In the current issue of the AAII Journal (American Association of Individual Inv
ID: 2623768 • Letter: I
Question
In the current issue of the AAII Journal (American Association of Individual Investors), Jim Simons, founder of Renaissance Technologies, the world's most successful hedge fund, says:
"If you do fundamental tradingm one morning you feel like a genius, the next you feel like an idiot. By 1998, I decided we would go 100% models." By this, Simons means he would base all trades on pre-defined mathematical alforithms. "You do whatever the model says, no matter how smart or dumb you think it is. And that turned out to be wonderful for our business."
What prompted Simons to take this approach? Why did it turn out so well?
Explanation / Answer
Prediction is a science not a whim. To be able to predict one day and have no idea the next one was a poblem with the terms of a growing business. He understood this problem and try to know the solution. For this reason he adopted the approach of calculated simulation and he trusted the "judgement" ( simulation result ) of the algorith used.
This turned out to be so well because,
firstly, They are amongst the first to employ such a scientific statistical model, so they gained public interest.
Secondly, The logic of the algortihm was always basic in form or the other, there has to be a trend in the market, thus being able to predict these changes they did well in the business ( They made predictions too their business)
Thirdly, (this is a personal observation) they affect behavior of the masses, by dgiving them advice on investment. Thus knowing the flow of cash. These type of capabilities have of numerous scams. It helped their business though, they were able to influence or part generate an intimation in large masses and thus will know about the demand beforehand any changes in market value is observed.