The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution Hardcover – Illustrated, November 5, 2019

Note that I said “business” and not biographical, trading, investing, or politics. In reality, this book is all of those.I don’t understand why some reviewers complain about the book not revealing any trading secrets. What were they expecting? The master code driving all RenTec trades? I think the book gives enough details for anybody to understand what these guys were into as they developed their trading systems. I know I personally would have loved having this book in my hands 8+ years ago. It would have saved me a lot of time. That’s because a book like this helps you understand how far behind you are in the process of developing a trading system (and, as a corollary, how impossible it would be for you -an individual investor- to beat these guys). We are talking about an army of PhDs using machine learning and speech recognition models to try to identify market patterns...in the 80s!!! Today, they have (real time) data on every potentially measurable thing on earth (and out of it) and they are putting that on the hands of the most talented people with the most advanced techniques! The most appealing thing of all is that they are not even high frequency traders. They are an investment firm (i.e. they are on the buy side). They don’t play with the advantage of knowing how orders are coming in and trading against that. Now, that’s probably the only advantage they don’t have. There are a lot of very popular quantitative funds out there and their returns are not even close to those of RenTec. It seems as if this was yet another example of a the winner-takes-all situation. So, RenTec would be like the Microsoft of the trading firms.As I’m writing this, we are in the middle of the coronavirus lockdown in the US. It’s April 6th and some are saying that we are hitting the apex. Hopefully that’s the case. Anyways, the reason why I mention this is because anyone who’s been following the markets in the last few years know that the last couple of years have been extremely volatile compared to the previous 10 years. So, reading a book like this in that context is a extremely humbling experience. It reinforced my conviction that the most an individual investor with limited time and a full time job can do is asset management. By that I mean that it will be very difficult for a retail investor to beat the S&P 500 on an absolute basis. So, the best they can do is to try to beat it on a risk-adjusted basis (based on metrics like the Sharpe or Sortino ratios for example).So, back to the book. Before Jim Simons started his firm, he had been working for the government as a code breaker. Apparently, the statistical/mathematical techniques used in code breaking are similar to those used in speech recognition (which is what Mercer and Brown were doing for IBM before joining RenTec). In particular, they were using Hidden Markov Models to predict sequences of data. In other words, they were using an extremely advanced form of Technical Analysis. And that was just when they were starting in the 80s.At the beginning of this review I said that this could also be tagged as a book on politics. And that’s because of the critical role that Bob Mercer played in the last presidential elections. It would not be far-fetched saying that Mercer is who made Donald Trump president of the US. The author goes into a lot of detail describing the developments that took place during the presidential campaign. It made me aware of how flawed the system could be. Mercer just happened to be a shy and nerdy scientist how found himself so rich that he could spare millions of dollars financing his libertarian hobbies. Unfortunately, he was smart enough not to fund the libertarian party but the Republican one. My final take on him is that he was just a conservative and racist person.Finally, I found the last chapter of the book really interesting. In there, the author explains the impact that these quantitative funds are having on the money management industry and the market as a whole. He does seem to confuse an important concept though. He likens “active” managers to “traditional” managers. And he confronts active managers vs quantitative ones. As everyone knows, quantitative funds can be actively managed (RenTec’s Medallion fund is actually a perfect example). The only difference is that -in these cases- the trading decisions are made by an algorithm, not a person. On the other hand, you can perfectly have traditional/discretionary managers that are quite passive (Warren Buffett). In any case, this is actually not that important since the reader can still get the main point the author is trying to make (which is that discretionary managers are nowadays outperformed by systematic/quantitative algorithmic funds). He actually gives a bunch of good examples as to how this occurs.In short, a very enjoyable and interesting read.

I enjoyed Mr. Zuckerman’s effort very much - it was a book I didn’t particularly want to put down and it makes for a fun and quick read. Think folks would do well to consider their perspectives/objectives for the book. I’m not primarily a professional money manager, have an M.S. in finance but no advanced training in complex mathematics. I think quantitative rules-based investing systems have significant value. I came to the book under no illusion that it was going to reveal any “secrets” that could be put into action and that held true. But I found it to be a nicely done history of quantitative investing & how technology enabled the scale and complexity. Here are some specific notes:1. I’m not sure the title does justice to the book or to participants. There’s no doubting the obscenely amazing performance of the Medallion funds. Mr. SImons, as founder and CEO, certainly has earned a large place in financial history. But while the book does a terrific job communicating Mr. Simons’ early work as a cryptographer & his academic achievements in respect of geometers etc., it seems to describe a man who had a vision for how the market might be solved & drove the funding/infrastructure for realization - but not a man who actually developed the specifics of the fund’s model. It really seems to be several of the other key characters who poured endlessly over pricing history, identified & tested anomalies and wrote the algorithmic codes (beginning with commodities & fixed income, equities later on).2. The author does a very good job, IMHO, of discussing concepts like factor investing, statistical arbitrage, paired trades, hedges, market neutral, etc. And he takes the time to nicely reference some of the underlying math for those who have the interest, touching on concepts ranging from differential equations to mean reversion to Brownian motion to embedded Markov processes. The author doesn’t purport to try and teach readers how they might use those ideas - appropriately so - but it’s meaningful perspective.3. Not surprisingly, there’s a dichotomy re “how” the market was “solved.” There won’t be much new here for traders. At the broadest level of generality, certain pricing anomalies were identified & incorporated into algorithms that turned the raw data into trading signals. Harnessing computing power, the fund trades a ton, such that it doesn’t need to make much on each trade and only needs to get it right a bit over half the time - returns are then amplified by liberal employment of leverage; the systematic model is trained - application of machine learning - to continue to improve precision on its own and to determine trades/positions. Beyond that, though - & it shouldn’t be folks’ expectation- the book doesn’t go granular on the model’s inputs. It can’t and doesn’t give away the particulars of the black box. The author should be credited for his tackling of the funds’ initial problems with slippage and for reporting on how the funds had no choice but to move into equities in order to attain such massive AUM. Also great history on early and superior efforts to obtain/recreate pricing data & good discussion of the core fund’s preference for extremely short holding periods.4. There’s some pretty riveting investing history here, ranging from early developments in technical analysis to the long and steady rise of fundamentals-based investing to the profound skepticism with which systematic quant trading was treated for an exceptionally long time.5. The narrative is at times beautiful , at others choppy and abrupt. Probably too many cases of basically “the fund was in trouble” to “the fund was thriving”. It’s like, “oh, that’s good”6. In terms of personal biography, my understanding is that Mr. Simons is intensely private - under those constraints, the author does well in tracing his life and career, though for me, a truly strong and well developed portrait remains elusive. The author comes closer to that mark in telling the stories of several of the other key participants in the firm’s rise over time.7. Later in the book, a ton of space is devoted to Robert Mercer’s public politics and how it impacted the firm. I thought it was interesting stuff, but some may find it loses focus, e.g. there’s quite a bit on Rebekah Mercer that just doesn’t have much relation to the core story.This was an ambitious endeavor and Mr. Zuckerman should be credited for that. As personal biography, it’s s fine effort. As financial history, I’d characterize it as informative, accessible and entertaining. But I’m not sure I’d say it’s of huge importance. The telling of the story isn’t, in my view, likely to have any real impact on the methods and practice of finance. But for finance junkies, there’s a ton of on point info, perspective, teaching and fun. Thanks much to the author.