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James Simons Takes "What's Good for the Whole Approach" Further
James Simons is the founder of Renaissance Technologies.
He's the richest hedge fund manager in the world at $24.4 billion in 2021.
Ray Dalio in 2nd place is at $20 billion.
Although Ray Dalio manages $154 billion in assets compared to James Simons' $50 billion worth of assets.
Ray Dalio advocates for what's good for the whole is good.
James Simons takes this even further.
He hires only the brightest people with strong mathematical and scientific backgrounds.
No finance background is required.
He makes all of them partners and ties each of their compensation to the growth of the entire fund.
His reasoning is that this incentivises everyone to work together, increase transparency and sharing of ideas.
He gives everyone a lot of freedom and focuses on building the infrastructure for these people to come up with quantitative trading models (machine learning).
These models are fully automatic.
No human element of trading.
They spot anomalies in the markets like short-term pricing inefficiencies.
Very interesting.
On the other hand, I gotta wonder at what level we define "the whole".
It's certainly good for the company.
But is it good for the whole society?
It would probably be great if the business advanced some technology or produced products, but do trading models improve the world?
Maybe if it cascades in other applications.
Just don't know enough to infer.
That being said, it's certainly an interesting, cool, and potentially win-win, pie-enlarging approach.
Leadership-wise, I see what you mean.
It can be used to enhance the culture of collaboration within a team.
And people are less incentivised to climb over others.
It's certainly good for the company.
James Simons gives the people in RenTech (his employees/partners) compensation for the whole fund and gets them to sign lifetime NDAs.
Coupled with the exceptional returns, it seems that there's little incentive for employees/partners to leave the company and take a risk of getting such returns elsewhere.
Maybe we can say it's an extreme version of golden handcuffs.
But is it good for the whole society?
It would probably be great if the business advanced some technology or produced products, but do trading models improve the world?
Maybe if it cascades in other applications.
Just don't know enough to infer.
Hmm yeah, that would be a complex question.
As a business, I personally see successful hedge funds as tools/services for the wealthy to grow their wealth.
I'm not at that wealth level so I don't have the personal experience to sketch out more details.
At my wealth level, the equivalent would be exchange-traded funds (ETFs) or mutual funds.
They help me make passive income and reduce risks (safer than holding all your wealth in a single currency for example).
Then, I can focus on working on other goals rather than spending all day looking at the stock market.
So for hedge funds, my view of its value to society is that it depends on what kind of limited partners it attracts.
If one of the partners is an organisation working on malaria as a biased positive example, then the hedge fund is a great tool to support the financing of this goal.
If the hedge fund attracts terrorists as a biased negative example, then it is helping to facilitate violence in this world.
And then, of course, what does the founder or general partners do with their earnings?
For James Simons, he uses the money to fund basic research in mathematics and science.
He also kicked started an organisation to give a community to high-school teachers so they feel more valued in society and would contribute more to the education in the USA.
For some other hedge funds, I suppose they may just focus on generating more and more growth and earnings.
And the general partners get to earn management fees by taking on risky investments that seem good in the short term.
So the value to society may be questionable.
Some pension funds invest in hedge funds.
I'm not sure if the returns outweigh the risks.
Market-Wise
One view is that hedge funds provide liquidity in the "macro" sense (mid-to-long time frame) due to their focus on the risk-adjusted returns (alpha).
They are like a wholesaler except with liquid assets.
From this Towards Data Science
Bear in mind though, RenTech, according to the book, only has barely more than a 50% success rate per trade, but they make it up by the sheer volume of trades, as well as position sizing.
I recall the exact figure was 50.4% but couldn't find the source again.
It helps to show that the market is priced efficiently and it's exceptionally hard to beat it.
Technology-Wise
Technology-wise, it advances machine learning, stochastic models, time series, etc.
But it's all proprietary.
And being proprietary, retail investors are at a huge disadvantage for short to mid-term trading.
We can argue that technology, in the long run, will trickle down to the average consumer.
Although that's hard to say.
Certain knowledge may be held very secretive with little incentive to share with the general public.
As a whole, I don't know if hedge funds generate net value for society.
