New York - Henry Laufer was teaching math at Stony Brook
University on Long Island in the late 1980s when he got a call from Jim
Simons. A former colleague, Simons had left academia to start Renaissance
Technologies a mile down the road, and his hedge fund was struggling. Would
Laufer help him find a better way to predict commodity prices?
Three decades later Laufer is a billionaire four times
over, and Simons is even richer. Their Medallion Fund, based on models that
find signals hidden in the noise of markets, has become probably the world’s
most successful money machine. Powered by millions of lines of computer code,
it has made about $55 billion over the past 29 years, thanks to average returns
after fees of an astounding 40 percent, data compiled by Bloomberg show.
Today, Laufer’s wealth is valued at $4 billion and
Simons’s at $15.7 billion, according to the Bloomberg Billionaires Index.
Two other owners of Renaissance -- Robert Mercer and Peter
Brown -- are on the cusp of joining them in that rarefied realm, according to a
person familiar with the firm’s operations who requested anonymity to discuss
the matter.
If and when they reach that threshold, Medallion, which
manages money for about 300 Renaissance employees, about 100 of them PhDs, will
have created more billionaires than any other hedge fund. The four men declined
to comment for this story.
Political divisions
Medallion’s success has vaulted quantitative investing to
the forefront of the industry. Even stock-picking hedge funds have changed
their recruiting practices, hiring PhDs instead of MBAs in the hopes of
boosting returns. But how Renaissance distributes its profits is as opaque as
the inner workings of its computer models, making wealth valuations difficult.
More visible are the political divisions that separate
the four men. Simons and Laufer, both of whom retired from Renaissance in 2009,
were among the biggest donors to Democrats last year, and Simons, through a
foundation started by his son Nat, has spent some of his wealth funding organisations
that fight climate change.
Co-CEO Brown, 62, also contributes to Democratic Party
candidates, and his wife ran the Food and Drug Administration under Barack
Obama. He spends many weeknights sleeping on a Murphy bed in his office and
drives a Prius, even though he has accumulated a fortune of almost $1 billion.
Mercer, 70, who shares the CEO title with Brown, gave
millions of dollars to support Donald Trump’s campaign for president. He backs
climate-change sceptics, spends his leisure time on a 203-foot yacht, owns one
of the country’s largest collections of machine guns and historical firearms
and has a model-train set in his basement that cost him $2.7 million.
A computer scientist by training, Mercer gained recent
attention for his ties to Trump. His daughter Rebekah recommended her family’s
two closest political aides, Kellyanne Conway and Steve Bannon, be
put in charge of the campaign during its final months. The Mercers also are part-owners
of Breitbart News and Cambridge Analytica, a data company used by the campaign.
After the election, Rebekah Mercer served on Trump’s transition team.
One longtime Renaissance employee, David Magerman, was
suspended in February after he told the Wall Street Journal he was unhappy that
Mercer is “using the money I helped him make to implement his worldview,”
including that “government be shrunk down to the size of a pinhead.”
Ownership stakes
To calculate the size of the fortunes Medallion has
generated, Bloomberg relied on public documents, including a 2014 Senate report
showing that Renaissance’s executive committee, which includes the four men and
CFO Mark Silber, owns 70 percent of the firm. While actual stakes aren’t
disclosed, Securities and Exchange Commission filings until 2009 provided
ownership ranges.
Simons, 79, the only partner whose wealth
has previously appeared on a major international wealth ranking, owned
between 25 percent and 49.9 percent of Renaissance, according to the 2009
filing, the last time ranges were disclosed. Laufer, 71, owned between 10
percent and 24.9 percent, while Mercer and Brown each had between 5 percent and
9.9 percent.
The net-worth analysis for the Renaissance partners
diverges from the standard hedge fund valuation methodology used by the
Bloomberg Billionaires Index to account for the lack of transparency about the
company’s operations. Instead of using the midpoint of the disclosed ranges, a
more conservative approach was applied: The high end was used for Simons, the
only Renaissance founder among the four, while the low end was used for the
others.
The analysis includes cash distributions the partners
receive from Medallion and dividends from Renaissance -- but only since
2006, the year after outside investors were cashed out of the
fund. No market appreciation is applied to any of the cash in the
analysis, and all known political and charitable giving is deducted for each
partner. Capital gains tax rates are subtracted, and the highest state and federal
tax rates are assumed.
Cash distributions
Cash distributions from Medallion are calculated by
multiplying the annual return after fees by that year’s assets, currently
capped at about $10 billion, according to the person familiar with the firm’s
operations. About 40 percent of that amount has been ploughed back into
the firm since 2009 to account for the fund’s higher operating expenses after
the financial crisis, the person said. The rest is allocated to each partner
using their stakes in Renaissance as a proxy.
Dividend payments from Renaissance are based on fee
income from Medallion and don’t include fees from any of the firm’s other
funds. While Medallion charges as much as 5 percent of managed assets and 44
percent of profits, according to a 2017 filing, the net-worth analysis uses the
industry standard fee structure of 2 percent and 20 percent. The calculation
assumes 20 percent of the fee income is distributed to the owners of the firm.
Renaissance and its algorithms are worth at least $10
billion, according to an estimate by an analyst with a long history of valuing
hedge funds. Shares are assigned to Simons and Laufer according to their
disclosed stakes but aren’t counted for Mercer and Brown. If they each received
5 percent, the low end of their Renaissance ownership ranges disclosed in 2009,
they would both be well over the $1 billion mark.
Math wizards
Laufer met Simons at Stony Brook in the 1970s, when he
was a professor with expertise in algebraic topology and Simons was chairman of
the department. Laufer joined Renaissance full time in 1992 and served as chief
scientist.
Mercer and Brown, both PhDs, met in the 1980s at the IBM
Thomas J. Watson Research Center, where they worked on speech recognition and
translation using statistical models. They jumped to Renaissance in 1993,
applying their math wizardry to the financial markets.
While Medallion was closed to outside investors that
year, Renaissance does run several funds open to them. Combined, the firm
manages about $42 billion, according to the person familiar with the firm’s
operations. The four men’s stakes in funds other than Medallion aren’t included
because it could result in double counting.
The riches generated by Medallion have helped keep Mercer
and Brown at the firm even as others have gone back to academia or turned to
full-time philanthropy. In a rare interview at a 2013 academic conference, they
were asked whether they’d still be researching natural-language processing if
the pay were the same.
“My dream is when it all ends, to go back to what you
guys are doing,” Brown told the audience. “Bob has big spending habits, so...”