We note the passing of Jim Simons at the age of 86, a man whose achievements ranked at the very top of multiple professions. These include breaking codes for the NSA, conducting foundational work at the intersection of geometry, topology, and quantum field theory, and (arguably) the greatest hedge fund manager of all time.
We say arguably here only to admit that others may have a different view of what constitutes greatness. According to one analysis, his firm (Renaissance Technologies) delivered gross annualized returns of 66% between 1988 and 2018 in their Medallion Fund. While other hedge funds have been larger and provided more total returns to investors over time, by our lights Simons was the GOAT. Medallion was closed to external capital since 1993, while other Renaissance funds have delivered more modest returns.
Many articles have been written and many water-cooler conservations have centered on what special sauce could have led to these returns, but there’s a larger point missed by most of them. That point is that “alpha,” the return an investment delivers that can’t be captured by simple exposure to broader markets (like a stock or bond index) is a rare commodity: there’s only so much of it to go around. What the geniuses (and certainly many qualify as such) at Renaissance understood early is that their strategy would fail to deliver such outstanding returns if they just poured more dollars into it.
These days a standard due diligence question for a strategy that promises to deliver alpha is the “capacity” of the strategy. The implication is that the manager will have a rough idea of the size at which the strategy’s performance will tail off, and will have the integrity to limit the intake of new assets before it does. And integrity is the issue at heart: asset managers have a financial incentive to be better, but a larger incentive to be bigger. In this context, the term “asset gatherer” is a pejorative–and we find the term applies to many advisory firms as well.
Time will tell whether the current crop of in-demand hedge fund managers will fit that description. Many of these are multi-manager funds, or “pod shops” in the vernacular. Capital is allocated from the top to managers of distinct strategies, and increased or decreased (in some cases very rapidly) depending on short-term performance. So far none of these can hold a candle to Medallion’s performance, but maybe they’ll be just good enough.
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