Wednesday, March 17, 2010

Trader of the 20th Century?

James Simons:
Mr. Simons made his reputation on his signature fund, called Medallion, which has posted average returns of about 45% a year, after fees, since its inception in 1988. Since 1995, it has had only one money-losing quarter, slipping 0.5% in the first quarter of 1999, according to documents reviewed by The Wall Street Journal. Medallion's returns have outpaced those of Warren Buffett, whose Berkshire Hathaway Inc. has gained roughly 20% a year since Mr. Buffett took over in 1965.

In the 1980s, Mr. Simons, who shuns the public eye, was among the first to develop a form of trading that used mathematical models and computers to predict markets. In the process, he blazed a trail followed by a slew of hedge funds that rely on quantitative strategies—so-called quants—such as D.E. Shaw Group, AQR Capital Management and Citadel Investment Group.

Nearly all of the Medallion fund's trading is automated, involving little to no human interference. Computers are programmed to buy and sell assets of all kinds, attempting to predict whether they will rise or fall based on historical patterns.

I'm proud to say that I've only had one losing quarter in the last 4 years (Jul-Sep 2008) of my primary trading strategy. But I'm nowhere near 45% per year in average returns.

Then again, Medallion's returns have been easing in recent years. My theory is that other high-frequency players are now eating part of the same lunch that Simons was able to eat by himself a decade or two ago.

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