Renaissance Technologies founder and mathematics professor Jim Simons is an enigma in quantitative hedge funds.
Simons rarely gives interviews. One of the best is an Institutional Investor interview he gave in 2000 (PDF). One insight is that Renaissance makes trades in specific time periods using pattern recognition to model volatility.
Simons has done important work in differential geometry and the theoretical physics subdiscipline of string theory. I recently looked at some academic journal articles by Lars Brink (Sweden’s Chalmers University of Technology) and Leonard Susskind (Stanford University) to try and understand how Simons views financial markets.
String theory proposes one-dimensional objects called strings as particle-like objects that have quantum states. String theory and cosmology has progressed over the past 35 years to describe this phenomena but still lacks some key insights.
How might Simons use string theory to understand financial markets? Two possibilities:
(1) The mathematical language of couplings, phase transitions, perturbations, rotational states, and supersymmetries provides a scientific way to describe financial market data and price time-series. It does so in a different way to fundamental analysis, technical analysis, and behavioural finance: Simons uses string theory to understand the structure of information in financial markets. (Ed Thorp pursued a similar insight with Claude Shannon using probability theory.) String theory-oriented trading may be falsifiable in Karl Popper’s philosophy of science.
(2) String theory provides a topological model that can be applied to money flows between mutual funds, hedge funds, and bank trading desks over short periods of time. This might enable Simons’ traders to forecast the likely catalysts for changes in stock prices in the short-term and to trade accordingly. This might involve using string theory to forecast how price trajectories might change if portfolio managers at other funds alter their portfolio weights for a stock. In doing so, Simons is trading in a similar way to SAC’s Steve Cohen (who uses game theory) and D.E. Shaw’s David Shaw but uses different methods of pattern recognition to do so.
I have made a list of popular science books and Springer academic monographs to keep an eye on string theory. Simons’ success also illustrates how insights from one knowledge domain (string theory, astrophysics, computational linguistics, and voice recognition) can be transferred to another domain (financial markets trading).