote a New York Times article, a magazine section cover story, about how we would win in Vietnam. And I didn't like that war, I thought it was stupid. And I wrote a letter to the Times, which they published, saying not everyone who works for Maxwell Taylor, if anyone remembers that name, agrees with his views. And I gave my own views ...
CA: Oh, OK. I can see that would --
JS: ... which were different from General Taylor's. But in the end, nobody said anything. But then, I was 29 years old at this time, and some kid came around and said he was a stringer from Newsweek magazine and he wanted to interview me and ask what I was doing about my views. And I told him, "I'm doing mostly mathematics now, and when the war is over, then I'll do mostly their stuff." Then I did the only intelligent thing I'd done that day -- I told my local boss that I gave that interview. And he said, "What'd you say?" And I told him what I said. And then he said, "I've got to call Taylor." He called Taylor; that took 10 minutes. I was fired five minutes after that.
JS: But it wasn't bad.
CA: It wasn't bad, because you went on to Stony Brook and stepped up your mathematical career. You started working with this man here. Who is this?
JS: Oh, [Shiing-Shen] Chern. Chern was one of the great mathematicians of the century. I had known him when I was a graduate student at Berkeley. And I had some ideas, and I brought them to him and he liked them. Together, we did this work which you can easily see up there. There it is.
CA: It led to you publishing a famous paper together. Can you explain at all what that work was?
JS: No.

Read more here: http://www.ted.com/talks/jim_simons_a_rare_interview_with_the_mathematician_who_cracked_wall_street/transcript

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