The first lesson is just how hard it was for Simons to crack the code, so to speak, and create a successful business. Hindsight bias makes him look like an exponential sensation since the launch of RenTec's Medallion Fund in 1988. But in truth Simons was struggling in obscurity for an entire decade after leaving academia at 40 to take an improbable shot at outwitting the collective wisdom of global markets.

He launched his first hedge fund, called Limroy, under the firm name Monometrics in 1978, recruiting two outstanding mathematicians, Lenny Baum and James Ax, to join him a year later. While both became partners, they also each quit following dramas. Baum was the first to go in 1984 after losing 40 per cent of the money he was managing.

Patchy performance

After 10 years of patchy performance that forced the quants to ditch their vision of developing an automated trading system for a simpler, judgment-based “macro” method, Limroy was closed in 1988. Clients also had concerns about the middling venture capital investments that Simons co-mingled in its portfolio.

Simons and Ax replaced Limroy with the now iconic Medallion Fund, immodestly named for their maths prizes, with a plan to concentrate on systematic trading given innovations in processing power.

But 1989 was a disaster with Medallion down 30 per cent at one juncture, compelling Simons to demand Ax cease all trading, which triggered a legal battle between the partners. Within months Ax had sold his stake to a new hire, the computer scientist Elwyn Berlekamp. Only a year later, however, Berlekamp also bailed because he could not handle Simons’ pestering style, prompting one employee to worry that the founder would commit suicide. It would be 15 long years before Simons was managing more than $US100 million.

Personnel problems would persist in wreaking havoc on Simons throughout RenTec’s tumultuous trajectory, presumably precipitated by the challenge inherent in managing exceptional human talent.


Long-time RenTec CEO, computer scientist Robert Brown, who reportedly sleeps in his office, has a notoriously caustic relationship with staff that borders on bullying in Zuckerman's account. Brown’s co-CEO for much for the 1990s, Bob Mercer, who was a fellow coder from IBM, has attracted intense criticism for his extreme right-wing views, including allegations of racial prejudice, and for the crucial role he played in both the Brexit campaign in the UK and the election of Donald Trump. Simons sacked Mercer in 2017 as a result of internal dissent that could have led to a mass exodus of staff.

There has been heated litigation between RenTec and former employees who allegedly stole intellectual property and at times a toxic corporate culture with different fiefdoms warring for profits.

The accumulated animus burst into the public domain in 2017 when the key software architect for RenTec’s trading execution systems, David Magerman, sensationally gave an interview to the Wall Street Journal airing a dispute with his boss, co-CEO Bob Mercer, in which he was accused of calling him a white supremacist. “His views show contempt for the social safety net that he doesn’t need, but many Americans do,” Magerman informed WSJ. “Now he’s using the money I helped him make to implement his worldview … [that] government be shrunk down to the size of a pinhead.”

Systems struggle

A secondary insight is Simons’ enduring struggle to go systematic. He tried and failed during the 1970s and 1980s, ultimately reverting to intuitive decision-making that resembles most other hedge fund managers. It was only with breakthroughs in microchips, data storage and the advent of the internet in the 1990s that RenTec was able to establish a viable systematic strategy.

Yet much to the chagrin of his quants, Simons remained stubbornly sceptical of a perpetually automated approach, personally intervening to override RenTec’s model signals during the global financial crisis and as recently as December last year. This was borne out of a visceral understanding of the difficulty models have processing sudden regime changes in asset pricing and the knowledge that there is always the non-diversifiable risk that there are residual errors in the code.

Coding errors propagated a significant losing streak in RenTec’s equity strategy in 1995. When the long “tech boom” during the 1990s suddenly shifted into the savage “tech wreck” in 2000, RenTec’s momentum-based systems could not cope, torching $US260 million in just three days (or total losses of 16 per cent). Once the quants identified the models were broken, and modified them accordingly, Medallion recovered quickly, ending up 74 per cent after fees in that same year.

During the synchronised “quant quake” in August 2007, Medallion lost more than $1 billion, or 20 per cent of its value, in a single week. Another longer-term fund that RenTec had launched, called RIEF, smoked $3 billion concurrently. It transpired that around one-quarter of all RenTec’s trades were being emulated by peers. Steam-rolling the recommendations of his team, Simons overrode the models' desire to keep buying and started unilaterally liquidating. “Our job is to survive”, Simons argued. “If we are wrong, we can always [add] positions later.”


As this column previously explained, RenTec has found greatest success exploiting short-term, rather than long-term, anomalies. That makes perfect sense given it is much easier to predict what will happen over hours, days and weeks than months or years (volatility grows with the square root of time).

Having said that, its win ratio is only just north of 50 per cent, and its enormous returns are a function of gargantuan leverage combined with massive trading volume on a global scale. And the impressive monthly return series conceals large losses and variability on a trade-by-trade basis.

While one lesson from this tale might be that markets are inefficient, with the corollary that active managers can generate alpha, perhaps the superior insight is that it is bloody hard work identifying and capitalising on those anomalies.