June 23, 2020

During the weekend, I came across an interesting book called “The Man Who Solved The Market”.

If you are interested in managing your own portfolio (or even day trade), I think this book will provide you with many insights including:

  • What’s the highest return a hedge fund can get?
  • Who owns the world’s best hedge fund?
  • How volatile is the world’s best hedge fund?
  • What kind of people do they hire in the world’s best hedge fund?

90% correct transcript:

So last weekend, I was walking into a bookstore and came across an interesting book and it's called the man who solved the market. And it was about the most successful hedge fund in the world started by Jim Simons. So that's why I wanted to make this video because you know, I'm an investor as well. And I kind of want to know what is the highest return someone has ever gotten in the market. And I know I'm not the highest and that's fine because my goal is to make around 30% a year. So I want to share this book with you. I haven't finished it yet. I only skimmed through it. I, I sped read the book when I was in the bookstore. So I kind of got a couple of data points. I want to share with you in this video. Now, before we start, I just want to celebrate another success story within investing a celebrator, Tony, he made it 98% within four months from ABM B.

Now this is actually recommended by one of our members within investing a celebrator and Tony Ashley did his own research and then decided that is also a good investment so that he bought it. And in four months he made it 98%. So congratulations, Tony, you did a fantastic job and look forward to your next investment and your next success story. So let's get started now for those of you who don't know, this is actually what the book covered looks like. And that's actually what caught my eye. You know, the man who solved the market, because when I first started out, I wanted to solve the market too. I love math . And I was actually an honors math when I was studying in UBC for a year. Yeah. And you know, Jim Simons launched his quant hedge fund and revolutionized the industry. And obviously he did this many years probably before I was born.

So let's take a look at his story and what makes him so successful and how successful is he now in this video, I want to cover a couple of questions. You know, what's his return? What is the highest return you can get in terms of a hedge fund? What is the sharp ratio? I'll extinct, I'll explain what that is as well. If you don't know what that ratio is, what is the key skillsets when it comes to working for his fund, if that's ever your interest and how does it compare with the rest of the market and what kind of people work for this fund? Alright. So if you guys don't know who Jim is, this is what he looks like. He kind of looks familiar to me. I've seen him on TV before, perhaps. But I didn't realize that was Jim Simons that started the most successful hedge fund in the world until 30 minutes ago.

So let's jump right in, shall we? So first of all, let's look at his return. So since 1988, his return is 66% a year. So that is amazing. And I know a lot of people always focus on the return after fees, but I don't think that's really the focus because what I wanted to know is how much return you can get the fourth is because I manage my own portfolio. And if you're managing your own portfolio is to return before fees matters because you're comparing your strategy, which you don't take a fee for and someone else's strategy, which you shouldn't include their fee. So here Jim makes 66% a year. That is pretty amazing. And yeah, that's fantastic. So in the daily, as an investor, I would compare that against my own return. And right now my return is somewhere between 40 to 50%.

So as of the last time I calculated it, it's around 45% a year. So surprisingly, I'm actually not too far off from the top. Now, obviously, if you have watched my free webinar, you you'll know my investing strategy has no machine learning has no AI in it. It's a longterm investing strategy that uses options and still I'm able to achieve 45%, which is not too far off from, from Jim. And later on, you'll notice he has a team of PhDs and I'm just this one guy now that's actually quite interesting because I also know another friend that runs a similar quant fund as well. And he makes around 50% a year. So I would say Jim's return is definitely better than his. Obviously my friend's fund has only been around for around five years or so, and he makes around 50% a year.

So, and he hires two PhDs. So I think that level of return is achievable, especially if the person has solved the market per se. Okay. So if you are an investor and if you're investing in an ETF fund, you're getting around 7% a year and it's good to have this number in your head that the absolute maximum that people can achieve longterm before fees is 66%. So if you seem somebody promising you that they can make you a hundred percent return every single year, you notice probably a scam because you know, the best hedge fund in the world managing $110 billion, Jim is only making 66. Yeah. So if you want to take a look at the data and another way you can compare that with S and P 500, and here's a very simple chart of the fund medallion with the fee included versus S and P 500.

So you will see that this is actually a log scale, and it both started with a dollar and over time S and P 500 grew to $20. And the DeLeon grew to $521. So this is the difference between Medallian Jim's fund for versus S and P 500. And this is actually quite interesting because if you take a step back, right, and you think about it is the society equal, and chances are the answer is not, you know, everyone has their own strengths and weaknesses. Everyone has different opportunities and disadvantage and so on. And this is a perfect example of, you know, if someone is good at a certain thing, in this example is actually building a quad fund. You can actually outperform the market approximately 25 times. So that was really rough calculation, 25 times. Yeah, that's about right. So 25 times higher than the market return.

Now, interestingly enough, when he first started the fund, he was actually not performing better than the market. If you look at this period, you know, for the first, let's say 20 years or so, he wasn't performing better than the market, but recently he must have improved and improve on his algorithm until you got to do a point where he's performing better than the market. Now, remember this is after fees. So, and the fee for medallion fund is approximately 20%. So if you are looking at the growth before fees, this number will be a lot higher. So they probably surpassed the market like, you know, way before here and the fee was too much. That's probably why. So when you think about it, it really breaks your belief on what is possible in the market. And I know, because my goal was to make around 30%, which is supposed to be higher than the S and P 500 return.

And here you get Jim making $500 from a dollar, an S and P 500 only makes 20, which is 20 X. So this is 20 eggs. This is 500 eggs. So that is, that is the difference. Okay. So if you like another chart, this is the annual return for gym, and you will see that initially, who was actually, you know, maybe refining his algorithm or whatnot. And wasn't making that high of a return in 1988. Now, afterwards, you'll see that, wow, on a year to year basis, he actually makes around 25% plus per year. And some years actually makes around a hundred percent. Now, this is actually quite interesting because a lot of people focus on the fluctuation in the portfolio. And we'll cover that in a bit because that's what the sharp ratio is all about. And just looking at this chart, you can already see the fluctuation is quite big.

You know, one year I make 25% and not a year, I make a hundred. So you can imagine how much the portfolio fluctuates and just looking at this return for the last 20 plus years or so. So that's actually quite interesting as an investor, you know, you wouldn't expect your investments to go up like a straight line, and if your investment is going up like a straight line, you're probably leaving some money on the table. So this is what a super, super, super duper successful hedge fund looks like. And its annual return. Now let's talk about the sharp ratio and that's actually quite interesting again, because just a week ago, a subscriber asked me for what my sharp ratio is, and I don't have that answer because I don't calculate it. Now. What is sharp ratio? Sharpe ratio is the return. You get minus risk, free return divided by the standard deviation.

Now, if you don't know what that means is simply the return divided by how much your portfolio fluctuates. So let's say if you're making 10% and minus risk-free, don't worry too much about risk-free, you're making 10% divided by the fluctuation of your portfolio, which is 10%. Then your sharp ratio is one. So ideally you want a very high return, but a very low fluctuation. And that will give you a very high sharp ratio. So that is really the goal. So then the first question you should ask is, well, what is SNPs a sharp ratio now for the past 25 years, this is a Google search. Again, the average annual sharp ratio for S and P 500 is one. So that's pretty straight forward. I was actually surprised that it is exactly one. But if you think about it S and P 500, it's around 7% a year.

Now we can include risk free rate. If we really want to you'll take off maybe two, 3% and divide it by the fluctuation. So that means the average fluctuation or the standard deviation in this case is around four to 7%, depending on how you calculate it for myself. I just assumed the risk free a percentage to be zero. Now, interestingly enough, Jim's sharp ratio, even though he's making such a high return, it's actually greater than one. So Jim's sharp ratio based on dis a news article from institutional investor is around 1.8900000000000001 to 2.5. So you can see, wow, he's actually performing better than markets getting a high return with lower fluctuation. Now it doesn't mean Jim has less fluctuation then the markets, because if you look at this, you know, the fluctuation is quite a bit, what this means is if Jim is making around 60% a year, then the fluctuation is less.

Let's say it's two, it's approximately half of that. So the standard deviation is 30%. So if you are making 60% a year, your fluctuation is 30%. So when you think about it, wow, that's actually quite high. And a lot of investors who are not familiar with the markets who are not familiar with investing in general will get scared because wow, a fluctuation of 30% is really high. But if you look at this graph, right, and I just want to explain to the subscriber who asked me this question, the return fluctuates a lot. And if you try to maintain a very steady increase, you know, kind of like getting dividends, whereas failure predictable, or you're trying to get like a bond where you get interest payment, very predictable with very, very low sharp ratio. Then you're going to cut out all the gains here because what you will end up getting in terms of an investing strategy is if you want predict, built predictability, you'll try to draw a line here and you will always take profit at a certain level.

So what that will give you, it's a very predictable return. For example, if, if I take profit every time when I hit 25%, then everything above 25% is what I'm leaving on the table. And instead, if you try to maximize the profits for each of your investments, then you will capture these bigger gains. Like one year you make a hundred percent and that a year you make a hundred percent, but your sharp ratio will not be as good. And in this case, Jim obviously has a return of 66%. And a sharp ratio let's say is two means a standard deviation of 30%. So it is quite high in terms of standard deviation. That means if you just imagine the average here is around 30 or whatnot, the return can be 60 to 30 or zero. So you can see there is that fluctuation. And when it comes to these portfolios that make a high return, I wouldn't be surprised if the sharp ratio is low, a lower than what people want it to be, because when you're making like 60%, it is very easy, very, very easy to have a 30% fluctuation.

And I got to say, Jim is doing a pretty good job, so that's fantastic. Now the next question I had in mind when I was doing research was really how long was Jim holding onto his trade for now, given that he's a mathematician given that he is, you know, starting a quad fund, I suppose that he wants to take profits really quickly. So a very, very short amount of time. And I was right. The average holding period is two days. So that's actually within my expectation because my friend who also runs a hedge fund, his holding period is a couple of seconds. So he's like scouting the markets really quickly, and he has an algorithm to do that for him. So for Jim, the average holding curate is today which I think is actually longer than I thought, given that he's using an algorithm that can make decisions fairly quickly.

Now, this is very interesting because for those of you who want to be a day trader and who wants to make the big buck by being a day trader, this is what you're up against. And later on, we're going to talk about Jim's team. But basically a lot of quantifies nowadays are just using algorithms to make decisions. And they just take profit like that without emotion, without, you know, analyzing anything subjective, it's all quantitative. And they just make the right decision in the blink of an eye. So are you going to be fast enough? Like if you are just day trading, are you going to be fast enough? I don't know. I try to turn it before 12 years ago and it didn't really work out for me. So here you can see that the average holding period is two days. And for myself, I'm making 45% a year.

And my average holding period is somewhere around one, one year to two years. So you can see the diversity of people's investing approach and still being able to make a high return. Now, I was very curious because when I was reading the book or skimming through to book this weekend, I was actually Ashley got a glimpse of the kind of people they hire. And I actually found a quote on Wikipedia. So you can trust that source all of his 200 employees and content in a fortress, like building in unfashionable, long Island, New York, a third half PhDs. This is actually what I wanted to emphasize to you a third half PhDs, not in finance, but it feels like computer science, physics, mathematics, statistics, and Renaissance has been called the best physics mathematics department in the world. And according to what are all avoid hiring anyone with the slightest whiff of wall street on a fees.

So that's actually quite interesting, right? They hire nonfinancial PhDs because what they want when you're trading in two days or whatnot, is you're trying to analyze the wave, the wave of the market, because when you're looking at daily or even just two days, and you're trading the markets, a lot of things don't matter. Fundamentals probably doesn't matter. News, maybe it matters, but technical matters a lot. And technical is the study of price is a study of pattern. And if you have enough PhDs in this case, it's around 70 PhDs, then you probably, you know, figure out a pattern or two where you can consistently trade, buy and sell in a blink of an eye. So when you are a short term trading, when you are day trading or swing trading, this is kind of what you're up against. And I realized that kind of early in my life that I can't fight against people with supercomputers because my computer is vast enough. And it's really difficult to fight against people PhD's and especially a team of PhDs. So that's what you're up against. It's actually quite interesting. And if you have a nonfinancial PhD, then perhaps you can work for it as fuck.

So to summarize, I think there are three key lessons. And the first lesson is really, if you are looking at what is possible to date, and obviously some people will say they make a lot more money, but the ceiling is approximately 60% a year. And that's what Jim's fund is making with artificial intelligence, with algorithm trading, with a team of PhDs, but it is possible. And right now I'm 45% return. So I think I'm pretty close to there. And I'm pretty happy relative to what the hedge funds are making, given that I'm just using an hour, a week on investing less than number two. You don't need to know quants or day trading, and you can still get 30% a year. And I wanted to put, put this as less number two, because I'm the living proof that you don't need quants or day trading, and I'm still making 30% plus.

So that was pretty good. So this gives you hope that even if you are a small retail investor, even if you're just starting out investing and you don't have a financial background, it is possible to get 30% and you don't need to have a PhD to make 30% a year. I mean, if you have a PhD, perhaps you should aim for 60% a year because that's what a gym can do. And number three, it is possible to perform better than the market. And I think that is the best lesson and a very important lesson, because if you go to, you know, study financing university, who you take a certification in finance or whatnot, they'll always tell you, you can't beat the market. You can't beat the market. You can't beat the market, Eric. And that's very interesting because people beat the market all the time for him, buffet beats the market.

So it was Jim. So it was George Soros. So it is possible to pull, perform better than the markets. And if you want to learn more, then you can pick up this book from the bookstore. I think it was just released this year. If I remember correctly and it's called the man who solved the market and how Jim Simons launched a quantum revolution. So to wrap up, I just want to congratulate Tony again for making 98% in four months from a M B D. So that is fantastic. And congratulations, Tony, I'm very proud of you and I look forward to your next successful investment in investing accelerator. So my name is Eric CDOT and I help people without a financial background to master investing and target 30% a year using an hour a week through a coaching program called investing accelerator. So I'm not a quad guy.

I don't day trade. I focus on longterm investing. And if you want to learn more about what I do, you can go to this link called five minute investing.com/free case study. And you can watch the webinar called how to get 30% from the market in 12 months. So this is quite an informative webinar. It's quite long as well. So make sure you get a notebook, get a cup of coffee, get a pen and prepare to sit down and take some good notes. And you will find a lot of golden nuggets within it. As long as you watched the entire webinar. And once you watch the entire webinar, if you do want to join the full program, investing in accelerator, then you can schedule a call with me and we'll have a 45 minute chat to see if you're a good fit for the program. So that is pretty much it. Thank you for watching.


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About the author 

Eric Seto

Investor, CPA (Canada) based in Hong Kong and Vancouver

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