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Jim Simons’s First Stock Fund Ran on Stat Arb. A Quant Who Left Morgan Stanley Built It.
Robert Frey left Morgan Stanley in 1988 to build Kepler, and Renaissance kept his prediction model when it rebuilt the fund.
In 1988 Jim Simons, a mathematician and former codebreaker who founded Renaissance Technologies, launched its Medallion fund to trade bond, commodity and currency markets. That year Frey set up a separate stock trading firm, Kepler Financial Management, and Simons became one of his investors.
In 1993 Renaissance hired Peter Brown and Robert Mercer, two speech recognition researchers from IBM, and in time put them on its stock trading. The way it is usually told, the pair arrived as outsiders, tore out the old system and wrote a new one from nothing, and stocks became one of Medallion’s great profit engines.
That telling skips the moment they opened Frey’s code and had to decide what in it was worth keeping. What they kept, trading each stock against the forces that move it, has a published textbook version anyone can run on public prices, so I ran it on today’s largest US stocks.
Charged the textbook’s own cost on every stock trade, it has netted 0.4% a year since 2002. If you run a reversal model of your own, yours faces the same arithmetic: it pays only when it earns more on each dollar traded…
