A Financial Renaissance

“I strongly believe, for all babies and a significant number of grownups, curiosity is a better motivator than money.” - Elwyn Berlekamp

The top floor of a nineteenth century colonial on tree-lined North Country Road: the location sounds more like the home of a tech startup than a hedge fund. Nevertheless, those Long Island digs are where Renaissance Technologies took off in 1990’s. Its patriarch Jim Simons, takes most of the credit for that. However, the group of people that supported Simons represents one of the best data teams in history. The story shows how out-of-the-box thinking, a scientific approach, and the careful hand of a leader can drive innovation.

Squabbling Quants

Renaissance Technologies or RenTech may technically be a hedge fund, but its people make it look more like a mathematics lab. Simons began devising mathematical approaches to trading currency after a long career as a mathematician in the late 1970’s. His early partners virtually invented the modern approach to electronically traded funds, naming theirs the Medallion Fund. James Ax, a prickly number theorist and Sandor Straus, a currency data “purist” first set up a Huntington Beach, CA office. Elwyn Berlekamp, who later took over the office, invented a type of game theory. Rene Carmona, a native of France, wrote the trading program. Henry Laufer explored functions of complex numbers, becoming the fund’s first true manager. Numerous others built on the ideas laid out by these original team-members with Simons finally bringing the the company back to his hometown of Setauket, Long Island. The catch? Not one of them had any background in Finance whatsoever. They were outsiders - academics and “quants” before the term came to refer to a technical financial analyst. Since 1988, the Medallion Fund has generated nearly 40% average annual returns after fees.

The atmosphere was not always serene, though. Ax often squabbled with Simons about expenses at the office distant from Simons’ Long Island home. He fretted about compensation and recognition compared to Laufer. “I’ll treat you both equally,” Simons appeased him to no avail. One teammate said, Ax “had no personal self-confidence and always took things the wrong way.” Simons did not favor that kind of individualistic approach though, and Berlekamp eventually bought Ax out. Simons kept to his word though, insisting that the entire team shared in successes as the company grew, with champagne toasts for important milestones. Despite the bubbly team dynamics, the group virtually invented the first machine learning applications in Finance.

Anti-Dogmatic

“Try to get on a great team.” Burlekamp once advised. He certainly took that to heart, joining Bell Labs early on in his career. “Burlekamp hadn’t worked on Wall Street and was inherently skeptical of long-held dogmas developed by those he suspected weren't especially sophisticated in their analysis,” according to the 2019 book “The Man who Solved the Market” by Gregory Zuckerman. From then on, RenTech primarily hired non-Finance types with backgrounds in mathematics or science. One competitor later epitomized an inter-disciplinary team, hiring a “chessmaster, stand-up comedians, published writers, an Olympic level fencer, a trombone player, and a demolition specialist, [or no one] with preconceived notions.” Even after RenTech moved back to Long Island from California, employees wore jeans and t-shirts rather than the typical suit and tie. Compared to the boiler room offices of other stock market traders of the day, those of RenTech and its peers were quiet and somber as a library. The nine team members of the early 1990’s barely had room to work even, crowded in that top floor of a residential home for their first office on Long Island. Little did they know they were ushering in a renaissance for financial services.

Today the glimmer of automated trading systems has faded. From the 2008 financial crisis to the 2010 flash crash, algorithmic trading has not been benign. The team’s goals were not entirely noble either - their success made Simons and his partners some of the wealthiest people on the planet.

Before any of that though, RenTech revolutionized investing to the benefit of endowments, foundations, and retirement accounts everywhere. Today, automated investments make up over a third of all trades. Perhaps Burlekamp was right - both about curiosity and teams.