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Jim Simons’ Playbook: the King of Quant
90% of active managers fail to beat the market, but Medallion boasts >40% annualized returns, 98.5% in '00 & 82.4% in '08.
What gives?
Hint: it's more than math.
No one knows current strategies but here's what we've learned from past
90% of active managers fail to beat the market, but Medallion boasts >40% annualized returns, 98.5% in '00 & 82.4% in '08.
What gives?
Hint: it's more than math.
No one knows current strategies but here's what we've learned from past
1) Exploit repeated patterns in human behavior
More than just greed and fear. The highest-signal trades exploit simple observable actions.
Example: Simons realized floor traders liked to end the week holding no futures. So Medallion bought flows on Friday & resold on Monday
More than just greed and fear. The highest-signal trades exploit simple observable actions.
Example: Simons realized floor traders liked to end the week holding no futures. So Medallion bought flows on Friday & resold on Monday
2) Stat arb & risk neutrality
What does “stat arb” mean anyways? Originally it was just a fancy term for pair trades like buy V / sell MA, or buy cheap futures / sell underlying.
Benefit: Simons didn't have to track beta. Just swooped in when spreads deviated from norm.
What does “stat arb” mean anyways? Originally it was just a fancy term for pair trades like buy V / sell MA, or buy cheap futures / sell underlying.
Benefit: Simons didn't have to track beta. Just swooped in when spreads deviated from norm.
3) Bat small; Bat frequently
Capital concentration in a few trades is stupid. Mess up a couple times & your portfolio is toast. Make a lot of trades and each individual move is less important. You only gotta be right 51%.
How small is optimal? Read about Kelly's criterion.
Capital concentration in a few trades is stupid. Mess up a couple times & your portfolio is toast. Make a lot of trades and each individual move is less important. You only gotta be right 51%.
How small is optimal? Read about Kelly's criterion.
4) Techno advantages
Did u know Simons was a cyber junkie at the NSA before he was a quant? Doing cryptography Simons learned that computational edge was like a genie in a bottle. He took a stab at ML deep nets way before AlphaGo.
Then he got into quantum. Now he's into...?
Did u know Simons was a cyber junkie at the NSA before he was a quant? Doing cryptography Simons learned that computational edge was like a genie in a bottle. He took a stab at ML deep nets way before AlphaGo.
Then he got into quantum. Now he's into...?
5) Autocorrelation aka Behavioral Persistence
"People persist in their habits longer than they should." Berlekamp realized that correlation of deutsche marks btw any {t0, t1} was >20%.
Simons cut his teeth trading commodities and currencies. This was (maybe is?) his home base.
"People persist in their habits longer than they should." Berlekamp realized that correlation of deutsche marks btw any {t0, t1} was >20%.
Simons cut his teeth trading commodities and currencies. This was (maybe is?) his home base.
6) Understand transaction costs
“I’m not sure we’re the best at all aspects of trading, but we’re the best at estimating the cost of a trade” (direct quote)
“I’m not sure we’re the best at all aspects of trading, but we’re the best at estimating the cost of a trade” (direct quote)
7) The IRS is dumb. Take advantage.
RenTech tricked the IRS and got away with it for 10 years. They skirted ST capital gains tax using a basket option called "COLT." Basically Barclays kept the basket of securities on its balance sheet, while Simons got the LEAPs on said basket.
RenTech tricked the IRS and got away with it for 10 years. They skirted ST capital gains tax using a basket option called "COLT." Basically Barclays kept the basket of securities on its balance sheet, while Simons got the LEAPs on said basket.
8) Marry a smart girl.
1st wife Barbara was a CS PhD, went to IBM as a researcher and become president of ACM, the largest educational and scientific computing society. Then she became a national expert on cybersecurity & computerized voting.
1st wife Barbara was a CS PhD, went to IBM as a researcher and become president of ACM, the largest educational and scientific computing society. Then she became a national expert on cybersecurity & computerized voting.
