In this episode of The Acquirer’s Podcast Tobias chats with Gregory Zuckerman. He’s a journalist at the Wall Street Journal. He’s written several fantastic books. His most recent one is The Man Who Solved the Market, which is about Jim Simons and Renaissance. During the interview Greg provided some great insights into:
- Jim Simons – Managing The Best And Brightest Led To Outstanding Returns
- What Makes Rentec More Successful Than Other Quant Firms
- Why Being ‘Too Big’ In Investing Leads To Under-Performance
- Even The Best Investors Need A Little Luck
- Renaissance Technologies – Multiple Medium Term Strategies, And No Outside Investors
- Successful Investing Requires Intellectual Humility
- Key Takeaways From The Man Who Wrote About The World’s Most Secretive Quant Firm
- A Simple Algorithm Beats The Best Expert
You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:
Tobias Carlisle: If you’re ready, let’s get underway.
Greg Zuckerman: Ready to go.
Tobias Carlisle: Hi, I’m Tobias Carlisle. This is the Acquirers podcast. My special guest today is Gregory Zuckerman. He’s a journalist at the Wall Street Journal. He’s written several fantastic books. His most recent one is The Man Who Solved the Market, which is about Jim Simons and Renaissance. We’ll be talking to him right after this.
Commercial: Tobias Carlisle is the founder of Principal-Acquirers Funds. For regulatory reasons, he will not discuss any of the Acquirers Funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions of Acquirers Funds or affiliates. For more information, visit acquirersfunds.com.
Tobias Carlisle: All right. Greg, how are you?
Greg Zuckerman: Great. Thanks for having me.
Tobias Carlisle: My pleasure. I absolutely love the book. Why is Jim Simons and Renaissance? Why is it important? Why is it a worthwhile topic of study and writing about?
Greg Zuckerman: I guess first and foremost, the reason I wrote it are these ridiculous returns, a 66% a year since 1988. In the Key Fund, it’s called the Medallion Fund. It charges a lot of fees. So after fees, the returns aren’t nearly as good. They’re only 39% a year since-
Tobias Carlisle: [crosstalk 00:01:24] Spectacular. Ridiculous.
Greg Zuckerman: … 1998 is down year and in 1989. First and foremost, those crazy returns but it’s also the more I started talking to people and doing research, I realized that he’s a pioneer. He’s the one guy who really set the standard when it comes to quantitative investing, which is where everything’s going today, shifting from human decision-making to a statistical models and using computers. But, he’s also really in some ways a pioneer when it comes to just in general building algorithms and predictive algorithms. It’s the kind of stuff that we see every day when it comes to Facebook and Netflix and Amazon. He was doing this in the eighties, 1980s.
Greg Zuckerman: One can learn about technology also from the bucket and also management in some ways. He manages in a very different way in recruits. I personally learned a lot from how he deals with people. There were a lot of reasons I learned from the book and in the research.
Tobias Carlisle: I’m sort of jumping all over the place here, but that is one of the things that I picked up from the book. Even though he’s a world class, maybe generational mathematician, it felt like or I understood from the book that really what he had done was he had hired really well and let those guys do their thing. How much of what Renaissance does is Jim Simons and how much of it is the employees?
Greg Zuckerman: That was one of the things that surprised me. I figured once I dug into the firm and finally got people to talk who shouldn’t be talking, that I’d find all of these kinds of algorithms that’s that Simons came up within. It turns out that he played an important role on this, on that side, looking for signals as I call them, phenomenon in the market that are underappreciated by others or overlooked by others. But, just as important was his management skill. When he talked to people there or he used to work there, one used the phrase that Simons is genius, is managing genius. I wouldn’t have expected that. That to me is part of the reason why the returns are so crazy.
Greg Zuckerman: What makes him unique is that he can do that side. The quantitative side, he’s a mathematician and we can talk about that. He’s really one of the greatest mathematicians, especially as geometer over the past 50, hundred years. He could do that side, but he also was really good and interacting with people, which is rare-
Tobias Carlisle: Right.
Greg Zuckerman: … for a mathematician. You know the joke about the mathematician is an outgoing mathematician is one who stares at your shoes as opposed to his own. But, he’s not like that. He is a fun guy to hang out with. I spent over 10 hours with him. As long as you can handle the smoke in your face from his chain smoking Merit cigarettes, he’s an interesting guy. He’s fun guy. He drinks, he’s funny. He knows what ticks, he knows how to motivate people. It’s rare to find somebody who can do both sides. That’s part of the explanation. I would argue with that why the returns are so good and why they are unique firm. He doesn’t run things day to day anymore, but for many years he did.
Tobias Carlisle: It’s striking that he was 40 or in his 40s by the time it even launched and it was not immediately successful. He had this quite successful career though before then as a mathematician, as a codebreaker. But, he seemed kind of restless looking to do something else.
Greg Zuckerman: Yeah. That was another of the surprises that given these returns, you would’ve thought, “Okay, they figured it out around 1990s when they turned the corner.” I would argue and they shifted to short-term trading from a longer term orientation and then you look at their terms, “Okay, they’re off to the races and everything’s easy.” But, there were so many obstacles along the way. Someone’s drama behind the scenes and that’s what I learned from it.
Greg Zuckerman: I was surprised by and it’s also in some ways I think maybe reassuring for others, be it investors or people in general, in life that you got to deal with all kinds of setbacks and quite frankly, there’s a lot of good luck involved too where he could have gone either way a few times. He almost pulled the plug on their effort to figure out equities. He gave his guys six more months and he’s really an optimistic, patient individual and for him to almost pull the plug says something. It could have gone either way and there was a glitch that now really aren’t jumping all over the place, but as you suggest, there were many more setbacks and obstacles that I was surprised to learn about.
Tobias Carlisle: I think. I’m not sure when Renaissance first got media attention, but it was in last 10 or 15 years it feels like to me. And then, the moment that they arrived, everybody was scrambling. I think that return, you could see a scan of their return sheet that got shared around. I remember that maybe 10 years ago and the returns were absolutely ridiculous on that return sheet. How much of that is a fundamental understanding of the market and how much of it is more of a code breaking signal detection? Do they have some fundamental insight that alludes the rest of us?
Greg Zuckerman: To your first point, yeah, they’ve always been below the radar screen. The first piece that came out about them was in 2000 and crucial investor magazine. There’ve been things here and there, but it’s always been this kind of mystery how do they do it and wow, these returns are crazy. I share that fascination, which is why I did this book. I was just curious how they do it and how it happened, how they develop this thing. I would argue and I write about it in the book that they do have a different understanding, a whole different approach in so many different ways. People think about quants. Quants are these big kind of bucket and they lump everybody in.
Tobias Carlisle: Right.
Greg Zuckerman: And there’s so many different ways of doing it. What they do is very different, very distinct from other quants even, let alone other kind of traditional fundamental investors in that. They’re not doing what AQR does.
Tobias Carlisle: Right.
Greg Zuckerman: They’re not factor investors, they’re not high frequency investors. They get confused often with high frequency. They’re medium-term investors. Two days is my understanding of the average holding period. They’ll go shorter or they’ll go longer. They look sometimes like high frequency because they’ll re-trade rapidly and very effect quickly. But, that’s more to put on positions or take off positions. So they get confused often with high-frequency guy, but they’re their medium frequency and they’ll go moments to two months as the way they describe it internally. They do have a very different understanding in a lot of ways. They don’t believe you can predict individual stocks. What they’ll do is do groups of stocks versus groups of stocks. They generally speaking hold about 5,000 equities long by 5,000 short. And what they’re betting on are short-term patterns in the market between these groups, not all 5,000 versus 5,000 but relationships among them. It’s relationships between a group of stocks and another group of stocks, a relationships between group of stocks and an index and a factor.
Greg Zuckerman: It’s all these relationships which are quite complicated. It’s more of an internally they describe it as sort of an engineering challenge in some ways. Putting all the systems together. They believe that there are more factors, as we call them affecting equities and investments in general than we all understand. We all focus on earnings and revenue and all those kind of basic criteria and ratios, et cetera. They think there are many more. Sometimes, they affect things more much more. There’s no like hidden secret and some people like on Amazon, “Well, I didn’t get the formula.” I read the book but I didn’t get the formula. That’s not what I set out to do and there isn’t such a thing. They do have some things that are consistent winners but they may not work tomorrow and things were evolving and there’s an urgency even there today. It’s about how they develop. I write about how they recruit and how they approach things, they hide their signals. There are a lot of tricks that I do write about, but there’s not like someone’s secret formula. I took a Coca-Cola kind of thing.
Tobias Carlisle: Right. Yeah. What I took away is that there’s probably lots and lots of smart guys trying to independently develop lots of different ideas and they don’t really need to understand why something works if it’s statistically robust the way that they measure it. Is that a fair sort of description?
Greg Zuckerman: In a lot of ways, yes. That is one way that they distinguish themselves. Other firms, like Two Sigma hedge funds, they need to understand most firms. They need to understand why they’re investing. Partly, it’s because they have outside LPs, they have outside investors and have to give them a little sense of why you’re doing what you’re doing. In some ways, it’s a structural advantage. Well, he always has in terms of this medallion fund in that he’s kicked all his outside investors out so he doesn’t need to explain anything and he can trade on these non-intuitive state signals as they call them. In other words, phenomenon that keep repeating, but they have no clue why. Another investor like a clubhouse or somebody might notice the same ones, but they’ve got outside investors. You can’t just put money on trades that you don’t understand why they are working.
Greg Zuckerman: But Simons and his colleagues can. Now to be fair, they’re not putting a lot on those non-intuitive signals and they will try to figure out why they’re working. They’re not not curious about it, but yeah, they have a little more freedom. Again, these are small edges, but they all add up and that’s what I would argue. They have a series of advantages in different approaches relative to other even big investors in small ones for sure and they all add up. Each one in themselves is maybe just interesting and not won’t blow you away but I think when you add them all up, they add up to the greatest money-making firm finances, modern finance has ever seen.
Tobias Carlisle: You listed out three signals that they have and there was sensible signals, which I’m guessing is like the ones that everybody knows about momentum, value, whatever or something else. Surprising trades with strong statistics. And then the third one, which I think is the most interesting and probably everybody knows the least about including them, is the bizarre signals. Do you have any sense of what the bizarre signals are?
Greg Zuckerman: None that come to mind and none that are sort of tried and true that will always work and they do change. Quite frankly, I’ve raised the question with people internally who worked there right now, can results continue and also the market is changing itself as more investors do passive investing, index investing. See, a lot of taking a step back. A lot of the reason why they do so well is they take advantage of the mistakes of others, be it small investors or larger investors. They do well in panics. They do well when the market is blowing up, partly because they have mapped out these turns the market throughout for hundreds of years. They have better day than everybody, it’s cleaner than everybody. They emphasize the data collection before everybody else. In some ways, they were the first data scientists. They in some ways take advantage of the small and also kind of larger investors, but fundamental investors and all the behavioral economic stuff that we all are familiar with. These greed and fear and the common mistakes we all make, they take advantage.
Greg Zuckerman: But, what happens as investors shift to more passive investing? I’ve raised that question. Has the market fundamentally changed and can you continue to do this? Well, if you don’t have dentists to take advantage of on the other side of you. The people I’ve talked to internally who work there right now acknowledge the challenge. It’s part of why they still have this urgency, this pressure that they feel every day. But, their counter to me is that the market isn’t changing overnight and it hasn’t changed overnight. It’s slowly changing. There still are enough, these phenomena, recurring phenomenon that they can take advantage of. I’m a little skeptical whether they can continue, but they’ve done well this year as well. So far, the proof’s in the pudding that they’ve continued to do so.
Tobias Carlisle: It’s interesting that… I had no idea that dentists had so much money that they could extract that amount from them every year. It’s interesting that they’re quantitative, which means they’re anti-behavioral era. But as you point out in the book, even Jim Simons himself is not immune to making behavioral errors or attempting to at least.
Greg Zuckerman: That’s where one thing that jumped out at me and I thought really fascinating and ironic. I talked to him about that. He didn’t necessarily appreciate the irony like I did or like you did. What we’re referring to is that here he is, Jim Simons, the premier preeminent quant, acclaimed mathematician, he’s the person we all look up to in the quant world, set the standard and he’s made $23 billion being a quant by handing the decision making over to computers. He tried another approach early in his life and I talk about it and it left him sick to his stomach literally and ups and downs just got to him. So he’s made all this money, $23 billion as a client. And then late last year, he’s on vacation with his wife in Beverly Hills and people are recalled late 2018, the market was collapsing and like everybody else, like me, like others, he starts panicking. You would think he’d meet the last guy to be panicking. If Jim Simons is panicking, then and who isn’t panicking?
Greg Zuckerman: It’s exaggerate in panicking, but he got concerned and he calls up the head of his family office, “Hey, should we be buying some protection here?” Which I said to him, “Jim, you’re getting thrown by the market, you’re getting affected by the market collapsing? I thought you’re all about handing decisions over the computers.” In the end, they didn’t do anything. But it was mostly the head of his family office who said, “Well, Jim, let’s wait a few days and see what happens.” To me, it just underscores how hard it is to be a quant, even the preeminent quant has a tough time and I have other examples throughout the book where colleagues said, “Jim, stop messing with the models.”
Tobias Carlisle: He did it in the firm earlier on. There was a, for whatever, either the market was crashing or the models seem to be malfunctioning and he had them take some of the exposure off or take down the exposure.
Greg Zuckerman: That’s true. Also in 2007, when things were collapsing for quants, he pulled back and people internally were pretty upset at him. They said, “Hey, we’ve got these great opportunities here. We should be adding exposure and not reducing it.” So, he’s got a little bit of old school trader in him despite him being Jim Simons. He’s always kept these a few traders, humans around for times of crisis. Others scoffed, “Jim, why are you wasting our money in hiring these guys? But we’re fine with the computer models.”
Greg Zuckerman: Let me be clear that 99% of the time, he doesn’t override the models and he prides himself on that and believes it’s really important as part of their success and other firms do play with it and they don’t. So I want to be clear. But yes, you suggest hard times when market’s collapsing, he’ll step in. It’s usually to pull back exposure and you just have these instincts that even he has to fight to mess with the models. Early on when they created an early version of machine learning, which was their trading system was buying and selling without anybody knowing why they were doing it, it made Simons really uncomfortable. He’s like, “This is a black box.” Just like sort of I would be concerned about. That surprised me and my research that he’s-
Tobias Carlisle: Did it hurt his returns?
Greg Zuckerman: It’s hard to know.
Tobias Carlisle: Did it save the firm? Did it hurt the returns? Did it have any impact at all?
Greg Zuckerman: No, there were times I think it did save the firm. It may have hurt the returns, but the returns were quite good either way. It didn’t hurt him that much.
Tobias Carlisle: Yeah.
Greg Zuckerman: But, people internally give him credit for, that’s that other side of him. He was really good at knowing his prime brokers and knowing who he should be dealing with, who he shouldn’t. Hearing rumors and getting out of affirms like Bear Stearns and earlier I read about another example. The lesson there is maybe it’s important and I’m a huge believer in turning decisions over to models and computers and being careful about intuition and judgment. But, there are times maybe just in times of crisis and maybe the lesson is you pull back and you’d be more conservative because the way they distinguish themselves from people like LTCM is that they are not, they believe that their models are not foolproof. While they’ve done really well with them, they’re also somewhat humble about their own work and nervous about the future. It’s part of the reason why they come in every day with an urgency that they’re still trying to figure it out. They’re an interesting mix. They’re quants, but they’ve got other instincts as well that they deal with.
Tobias Carlisle: Some intellectual humility maybe keeps you alive a little bit longer.
Greg Zuckerman: I think so.
Tobias Carlisle: In strong contrast to LTCM, which seemed to be, they were the smartest guys in the room famously.
Greg Zuckerman: Right. So LTCM, the Simons and his colleagues tried to learn some lessons and understand what happened and why, whether it could happen to them. One of their lessons is you don’t double down when things are going against you necessarily. It doesn’t necessarily mean you override your models, but maybe you’ve reduced exposure. It’s okay to live to fight another battle.
Tobias Carlisle: You post some great questions at the start of the book and I’m interested to know your answers. What does it say about the markets that mathematicians and scientists do a better job than veteran value investors or veteran investors?
Greg Zuckerman: Well, taking a step back, there’s a paradox behind my whole book, which kind of drives it. I only was conscious of it sort of halfway through my research that it shouldn’t have been these guys who had these crazy returns because they’re mathematicians, they’re scientists. They’re not people that care about investing and care about the markets. Most of the time, they get hired to join the firm because they’re looking for an intellectual challenge. Once they get there, then you fall in love with the money, but they’re not there to get rich. They’re like, they are humans. You see the cars going from Mazdas or whatever, Hondas to Porsches. You could see that in their parking lot, but it shouldn’t have been these guys. It should have been somebody who cares about investing. Someone who got an MBA, someone got CFA.
Greg Zuckerman: Someone like myself, who I’ve always been fascinated by investing in investors. I was reading Barron’s and Wall Street Journal as a little kid and all that. Those guys had no, it was beneath them almost. They’re scientists and they didn’t want to waste their time. It should have been those individuals. So the question is why? What do we all have? What are we doing wrong? Part of it, I do think is the reliance we have on judgment. I’m a big believer now and as I said earlier, turning decisions over to models. It’s not just when it comes to investing. If you think about the most important decisions today by the Fed, by in White House, et cetera, a lot of it is still using judgment and instinct whereas the most successful companies are Tencent and Amazon and Netflix where they’ve got these dynamic models that they turn the decisions over to.
Greg Zuckerman: That’s one of the lessons for me, not just as an investor, but as a human. It’s not to say that you can’t have some sort of combination of the two. It’s not to say that there aren’t corners of the market where there are inefficiencies and you can still as a human take advantage, but they’re few and far between. That also speaks to another theme as you would ask me what lessons to me. The lesson there is that the market is a lot more efficient than I might have thought. You might think, “Okay, these guys have these crazy returns. It proves the market is inefficient.” I get that and Simons thinks the market is inefficient if you speak to him. But, I would argue that in some ways their success proves how efficient the market is in that. They only get a ride a bit more than 50% of the time and they’re short-term traders and not long term traders. They’ve failed as long-term traders. It didn’t really work and they had to shift gears.
Greg Zuckerman: If these guys who are the best and the brightest, the smartest scientists and mathematicians, they recruit from all over the world, they only get a right a bit more than 50% of the time. They use a lot of leverage and that helps them. They cap their fund is really important. There’s a lesson there too. Some people say to me, “Well, Greg, you can’t compare Simons to Warren Buffet. Buffet’s managing a company that’s 300, 400 billion or you can’t compare him to other investors managing tens of billions whereas this Medallion Fund, the Key Fund is at $10 billion. I would counter by saying, “No one’s forced Warren Buffett to get so big.”
Greg Zuckerman: I wrote this earlier book about John Paulson. It’s called The Greatest Trade Ever and he pulled off the greatest trade in human history in modern financial history where he made $20 billion over two years anticipating the financial meltdown and I give them a ton of credit for this trade. But then afterwards, he, sorry, it’s AUM soar, he got up to like close to $40 billion and his returns plummeted because he thought he’d be the exception and he got away from how we invest. There are all kinds of reasons why, but that’s another lesson there and investors never subscribe to that. The fact that you’ve got to keep your AUM down to a level where you could actually outperform the market. There are smaller investors that are able to beat the market.
Greg Zuckerman: But time and time again, I see it. I’ve been on The Journal 23 years, you see big investors who believe, “Well, I’m going to be the exception. I’m going to then be the one who’s got the hedge fund and mutual fund that keeps taking in money and outperforms in it.” It doesn’t work. And Simons, somehow he had that instinct and he realized that they couldn’t get too big unless they were going to give up returns. They didn’t want to do that.
Tobias Carlisle: It’s slightly off topic, but the Paulson book was interesting because he started off as a merger arbitrage and then he had a trade that was a little bit out of the ordinary for him. Then, he seemed to turn into a global macro guy with a big gold fund and various other things. I don’t know how successful he was as a merger arbitrage subsequently, but he got that trade right. Maybe that’s all you need. You just need the greatest trade ever.
Greg Zuckerman: True. See, I would argue people criticize Paulson and they say, “Wow, he was a one-hit wonder. Yeah, Zuckerman you wrote about that one hit.” I don’t see it that way. I see him, he was a very successful investor, not very successful. He was a singles hitter. He was a successful merger arb, but he had a really interesting approach. It was one that worked and he will try asymmetrical trades. Trades with limited downside and huge upside and he did it with mergers. He would get into merger deals and there were announced that had a potential third party to come in. Worst comes to worst, it was announced deal is probably going to go through, but the upside is great if another party came in.
Tobias Carlisle: Right.
Greg Zuckerman: He applied that same strategy to the mortgage trade because he’s buying credit fault swaps. To me, I don’t give him that much credit for being bearish on housing as I’m sure you recall, there were a lot of people bearish on housing.
Tobias Carlisle: Right.
Greg Zuckerman: But, I do give them a lot of credit for is figuring out how to express this trade better than almost everybody. They’re all kinds of really sophisticated mortgage guys who didn’t put on this trade, didn’t really figure out how to use credit default swaps in the right way. His colleague, Paolo Pellegrini, did. It was the same strategy looking for an asymmetrical trade. Worst comes to worst, you’re paying out credit fault swaps and you would lose money but not a ton. And the upside was remarkable. So he does this remarkable trade and make $20 billion and he got away from his strategy. He started doing, like you said, he became a global macro guy. He bet on gold. I mean, what’s gold worth? It’s hard to tell and it’s got upside, it’s got downside. He got into bank stocks, he got into pharmas and he got away from how we always invested.
Greg Zuckerman: It wasn’t so much that it was a one-hit wonder and he got lucky. I would argue that he really veered away from how he always invested. There’s a lesson there too and isn’t everybody’s hubris is not something that, it’s something that many investors fall into that trap, He clearly did. He thought he could be the one who could manage a fund, that hedge fund at $40 billion. I can figure out pharma and banking and all these other kinds of stuff and it’s a reminder not to get too big. It was a reminder to stick to what got you there.
Tobias Carlisle: I got to say just I slightly disagree with you that he got the asymmetric trade wrong because for Paulson personally, that gold fund was an asymmetric on gold. He had virtually no downside, but his upside was extraordinary personally, if he got the carry on them.
Greg Zuckerman: As a manager, yeah, you’re right. It’s sad to me, right? A lot of these guys, you can say all kinds of people. You could say HUR is the best investors out there today because they’re a great marketing shop. The returns aren’t great. Och-Ziff, all kinds of firms. I can go on and you bring it up that-
Tobias Carlisle: You could have raised Cliffs [inaudible 00:27:09]. I don’t think he get a nasty tweet from Cliff.
Greg Zuckerman: Yeah, listen, he’s a big boy. He can what he can’t. He’s very sensitive. To where these billionaires are so sensitive. I’ve seen it in my own work.
Tobias Carlisle: They’re human.
Greg Zuckerman: They’re human, I guess. But you would think at that point, you’ve done great. It’s knock on him. He’s built a great empire, but the returns aren’t nearly as good as many others. It’s a different approach. Other people built successful firms. But you were saying that as a gold fund, as a manager, he’s done well. I guess. But, I look at it sort of on returns, what he’s doing for his investors. John Paulson, I’m talking about in particular. And ultimately early on, he was very early golden. He got that run up, but ultimately it didn’t help as it. And, the reason was wrong, he expected inflation. He thought that money supply expansion would lead to inflation. So yeah, he was right that gold started soaring and he made a fortune early on, but it was not for the reason he had expected.
Tobias Carlisle: One of the interesting themes in the book, and it’s one that I have written about too, is this idea that the algorithm represents a ceiling for performance rather than a floor. It’s a ceiling from which you detract rather than a floor to which you add. There’s some studies that have been around since the ’70s and Paul G Miele is the grandfather of this stuff. The idea is always expressed this way that a simple algorithm beats the best expert, including when the best expert has access to the simple algorithm.
Tobias Carlisle: I’ll tell you the reason why it’s this, they call it the Broken Leg Theory. You have some simple algorithm about why John goes to the movie theater on a Friday afternoon. It might include the type of movie itself. He likes an action movie, he’s probably going to go. If it’s romance, he won’t go. Maybe it’s raining means he won’t go. Something like that. And then you learn one day, he’s got this broken leg and your model naturally doesn’t include that information. Are you allowed to make an adjustment for the fact that he has that broken leg? The answer is no. The reason why is that we make, we exercise our discretion too often. We want to override the models all the time. I found it really kind of fascinating that Simons was, he kind of did override the model. You say most of the time he didn’t, but there were these like pivotal moments where he cannot go in.
Greg Zuckerman: Yes. But, let’s also remember that the bulk of the signals are developed by his colleagues and they are much less comfortable overriding models. They would argue, and I think you suggest as much in terms of your case, they would argue that yes, we’re going to get it wrong. As I’ve said to them, it’s a dumb basic question, but you guys can’t figure out frauds. You can’t, you’re relying on… You’re going to be surprised. Your models are going to be surprised by all sorts of things. Shouldn’t you maybe include some sort of human elements and quantum mental and people try to do that? They said, “Yeah, we are going to miss out on those.” The MCI WorldCom where there are frauds involved. But if you trade enough, you will still do better with his approach despite those misgivings one might have, the flaws.
Tobias Carlisle: They try to hold so many that the idiosyncratic risk of any given company is negligible.
Greg Zuckerman: Yes.
Tobias Carlisle: They’re trying to capture whatever signal or factor or whatever the big muscle movement is.
Greg Zuckerman: Yes, a pattern that is persistent and may not have an explanation to it, but there’s got to be… That’s part of their thesis that we all, the average investor just not aware of and even they are not aware of all the reasons why markets are moving and individual investments are moving, but you could still map them out. They’re still potentially reliable these repeating patterns.
Greg Zuckerman: Like you said, they’ll deal with that kind of issue. I mean, part of it also is that whole thesis of Dave look at them as at least early on as something as like a casino. So yeah, it exceeded was going to, some big whales going to come in and they’re going to lose on some big hands and maybe somebody’s counting cards and the casino doesn’t know that. It takes them a little while, they figure it out eventually, but they’ve lost a lot of money on those idiosyncratic trades as you suggest or situations. But, you trade enough if you’re the casino, you still do fine over time. That’s their thesis.
Tobias Carlisle: Is there anybody who does anything comparable to these guys? Because I think that every other firm has, the quant firms are factor firms for the most part. IQR is a factor firm.
Greg Zuckerman: Yeah. Simons will do factors in addition to everything else. It’s a good question. There’s another thing, I would argue another one of their advantages. There aren’t as many people doing what they’re doing as you would think. There’s Pete Muller.
Tobias Carlisle: Right.
Greg Zuckerman: His firm. You’ve got Two Sigma a little bit. DSHA a little bit, part of what they do. We’re talking again, medium frequency holding periods of a couple of days, similar types of approaches. There are some smaller firms. Pete Muller maybe is the closest and it’s not a surprise because a lot, and I write about it in the book, a lot of the Genesis of their equity strategies is that you bound futures and commodities and currencies, but equities are about 60% of the returns more or less. A lot of that comes from, the basis of that is for Morgan Stanley and this system they developed there. They couldn’t quite make it work.
Greg Zuckerman: Part of it went over to Renaissance for a while. They couldn’t make it work. It took two individuals or a few people from IBM, I write about it in the book, Bob Mercer and Peter Brown and some younger junior type people to really turn the corner when it comes to equities. But, a lot of it comes from Morgan Stanley in terms of pairs trading. I mean, it’s not pairs trading. It’s much, much more sophisticated than that. But if you dumb it down to some version of pairs trading, I guess, it’s lots of different. It’s not like Coke versus Pepsi. You read the book… But, Pete Muller came from Morgan Stanley as well and he used to run Morgan Stanley’s stat arb type approach so it’s not a surprise that Pete Muller is one of the few people liked them. Frankly, he wouldn’t talk to me about my book and my research and I think part of it is there sort of some similarities there.
Tobias Carlisle: Right. One of my favorite scenes in the book is when they’re playing poker, I forget who the gentleman is, but when he gets a good hand, he sings the Battle Hymn of the Republic that still.
Greg Zuckerman: Bob Mercer, yeah. Bob Mercer. Although-
Tobias Carlisle: But, he was using it to set them up.
Greg Zuckerman: Yes. He’s playing against professional poker players and the freshman poker players all excited. You figured out Bob Mercer’s tell and it turns out he was playing. I don’t know, potentially he was. It’s not, it’s hard to tell.
Tobias Carlisle: It’s the most obvious tell. You have to be nervous about that one.
Greg Zuckerman: Yeah. So then, he thinks psychological, maybe he’s doing it intentionally because it’s obvious. They’re super sharp individuals. I was going to say guys, but there’s some women as well and a lot of poker players. Even with each other, there’s some element of playing poker and even talking to me, you have to be careful about what they’re telling you and whether it’s accurate and if they’re leading you down the wrong path when it comes to my research and I had to be conscious of that concern and double check and triple check what people were telling me. I was always a little bit, made it a challenging project because these people think a different way and they didn’t want their information to get out. And so if they’re telling you something, sometimes they’re confiding in you, but other times they’re trying to confuse you.
Tobias Carlisle: They’re misleading you. You said that this was the most difficult project you’ve worked on?
Greg Zuckerman: Yeah, by far. I’ve been with The Journal 23 years. This is the third adult book I’ve written ever. Two others for young people with my two sons. But, nothing compares to this just because A, it’s a secretive firm, probably the most secretive firms, so people were told not to talk to me. Other firms, people were told not to talk to me. I had meetings scheduled and canceled at the last second because someone from Renaissance heard about it and told the firm its arrival. They still were told you can’t talk to Greg. And people will have signed these 30 page non-disclosures even after they’ve left in us but to talk to me. It’s quantitative finance so it’s difficult to put into a narrative. I want it to be a narrative that people want to read and it was enjoyable for people. I also wanted it to be something that mathematicians in quants could learn from.
Greg Zuckerman: It had to be enough there. It wasn’t going to be all quanti and all mathematics because then you bore the other types of readers, but vice versa, you can’t be all about divorces and panic and screaming matches because then the mathematicians might not appreciate that as much or people that just wanted to understand their approach. So, I get people to talk and understand the math and I’ll tell you, I’ll read this, it might be funny for your audience. Simons eventually became really quite… I’m looking for something. Hopefully, I can read this and find it. He became quite helpful. In terms of, he wouldn’t tell me secrets, but he was really great about telling me his approach to mathematics and give me an understanding for how he got into the business. And even lately, last few years, his approach to philanthropy and some of the interesting things I’m doing. I apologize here.
Tobias Carlisle: No, you’re fine.
Greg Zuckerman: I asked him to define a term for me in geometry. It’s called holonomy. I got to find it. Anyway, basically he, I asked him to sort of dumb it down and he said, “Oh, yeah. Sure. Let me dumb it down for you.” And even dumbing it down-
Tobias Carlisle: I remember it.
Greg Zuckerman: … It was like RSAA holonomies is the phrase-
Tobias Carlisle: Impenetrable.
Greg Zuckerman: It was embarrassing because this is him. He’s a great teacher. He was explaining it to me.
Tobias Carlisle: Was he messing with you?
Greg Zuckerman: No, I think he-
Tobias Carlisle: He thought you understand that?
Greg Zuckerman: Yeah, or he thought he had dumbed it down. He can’t do that much more than this.
Tobias Carlisle: It’s this very long jog in a sentence that he gives you.
Greg Zuckerman: Exactly. I was a little embarrassed that I could understand it, but I’ve read it to other people subsequently and… Apologize, I can send it to you. He thought he was dumbing it down and I couldn’t understand it nor could others. It showed kind of the level of challenge I was up against trying to just understand some of these concepts and being able to write it for other people or maybe just other writers would have an easier job. For me, it was hard.
Tobias Carlisle: Can I ask you, when you’ve got a very secretive firm like Renaissance, how do you go about verifying the returns?
Greg Zuckerman: For a long time, they had outside investors until about 2006 and then they kicked everybody else out. But until 2006, they had audited returns that they would send to their outside LPs.
Tobias Carlisle: Why do they share their outside returns now? What are their shared returns now?
Greg Zuckerman: They don’t.
Tobias Carlisle: Okay.
Greg Zuckerman: Oh, they don’t. After that, I needed people on the inside. Their employees, they’ve got money in the funds, they would have no reason to lie to themselves. They don’t have outside funds. All the Ponzis in the world had been outside investors. If it’s just your own money, why would you lie about that? Frankly, no one’s had an example of pulling money out or asking for money, employees X employees and then not being able to get the money. You could see the wealth and where they’re investing or where they’re putting it.
Greg Zuckerman: The returns, so you could get the returns until around 2006 because they had to report them to their investors. And again, they could have been lying to them. They were audited, they had accounting firms, but so did Bernie Madoff. But, all the money was returned to investors in 2006. They were upset about getting their money back, these investors. There was never an example of somebody wanting to get the money back and they couldn’t and they kicked everybody out.
Tobias Carlisle: [crosstalk 00:39:25] But, they do still run outside money.
Greg Zuckerman: Okay, so then they started running in different funds.
Tobias Carlisle: RIFF.
Greg Zuckerman: Not the Medallion Fund. RIFF, exactly, and some other ones. So yeah, they have outside money and that’s audited, all that kind of stuff. But, that’s not the Flagship Fund that we’ve talked about, the Medallion Fund. RIFF and all those, they do pretty well too. They on a risk adjusted basis, beat the market but nothing like the Medallion Fund, which is the Key one.
Tobias Carlisle: I just wondered, I don’t want to be sued by anybody, so this is pure speculation, but I always wondered if Medallion traded against RIFF or something like that, if that was the way that it generated the returns.
Greg Zuckerman: No. The SCC was concerned about that too. I write about it in the book, early on RIFF suffered some real losses and people were really upset. They thought they’re being taken advantage of it front run by Medallion. But, the SCC was there for two years after Madoff as he went in there and look, that was among the things they looked at and maybe they got hoodwinked, but I don’t have any indication. People who’ve left, who are not so happy with the firm, I’ve never suggested as much. Excuse me. The only thing people not through with the firm point two are the aggressive tax strategies they’ve employed to convert short-term gains, longterm, which maybe legal but clearly are aggressive and clearly have cost the American tax payer. You could argue that the returns are the returns but their after tax returns are probably better than they should be because of these measures. They’re probably going to have to pay a lot of that back and it may cost them. But again, those are sort of after tax returns, not the 66% we talked about.
Tobias Carlisle: I highlighted it when I read it because I used some options sometimes too. When I saw that they were converting those into longterm, I immediately thought, I didn’t realize you could do that. I didn’t realize merely holding it beyond the year. Of course, you can’t and you dealt with that pretty quickly that on the next page.
Greg Zuckerman: Yes. We’ll see how much they pay people internally and people that are on the hook, things are going to lose or have to settle with the IRS. While they did get a tax opinion that said what they were doing is, it’s complicated. It’s in the book and there’s basket strategies where technically they don’t own the trades and they have a bank do it for them and they get the returns in exchange. It’s clever by a half but at the end of the day, they’re being quite aggressive and the taxpayer is suffering as a result. I do think that is going to come back to haunt them, but it won’t affect their returns. It will affect their take home after tax.
Tobias Carlisle: Look, I absolutely loved the book. Thoroughly recommend everybody go and take a look at it. It’s The Man Who Solved the Market. Final takeaways for you, you think that we should be applying algorithms in in every aspect of our life?
Greg Zuckerman: Takes that we can. There’s an argument that quantum mental approach combining the two is more effective. I subscribed to that, but all things being equal, turning decisions over to systems as opposed to relying on stories and narratives. It’s just dangerous when you… I’ve seen it over my career just getting caught up in stories and you see it’s our nose and we work in Uber and all kinds of examples where we as investors aren’t as good judging executives as we think we are and judging stories. But, I do have to say that there are niches in the market where the fundamental investors still can outperform it.
Greg Zuckerman: One of the things that was crazy to me is when you go out to talk to like a Sandra Strauss who is one of the key individuals early in my book and at Renaissance or even Simons, you would think that in there with their personal money, it would be all allocated to quantitative managers and yet they also are investing with traditional kind of guys. David Einhorn, who looks for stories and is a super smart guy. I was blown away by that and their argument is, “Well, yeah. It works for us at Renaissance, but there are other approaches that you can still make money in other ways.” I thought they would scoff and make fun of it and giggle at guys like Buffet even. They don’t feel that way genuinely.
Greg Zuckerman: So even though I came away skeptical of the traditional approach, they still hold out possibilities in some markets. You got to have some competitive advantage and increasingly it’s just so hard to get this information advantage. But, there are still approaches be it in illiquid markets, markets where in quants don’t really focus on it and maybe one of the lessons is try to be a little more of a longer term investor. You don’t want to go up ahead, go up against Renaissance day to day and there are short term, so maybe you need to be a little bit longer term as a result because they haven’t really figured out longer term investing.
Greg Zuckerman: Those are among the lessons I drew, but also just how you manage people. To me, in some ways, the book was as much of a management book and how he’s been able to get super smart, often cantankerous, difficult, stubborn people to work together and create incentives and motivate. I find that fascinating and eye-opening in a lot of different ways, in surprising ways. Anyway, those are some of my own observations.
Tobias Carlisle: I’ve got to say as a quantum mental guy, that’s music to my ears. But, the big takeaway for me was that just the humility was so important. As you find things, you’ve got to expect them to break down. You just got to plan for the worst and hope for the best maybe.
Greg Zuckerman: Yes. People internally, I ask them, “You guys are wealthy and you’ve got these returns. You just go in, press the button and drink your coffee.” And no, there’s a level of urgency there and nervousness about the future and competing for talent. That’s part of the reason why there was a lot of people and fear. There was a lot of morale issues with raw politics and Bob Mercer we suggest earlier because they have to compete with Facebook and Google in terms of talent-wise. So yeah, there’s a level of humility as you suggest, which surprised me.
Tobias Carlisle: And it’s genuine.
Greg Zuckerman: It does feel that way. Yeah. They’re not putting on a show. Part of it is Bob Mercer. I’m sorry, part of it is Peter Brown who runs the firm today and the guy’s still working his tail off and as a result, everybody else does. And yeah, even though they live in whatever big, huge homes and they got these returns and they’re wealthy, they’re a little bit like a team, a sports team that just won the championship. They want to keep doing it the next year. I was a little bit surprised by that.
Tobias Carlisle: Well, I love the book and I’ve really enjoyed chatting to you, too. Gregory Zuckerman, thank you very much.
Greg Zuckerman: Thank you for having me.
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