Being the House Player at the Casino

Renaissance Technologies Founder James Simons

Robert Mercer's preference for right-wing politics seems to stand in stark contrast to the political views of his predecessors at Renaissance Technologies--James Harris Simons and Howard Lee Morgan, the co-founders in 1982 of the company originally designed to revive dying companies.

Although all three men were brilliant in the field of mathematics, unlike Mercer, Simons became a politically moderate-leaning mathematician. He entered MIT at the age of 15, studying under Warren Ambrose and I. M. Singer. Only 23 when he obtained his doctorate from the University of California at Berkley (Bert Kostant thesis adviser) in 1961, and taught at MIT and Harvard until 1964. As Vietnam heated up after JFK's assassination, Simons agreed to work for the Institute for Defense Analyses (IDA), run by Maxwell Taylor, who had been Kennedy's chairman of the Joint Chiefs of Staff. He told Congress in 2008 that he was a "code cracker for the NSA."

The story goes that Simons denounced Taylor's statement that the U.S. could win the Vietnam War in a letter to the New York Times, which  published it. He then told a reporter "his survival strategy was to stop working on IDA projects and spend all of his time on his own research, until the U.S. left Vietnam. Ultimately, for the first and only time in his life, Simons was fired." That was 1968, the same year he joined Stony Brook University in New York, collaborating with Shiing-Shen Chern. They created a geometric theory that crosses over into physics and the quantum field theory. 

Within ten years Simons had begun his finance career in 1976 by trading in currencies with his own money, and after two years he left the university. He created an investment fund called Limroy and a hedge fund called Monemetrics--both involved in odd transactions based in the Bahamas and British Virgin Islands, to which we will return later.

RenTec--from Geometry to Physics to Computer Analytics

Simons, possibly sensing a need to add computer analytics to his investment formula, set up Renaissance Technologies (RenTec) in 1982 with Howard Lee Morgan. Morgan served as president of Renaissance Tech from 1983 through 1989. He had graduated from City College of the City University of New York in 1965 and taught there while working on his doctorate,
awarded by Cornell in 1968. Dr. Morgan then relocated to Philadelphia, teaching first in the Department of decision sciences at Wharton School of Finance (from which Donald Trump had graduated the same year Morgan arrived), and then he was professor in computer and information sciences at Moore School of Electrical Engineering ("birthplace of the computer industry"), both colleges part of the University of Pennsylvania, which he left in 1985. 

After 1985 Morgan taught briefly at Cal Tech and also at Harvard Business School. According to his bio at Edge Foundation, "His research on user interface technology, and on optimization of computer networks led to his bringing the ARPAnet to Philadelphia in 1974. As a result of this early participation in the internet, he advised many corporate and government agencies on the uses of electronic and voice mail, implementing it throughout the Wharton School in the mid 1970s."

An early investment Simons made in 1979 involved his putting $350,000 into Proximity Technologies, a company set up by a young California mathematician who created a spell-checking application and other features for word processing. In 1984 Renaissance Technologies invested in the first liquid crystal display (LCD) developer, CrystalVision, which focused on the technology now used in today's flat screen computer monitors and television. 

RenTec also infused $6 million into Franklin Computer Corporation, which had reverse-engineered Apple technology and then designed compatible applications. The money thus rescued Franklin from bankruptcy after it lost a lawsuit for copyright infringement. They negotiated joint use patent-sharing agreements with Apple, then took Franklin public in 1985 and manufactured Ace 2000 computers, compatible with Apple software. The company also spun off Franklin Electronic Publishers, Inc., which made electronic Bibles. As of 2002 Simons was still a director of Franklin Electronic Publishers, as well as on the boards of Numar Corporation, Cylink Corporation, Segue Corporation, and Kentek Information Systems. He was also named as  "founder and director of the Sanford Group, an industrial holding company in South America." Two years earlier, it was reported, RenTec's Medallion Fund "made a killing in the volatile oil futures market," but a mortgage-backed derivatives fund he backed "in 1995 swooned after two fine years."

Speech Recognition in Quantitative Finance

Mercer at IBM

In 1984 the New York Times mentioned "Bob" Mercer as part of a team lead by Fred Jelinek of Briarcliff Manor, developers of an office computer which could recognize and display words spoken into it. Jelinek had left a full electrical engineering professorship at Cornell in 1972 to lead the team of physicists, electrical engineers and computer scientists, who accumulated data, which was "statistically analyzed to predict patterns in the ways words are used and pronounced.... The team's goal was continuous speech recognition in what experts in the field call ''real time.'' That is, team members worked to produce a machine that could process and immediately display sequences of words and sentences as they are normally spoken."

The article gave a brief biographical summary of Jelinek, who was Mercer's boss at IBM:

Mr. Jelinek came to the United States with his mother and sister in 1949, at the age of 17, having lost his father in a concentration camp. Although he had wanted to become a trial lawyer in Czechoslovakia, he now had to cope with a new language and decided to study electrical engineering. After completing the last six months of high school, he spent four years at City College in New York City, attending classes at night and working during the day to help support his family as a lab assistant for a small manufacturer of transformers for fluorescent lights. A turning point came for him when a group called the Mid-European Studies Center awarded him a full scholarship to the Massachusetts Institute of Technology. He remained at M.I.T. to pursue a doctorate in electrical engineering, becoming an instructor there as well as a lecturer at Harvard University. In the last year of his doctoral program at M.I.T. he audited courses taught by Noam Chomsky, the renowned linguist....

Scott Patterson, Quants: ...New Breed of Math Whizzes, 114

The continuous-speech recognition team, with Dr. Jelinek as manager, consists of four groups headed by Lalit Bahl and Bob Mercer, both of Yorktown Heights, Ken Davies of Croton and Gideon Shichman, who commutes from Manhattan.

More than one IBM official, including Mercer and Peter Brown would leave in 1993 to work for Renaissance Technologies, and Bahl would soon follow them. In time, according to Scott Patterson, author of The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, Mercer was known as the "big gun." Patterson quoted one of the analyst/ traders, a former cryptographer, who said speech recognition training (referred to by financial experts as "statistical arbitrage and quantitative finance") gave Renaissance's Medallion Fund enough of an advantage to liken it to "being the house player at a casino. You have a small edge on every bet, and you have to know how to handle that." (p. 115)

IBM clearly did not have the iron-clad non-compete employment contracts that Simons implemented at RenTec. When two RenTec physicists--Pavel Volfbeyn and Alexander Belopolsky--tried to leave their jobs for another hedge fund, RenTec wasted no time suing for intending to violate its trade secrets. The physicists alleged in a court pleading that they left RenTec because it engaged in illegal trades "involving swap transactions, which they describe[d] as 'a massive scam' ... [which] violated U.S. Securities and Exchange Commission and National Association of Securities Dealers rules governing short sales." To escape the lawsuit, Millenium managed by Israel Englander, the Defendant hedge fund which hired them, paid $20 million to RenTec and fired Volfbeyn and Belopolsky, who remained as defendants--a dire warning designed to prevent similar exits or accusations.

After the 2008 collapse of the housing market, Simons testified before Congress, citing his credentials and negating claims that had been made by the former employees. He explained what his company did as follows:

Renaissance, an SEC-registered Investment Adviser since 1998, manages what are termed quantitative funds -- funds whose trading is determined by mathematical formulas designed to predict market behavior. Individual trades are generated by computers, based on work continually developed by our researchers. Naturally, human beings carefully monitor the trade execution process, making sure that all parts of the system are behaving properly. We operate in only highly liquid, publicly listed securities, such as stocks, bonds, currencies, and commodities, and do this on exchanges throughout the world. This means, for example, that we do not trade in credit default swaps or collateralized debt obligations, neither of which satisfies the above criteria. In the stock trading of our Medallion Fund, we hold balanced portfolios in each country, i.e., portfolios very close to being equally long and short. Our trading models tend to buy stocks that are recently out favor and sell those recently in favor.

Simons retired in 2009, and Robert Mercer replaced him. A piece in 2009 for Zero Hedge--"Time To Revisit RenTec's Allegedly Illegal Dark Pool, Limit Order and Swap Transaction Strategies"--points toward Renaissance quantitative equity hedge funds as the ultimate in a banker's wet dream. Just as much of last century's science and technology spy gadgets and remote viewing experiments were designed to accomplish a sure-fire way to make money in the stock market, Renaissance now hires hundreds of geeky PhD's to do the same thing for its highly secretive funds. A Bloomberg Markets article called one of RenTec's funds "the commercial version of the Manhattan Project," because of its secrecy. The confidential oath that employees sign makes it impossible for them to ever work for anyone else.

The next segment will explore how Renaissance Technologies used its math wizards to make money--effectively monetizing mathematics by crossing over into the fields of marketing, advertising, and even politics.

Computational physics has become the new magic wealth-creating formula that philanthropists, prime ministers and even mobsters (like Felix Sater) now seek.