The Man Who Solved the Market

The Man Who Solved the Market

In the spring of 1989, a hedge fund based in a converted building on Long Island was falling apart. The Medallion Fund -- named for the prestigious mathematical prizes its founders had won -- had lost roughly 30% of its value peak-to-trough over its first eighteen months of operation. The model's architect, a UC Berkeley algebra professor named James Ax, insisted the losses were within the expected range of his simulations. He wanted to keep trading. Jim Simons, the 51-year-old mathematician who had founded Renaissance Technologies and who held a controlling stake in the fund, disagreed. He flew in and shut trading down. Ax quit. Simons was left holding a fund that was, by most objective measures, a failure.

It was the low point of one of the most extraordinary turnarounds in the history of finance. The machine Simons would build over the following three decades -- with a succession of codebreakers, speech recognition researchers, algebraists, and game theorists hired from universities and government labs -- would go on to generate over $100 billion in gross trading profits between 1988 and 2018. The Medallion Fund compounded at roughly 66% gross per year, or 39% net after fees that were deliberately set to be punishing: 5% of assets under management and 44% of profits, nearly triple the industry standard. A dollar invested at inception and held for thirty years would have grown to approximately $27,000 net of fees. Gross of fees, the number was closer to $200,000. Warren Buffett, across the same period, compounded Berkshire Hathaway at approximately 20% annually. George Soros, at his best, managed something around 30%. The comparison illustrates not just a difference in degree but a difference in kind.