The transcript from this week’s MIB: WSJ’s Greg Zuckerman on Simon’s Renaissance Technologies, is below.
You can stream/download the full conversation, including the podcast extras on Apple iTunes, Overcast, Spotify, Google, Bloomberg, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.
VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have a special guest. His name is Greg Zuckerman. He is a reporter for “The Wall Street Journal” and author of numerous books. The one we spend the better part of two hours discussing is “The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution.” If you are at all interested in so many things, Renaissance Technologies and Jim Simons, quantitative investing, hedge funds, how difficult it is to beat the market and how astonishing the performance of Renaissance Technologies has been, let me tease you a little bit, 30 years, 66 percent a year.
That is just mind blowing. Nobody in the universe comes close. There isn’t anybody who does half of that. That’s what makes this so just completely mind boggling. They are absolutely a unique entity. You will find this to be an absolutely fascinating conversation. I really enjoyed the book. I plowed through it in a day and a half on the beach over the holiday weekend and it’s not out until November 5th. So, by the time you’re hearing this, it will be available for preorder.
All I can say is I enjoyed the book and I had a fascinating conversation with Greg, and I’m sure you will enjoy it. So, with no further ado, my conversation with Greg Zuckerman.
VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My extra special guest this week, I’ve been looking forward to this conversation for a long time, Greg Zuckerman, “Wall Street Journal” reporter and author, two time winner of the Gerald Loeb Award for outstanding business reporting. He is the author of “The Frackers: The Outrageous Inside Story of the New billionaire Wildcatters” and “The Greatest Trade Ever: How John Paulson Defied Wall Street and Made History.” But his newest and most fascinating book is Jim Simons, “The Man Who Solved the Markets and Launched a Quant Revolution.” Greg Zuckerman, welcome to Bloomberg.
GREG ZUCKERMAN, WRITER, THE WALL STREET JOURNAL: Great to be here.
RITHOLTZ: I think I’ve sort of retitled the book for you. So, I’m fascinated by Jim Simons ever since I was a high school student applying to Stony Brook Math department where he turned out to be the Chairman. That plus 60 percent annual returns for 30 years, those are just astonishing numbers. What was it that made you decide to write a book about the most reclusive hedge fund manager ever?
ZUCKERMAN: So, I’ve always wanted to. He sort of — if you’re a financial journalist and I focus on the buy side to a large extent, there’s no one more impressive.
RITHOLTZ: He’s the white whale, isn’t he?
ZUCKERMAN: He is the white whale and, yes, he’s also got this mystique about him partly because they’re such a secretive firm. Others have tried. That was part of the allure as well that others had reached out to him, he didn’t want to work with them. I myself had tried, he didn’t want to cooperate for whatever reason that created an added level of mystique and allure for me. So, I took the challenge on.
RITHOLTZ: So, in pursuit of this, you spoke to over 40 current and former Renaissance employees. What was that like?
ZUCKERMAN: Well, early on, it was quite difficult. No one wanted to talk to me. They …
RITHOLTZ: And why was that? I know there’s a little bit of paperwork involved as to why some people were hesitant to speak with you.
ZUCKERMAN: Right. So, Jim Simons and his colleagues at the firm have everyone signed 40-page nondisclosures, non-competes and they’re serious about them. I was warned early on, don’t waste your time, Greg, both by people internally, people that used to work there. Simons himself said he wouldn’t talk to me. It got worse than that. Simons started telling people, I wanted to talk to not just talk to me, not to cooperate with me.
RITHOLTZ: In other words, you would set up a conversation with someone and he would get wind of it and quash it.
ZUCKERMAN: Yes. I had meeting set up with senior people in the industry in the quant world, billionaires who you wouldn’t think would care what Jim Simons would think. These are rivals of Renaissance.
ZUCKERMAN: And yet, right before we were supposed to sit down, they said, sorry, I can’t talk to you, Greg. Jim asked me not to.
RITHOLTZ: Nobody talks about the family. As you described, he’s very …
ZUCKERMAN: It’s very much like the Mafi. Right. Yes, we’re competing but still there are things you don’t do and one thing you don’t do in the quant world is get Jim Simons upset. So, here I was being told don’t waste your time, Simons isn’t going to work with you, I’m not going to work with you because Jim asked me not to. I had — I literally had my advance, not insignificant advance from my publisher on my desk in my basement in my home in suburban New Jersey and I wouldn’t cash it because I wanted the ability to hand it back.
RITHOLTZ: Because you were concerned you wouldn’t be able to get anything done without any cooperation.
ZUCKERMAN: Right. You can talk to my wife. She does — she can give you that kind of conversations where I was whining and complaining and just frustrated and concerned that I wouldn’t be able to pull this thing off. And at one point, the accounting department from paying one, they were like what did you do with that check.
RITHOLTZ: Why hasn’t this check lift?
ZUCKERMAN: Somethings wrong because what author doesn’t cash a check. We don’t do so well.
RITHOLTZ: What was the turning point where you felt, no, I’m starting to at least get a little traction with these guys?
ZUCKERMAN: Right. So, I went out to California and I spoke to some former colleagues of Simons who worked with Jim back in the day, back in the ’80s and ’90s and …
RITHOLTZ: Early days.
ZUCKERMAN: Right. And their story was just too fascinating not to do the book and too compelling. I mean, these are interesting characters. As a writer, you look for just colorful, intriguing individuals, characters that you could write about and then you couldn’t do better than these people. They were temperamental. They were high strung. They were fascinating. They were smart. They’d accomplished all kinds of things in academia and then they took on this challenge of trying to conquer the markets.
And there were all kinds of intrigue that I wasn’t really aware of behind the scenes, anger, fights, disputes, screaming matches, things that when you think of a quant and mathematicians, maybe just I did, I didn’t really think they led like …
ZUCKERMAN: Yes. Exactly.
RITHOLTZ: Like sort of detached deliberative scientific.
ZUCKERMAN: Right. So, when I learned about the early story of Renaissance and it’s quite fascinating, I said, you know what, how do I not write this book. It was a bit of a leap. So, I had the early part. But then what would I do about the middle and the later parts where people — there weren’t as many people who had retired who were academics …
ZUCKERMAN: … who might speak to me. These are more recent types of individuals, some are still there. I had to work — I had to somehow get them to talk.
RITHOLTZ: So, what was the turning point? When did you start to have these folks speak with you?
ZUCKERMAN: When I — I got a good sense for the story. I got some people who worked there to open up to me and why they spoke to me, as a writer, you’re never hundred percent sure. I believe that good stories want to come out.
ZUCKERMAN: And this is a great story. This is …
ZUCKERMAN: … the greatest financial investor in modern history. Jim Simons’ firm is the most impressive moneymaking operation in Wall Street history. So, some of them were proud and some of them actually wanted to share and talk to the extent that they could. They kind of wouldn’t tell me usually …
RITHOLTZ: No secret sauce came out.
ZUCKERMAN: Well, it leaked out. So, here and there, that’s my job as a writer, you get a little snippet. They dropped a little crumb here and there. It’s my job to kind of put it together into something of a loafer, at least they’re half a loafer for the readers. So, they gave me enough to give me encouragement. Yes, they weren’t laying out all the algorithms for me, not that I wouldn’t understand them anyway. When I finally — so, then I finally got Simons to speak.
RITHOLTZ: So, discuss that because for the longest time he said no, I want nothing to do with this, I’ll never going to speak to you. How did you finally get him to sit down with you and how long did you talk him for?
ZUCKERMAN: So, we had and still have a complicated relationship. He didn’t want the book to be read and he still, as of a few months ago, asked do we — do I really have to write this book. Part of it is the guy makes $1.5 billion, hardly go into the office and doesn’t want to rock the boat.
These are hardworking individuals, scientists he’s hired or helped hired or have joined subsequently and he doesn’t want to get them angry. He’s generally a pretty good guy and here they are working slaving away and if the guy making $1.5 billion half is telling secrets, they wouldn’t be thrilled with him.
So, he didn’t really want this book being told and — but at some point, he got the message that I wasn’t going away and he realized I was doing serious research. So, I was talking to academics he worked with back in the day, codebreakers, he’s got this really rich fascinating life even before he got to Renaissance.
If he never started Renaissance, if he never even invested, he’d still be …
ZUCKERMAN: … it would be ample opportunity to write a book, there would be reason to write about him. So, I think when he started hearing from these 70 and 80-year-old academics from Princeton and other kinds of places that he worked with back in the ’70s and in the ’60s even, he got the message I wasn’t going away and I think he realized, well, better to talk to Zuckerman than not share any perspective in a book about him and his firm.
RITHOLTZ: The joke I used to hear from people who had reluctant interviewees and other books was, well, who do you want to shape the story, do you want to shape the narrative or do you want to let your competitors and enemies shape the narrative.
ZUCKERMAN: Right. And that’s a lot of my approach in my day-to-day writing at the “Wall Street Journal.” I call it the haircut approach. I’m going to give you a haircut. You can sit still or you can move around but I’m going to give you a haircut.
And it’s not to say that it’s a threat in any way. It’s being …
RITHOLTZ: It’s just honest.
ZUCKERMAN: Right. It’s a little blunt but yes. And Simons realized that there’s something to be said for working with me, but I do want to make it clear that he wouldn’t share inside secrets, secret sauce as you describe it. So, I do want to suggest that he kind of open the kimono. That was still difficult to the end.
So, it was — we sat down together multiple times …
RITHOLTZ: For how many hours did you talk to him?
ZUCKERMAN: Add it all up, it was over 10 hours.
RITHOLTZ: That’s a lot of Jim Simons FaceTime.
ZUCKERMAN: It was a lot of time and the topics ranged. It included his recent life which is also quite interesting where he’s trying to do an autism research, science education, subsidizing teachers around the city of New York City, politics a little bit too. He’s a big funder of Democratic causes and candidates.
So, the topics ranged. He was generous with his time and regarding with some of those subjects, his early life and his mathematics. A guy like me needed help understanding. So, I appreciate the help he gave me there. And in terms of …
RITHOLTZ: Are you saying Jim Simons tutored you in mathematics?
ZUCKERMAN: To some extent, yes. He was quite helpful because I — listen, I had a lot of people helping me.
RITHOLTZ: But he is a professor at heart and I could see him — even though he is objecting to your purpose, I could see him kind of saying, no, no, let me explain the math here and bring you along.
ZUCKERMAN: Right. And part of his — and I’ve learned this, something about mathematicians, little mistakes really bother them much more than they do me or people that come from a different perspective.
So, I think it would have just bothered him had there been significant errors in the book be in regard to his early life, other parts of his life and I get that. I would send small sections — we don’t send large sections but small sections to various top mathematicians and they would get angry. Greg, this is all wrong, how can you write this, it’s overstated, it’s wrong, you got to change a thing. You’re taken aback — early on, I was taken aback.
ZUCKERMAN: Eventually, I learned not to be. And then you drill into it and, I don’t know, they’re — five percent was wrong but those — that five percent really bothers them. So, I got that. So, I think if you’re Jim Simons, this guy is writing a 350-page book about you and your life, if they were glaring dumb errors, it would have bothered him.
RITHOLTZ: It really would upset him off. Let’s talk a little bit about the book and what’s revealed in it. I’ve kind of been Jim Simons groupie for a few decades. I think I know about everything that was public about him and Renaissance Technologies and work there and their approaches.
But I found the book filled with so many surprises and so many unknown things in the past. Tell us what you thought was the most surprising thing you learned and how much of this is fresh new information that was never publicly known before.
ZUCKERMAN: Sure. So, I’ve read everything that’s been written about Jim and his firm. I’ve watched every interview on YouTube. There are few here and there. And I would say about 90 percent of what’s in my book is fresh and new.
RITHOLTZ: I think that’s about right. I felt like almost everything like every now and then, I would recognize something, I kind of knew that, but every page was a new revelation that was something previously unknown to me.
ZUCKERMAN: And as a writer, that’s sort of why I did it to learn. I didn’t know enough about this world and about Jim and each of these characters is potentially a book in their own right. There’s so many — I think that was one surprise. There’s so many rich characters at the firm. It’s not sort of Jim and OK, you hear about Mercer and Peter Brown.
Time after time, I ran into fascinating accomplished, quirky, colorful characters and the other surprise is how hard it is to be a quant. So, you think of these guys are mathematicians, they’re scientists. You would think that instinctively, they would want to pursue a quantitative approach, the scientific
Method, that’s where they come from.
And yet, from the beginning, from Simons and his early colleague guys like Lenny Baum, Jim Ax, Elwyn Berlekamp and others, you see that they’re fighting their instinct and really their instinct is just kind of just trade like you and I do. Just sort of look at the news and anticipate where the world is going and the markets are going and they sometimes fall back into that pattern even they.
RITHOLTZ: That was shocking. The early parts of the book described Jim Simons as the derogatory term I used, he’s a macro tourist. He’s like every day trader watching TV, looking for news, trading in and out of stuff, doing good some days, losing money the other days but there’s nothing special or unique about that. He was every newbie trader, wasn’t he?
ZUCKERMAN: Listen, he had unique approached, what he thought were unique approaches. I get into them. At one point, he consulted with this early economist named Alan Greenspan and they had different ways, they thought they had an edge. But, no, they didn’t have an edge.
Not only that but it’s tore him up inside. It made literally — physically made him ill that he’d come into the office just unsure of himself. Some days up, some days down. They made a lot of money at one point. The name gave back a lot of money. They were falling out with different types of people.
But it’s not just early days. Even last year, end of last year, the market is imploding as we recall and …
RITHOLTZ: Down 20 percent Q4 of 2018.
ZUCKERMAN: Exactly. Jim Simons, and I write the story, I told this anecdote in the book, he’s on vacation on his huge ship somewhere and he starts panicking about the market and he calls his wealth manager, the guys managing his — I mean, Jim Simons were $23 billion which is quite the portfolio and he’s like, maybe we should be buying some insurance here. That’s like panicking and the market is down, hey, should I be selling.
RITHOLTZ: Down 20 percent like that’s a big deal. I guess when it’s $23 billion, it is a big deal.
ZUCKERMAN: It is. But he’s a guy who made his $23 billion on the scientific approach not on testing ideas and having systematic approach to investing, not on these narratives and nervousness and reacting, all these behavioral mistakes that we all make, he was about to make, too.
So, even an 80-year-old, the genius, the guy who solved the market as I call it, he is apt to trade like everybody else and the point being, it’s not easy being a quant. You have to fight your instincts to some extent even when you’re a scientist and a mathematician.
RITHOLTZ: So, let’s talk about that a sec. In the early days when Renaissance was starting to become who they eventually become, their big secret, they were really big data before big data was a thing. Before CRSP or Reuters or Dow Jones or Bloomberg made commercial database of market prices available, they were effectively assembling their own. That was fairly unique, wasn’t it?
ZUCKERMAN: That’s exactly right and that was one of the early edges and frankly, they were collecting data when no one cared about it. No one saw a need for it. This is pre-Bloomberg, pre-everything else. They were going down to the Fed collecting obscure pieces of data economic and other. They were going back in history.
So, it was several years later but they were collecting stuff from like the late 1800s and it didn’t really have a purpose for a lot of that data at that time. They had this instinct that maybe it was because they were scientists that the more data, the better and any kind of data could be helpful and maybe not right now but at some point down the road.
And yet, that gave them a complete advantage because then they could test and create models. They can do scenarios that others couldn’t. And the way I liken it is to a little bit like if you want to create a library, how long would it take you? OK. Like you’re a public library, you’re a local library, probably take you, I don’t know, a few months to collect all the books.
But what if you wanted to create a Library of Congress. It would be pretty impossible. Some of that stuff, you just can’t get your hands and that’s what Renaissance still has today and it does help them.
RITHOLTZ: So, the cost of building that database and they were fastidious about making sure the data was clean and up to date and accurate, how to be substantial. The typical hedge fund charges two and 20, two percent management fee, 20 percent of the profits.
But Simons thought the cost of the database needs to be passed along to investors. So, instead of charging two and 20, he charged, brace yourself, five and 44. Who the hell would pay that sort of fee?
ZUCKERMAN: When you’re making a lot of money and LP will pay that kind of fee and they did.
RITHOLTZ: So, their returns, which for the first time ever, have been released because it’s always been a rumor, you’re Appendix 1 or Appendix B, I don’t remember which, the end of the book, you note since 1988, the Medallion has averaged annual returns of 66 percent but that’s before those five and 36 or five and 44 fees. Afterwards, it’s only 39.1 percent a year for 30 years. Those are just eye-popping astonishing returns.
ZUCKERMAN: Right. And, right, as you suggest, you will pay for those kind of returns, you pay almost any fee. They kept raising the fees partly to discourage investors from sticking in the fund and eventually they kicked out all the investors. So, that’s part of their secret, too, that they kept it. They kept Medallion as …
RITHOLTZ: Because they realized it couldn’t return the sort of numbers beyond, what is it, $7 billion or $8 billion, something like that.
ZUCKERMAN: Seven or eight billion a year. So, you got to give Jim Simons all kinds of credit and his colleagues and they are the greatest modern-day investors in history. But you also want to know that they didn’t — they weren’t able to grow — they knew they couldn’t grow it beyond what is right now. We’re talking about the Medallion fund $10 billion.
So, it’s not like they kept growing it to $50 billion or $100 billion. They knew they could not get those kinds of returns.
RITHOLTZ: And they currently keep the Medallion funds or actually it’s been that way for 15, 20 years, is that about right, for just Simons and the employees of Renaissance.
ZUCKERMAN: Right, which is a wonderful way of keeping talents.
RITHOLTZ: Recruiting and retention.
ZUCKERMAN: Yes. You really have to pay people there. I mean, they do pay nicely. But just the ability to invest in Medallion retains top talent. It also makes them so wealthy quite frankly that a lot of these guys when they leave and the few women there working, when they leave, they’re not going to another Wall Street firm, they made so much money, they’re doing philanthropy, they’re going back to academia, other interesting things.
So, it’s a great way to retain talent and it’s also a great way to make sure people aren’t going to quit and start rivals.
RITHOLTZ: So, let’s talk a little bit about one of the most significant people in the book other than Jim Simons and that would be Bob Mercer. He — by the time he joins Renaissance, Simons has figured out how to trade bonds, how to trade currencies, how to trade commodities, but he hasn’t cracked equities.
So, Renaissance is a small unimportant firm generating some nice returns, helping to make Simons conventionally rich, not a billionaire but rich, but Mercer comes along. How important is he to the Renaissance story?
ZUCKERMAN: That’s exactly right. So, around 1994, Renaissance was an OK middling kind of firm respected by those who knew it. Most people had no clue who they were. They were doing nicely as you suggest in commodities and currencies futures, but couldn’t make it happen in equities.
And for some of the people internally, that was fine. They were getting wealthy. Who cares?
RITHOLTZ: But no scale, no influence, no — they don’t leave a mark on Wall Street.
ZUCKERMAN: And that’s what Simons want. He wants to leave a mark on the world broadly and make a lot of money, use that money, and he couldn’t do that unless they could crack equities because as we know, equities, you can manage much more money in the equity world relative to the other types of world’s fixed-income and commodities, et cetera.
So, they were frustrated and there were budget turning points within the Renaissance story. They almost fell apart a number of times, more than I would have expected. That’s another kind of surprise from my research to where several times where they really — it was touch and go whether they would keep going or not.
So, 1994, there were people within the firm and said, give it up, Jim. Stop trying to figure out equities. And they almost gave it up and then this guy, as you suggest, Bob Mercer came along and Peter Brown, two speech recognition experts from IBM, and they built and improved equities trading system, much improved the engineering, the technology was much better.
They combined all kinds of different signals and factors into one system, which is one of their great advantages, too, as opposed to different models. A lot of difficult quant firms have multiple different models. They have one system and it’s hard to pull it off and that’s what it took somebody like Bob Mercer to figure that out.
RITHOLTZ: So, one of the things we haven’t talked about, it would be important to bring this up, Simons isn’t recruiting people from Wall Street. He’s not rating Morgan Stanley or Goldman Sachs.
He’s rating the IBM Watson team. He’s rating academic math and computer science and physics department. He’s taking former NSA codebreakers and hiring them. This is not the usual team of Wall Street whiz kids. These are really brilliant scientists, academicians, and others but no one is coming out of lower Manhattan. They’re really a different caught, aren’t they?
ZUCKERMAN: Barry, that speaks to the paradox of the whole Jim Simons and Renaissance story. The very people who figured out the market and conquered the market are pretty much the last people you would have expected because they are people that didn’t know anything about the market.
It’s about — they didn’t know a lot of investing. Not only that, some of them weren’t even capitalists internally when you talk to them.
RITHOLTZ: Right. So, let’s stick with that.
RITHOLTZ: We’ll come back to the academic nature. I’m kind of fascinated by Bob Mercer. The juxtaposition with him is here’s a guy who, by all measures, brilliance, rational, completely mellow and even-tempered, just a data-driven mathematician professionally but then I guess that’s his Dr. Jekyll but the Mr. Hyde is his personality.
When it comes to his personal politics, it’s the polar opposite. He’s a wild-eyed conspiracy theorist. He trolls the other Renaissance technology employees. Simons is a big Democrat. A lot of the other academics at Renaissance are certainly left of center, if not, Democrats or even further left. How does Bob Mercer play in that environment?
ZUCKERMAN: Yes. So, Bob Mercer is a scientist who demanded internally that everyone stick to the scientific method and it’s a data-driven firm. Everything has to be approved. There’s no …
RITHOLTZ: All evidence based.
ZUCKERMAN: There’s no intuition. Exactly. And yet, as you suggest, when it comes to his personal beliefs, he believes every insane conspiracy theory out there. It’s so shocking compared to who he is professionally.
RITHOLTZ: What I’m really trying to emphasize is how different personally his beliefs are. Yes, I mean …
RITHOLTZ: … everything he argues against doing professionally, he does personal.
RITHOLTZ: It seems just so odd.
ZUCKERMAN: He demands proof when it comes to work and not so much outside of work. I mean, for a long time, he was treated as a curiosity within Renaissance. He’s going to the lunchroom, get under people’s skin by talking — by sharing some of these conspiracy theories about Hillary or somebody else and people weren’t sure internally whether he really believed in it or not. He was the boss. They don’t want to challenge him too much.
So, for a while, they didn’t take him seriously. They didn’t think they needed to. And then lo and behold, as he — as the firm grew and he became a multibillionaire, they realized that he was funding all kinds of causes that many people, if not, most people at Renaissance are really uncomfortable with, unhappy about and they were stuck, they don’t know what to do.
We’re talking about everything from Brexit. He was helpful in terms of Brexit. Breitbart, he was funding Breitbart and then, he got behind the Trump campaign. He is the one who put Kellyanne Conway and Steve Bannon in the Trump campaign. And one can argue and people have said that there may not be a Trump presidency where it not to this guy Bob Mercer which made everyone internally uncomfortable.
RITHOLTZ: And let’s set the stage for that. It’s August of 2016, the Trump campaign is in the midst of imploding. There had been a series of scandals back when scandals actually resonated.
The whole access, Hollywood tape comes out. I mean, the Trump campaign was circling the drain before Robert Mercer stepped in with a few hand-picked people and a little bit of cash.
ZUCKERMAN: Right. So, what happened was Bob Mercer’s daughter Rebekah Mercer who kind of runs the political side of things in the family, she ran up to Trump at an event, a campaign event, and say, you better turn things around or else we’re done and Trump …
RITHOLTZ: Had they been funding him financially?
ZUCKERMAN: Yes. First, they were Cruz, they’re backing Ted Cruz and they — after a lunch between Ivanka and Rebekah Mercer, the Mercer switched gears and also Cruz lost, he got out of the race. Then they switched gears. They became one of the top funders. I think they eventually got the top funder for Trump.
So, Rebekah Mercer runs up to Donald Trump at an event says, you were going to lose unless you drastically change things and Trump kind of acknowledges like, yes, what do I do. And Rebekah said, you’ve got to work with this guy Steve Bannon. So, Steve — and Trump was like, all right, I’ll meet with him.
So, Steve Bannon goes out to the country club in New Jersey to talk to Trump, has to wait through, Trump goes through a couple hot dogs, ice cream sundae, plays golf and Bannon is waiting and waiting. And finally, he gets an audience with Trump and he lays out strategically what he should be doing and Trump listens to him to his credit and the rest is history.
So, if were not for Rebekah Mercer and Bob Mercer, it’s not clear Trump would have won.
RITHOLTZ: I can’t get a good read on Rebekah Mercer in the book. She’s really very minor character relative to all these other scientists. Who is she and what was she doing before the election?
ZUCKERMAN: So, Rebekah Mercer like her father is very conservative. Rebekah homeschools her children and believes in small government, low taxation, hates the Clintons like Bob Mercer. But they also believe in data and they also believe in the fact that they get really frustrated with mainstream Republicans and they didn’t think anybody was going to shake things up like they thought it should be shaken up.
And frankly, as an outsider, as a writer, I look at these two people and I see two people that never really contributed to broader society. It sounds like they volunteered their time to do something to run, to support, to fund broader society.
Bob Mercer spent his whole life trying to make money. He was first trying to do science and then …
ZUCKERMAN: … trying to do — to make money. There’s nothing wrong with that. But then all of a sudden, he becomes — he and his daughter become the ones who really have such a remarkable shift on society, on you and I. I find that a little distasteful frankly.
RITHOLTZ: Now, weren’t they though on a bunch of philanthropic boards, in Museum of Natural History in New York and elsewhere, they had to be throwing some money around.
ZUCKERMAN: Yes. That was …
RITHOLTZ: So, that’s pre-election though, wasn’t it?
ZUCKERMAN: it’s a good question. When did they on a board, let me come back to that.
RITHOLTZ: Because it was only after the election that the pressure started coming up to …
RITHOLTZ: Wait, he’s a climate denialist and he’s on the board of the National Museum of Natural History.
ZUCKERMAN: She was.
RITHOLTZ: She is. Right.
RITHOLTZ: Is she on — am I confusing who’s on which board?
ZUCKERMAN: Rebekah was on the board of Natural …
RITHOLTZ: Museum of Natural History in New York.
] Museum of Natural History.
RITHOLTZ: But she’s also a climate denialist.
ZUCKERMAN: Yes. Bob Mercer is a climate denialist. They — he believes that nuclear war may not be as harmful as we all believe.
RITHOLTZ: No one should get past the radioactive cloud. It’s really not that bad.
ZUCKERMAN: I mean, that’s the argument. There you go. Again, not based on science.
ZUCKERMAN: There’s like this stray — he picked up on some stray — he sees …
RITHOLTZ: I’m getting sarcastic obviously.
ZUCKERMAN: Yes. He sees on a stray scientific paper that was since discredited …
ZUCKERMAN: … which is, again, goes back to the irony that a guy who demands science when it comes to his day-to-day work, when it comes to his personal outside interests, he’s less demanding.
RITHOLTZ: And then the other question that’s so interesting is how was Robert Mercer forced to step down as CEO at Renaissance Technologies and what is his role currently?
ZUCKERMAN: So, Bob Mercer was at Renaissance throughout the campaign, through the election, and many internally were unhappy about that, but not everyone. Others thought he was a good leader. He forms a really impressive partnership with a guy named Peter Brown.
Peter Brown is tempestuous. He’s always got crazy interesting ideas. Some works, some don’t. And Bob Mercer was the calm one. They were the Yin and Yang and they worked really well together.
So, internally, some people were like, what do we do here? Our CEO is still doing a great job. We’re still making 60 percent a year in the market.
RITHOLTZ: But for the destroying democracy thing, he’s fantastic.
ZUCKERMAN: And broader society potentially. And even Jim Simons was torn. So, Jim Simons was the largest — one of the largest funders of Hillary Clinton.
ZUCKERMAN: And his top employee, Bob Mercer, was the top funder for Donald Trump. So, he was in a bind, Jim Simons. He couldn’t fire his employee for his political beliefs and he also liked him. He likes him on an individual basis.
RITHOLTZ: And to Simons’ credit, he says in the book, who am I to tell him how to spend his own money. It’s not my decision.
ZUCKERMAN: Exactly. And many were torn internally. But it got to the point where morale was being affected and they were worried about their ability to recruit and that’s the lifeblood for that — of that place.
RITHOLTZ: What about outside investors? A lot of big institutions are not especially happy with Trump. How were they dealing with Bob Mercer as CEO of Renaissance?
ZUCKERMAN: So, by then, they had started a few outside hedge funds for institutions and others. They still had the Medallion, which is only for internal employees. But, right, by the time of the election, they had outside investors and many were unhappy. But that said, the returns were still really good.
So, it wasn’t clear to me that how many were really going to pull out over Bob Mercer’s politics. The bigger issue is that they were worried about their ability to keep attracting talent and that’s what they worry about.
ZUCKERMAN: That is their biggest concern because they’re not competing necessarily with PDT and Two Sigma only. They’re also competing with Google and Facebook. These are scientists who …
ZUCKERMAN: … could go work somewhere else and they were concerned about their ability to keep recruiting them. And at some point, Jim Simons said, Bob, we’ve got to talk, and I talked about that scene. I described the scene in the book.
And it was difficult for both of them. Bob Mercer was effectively told to step down and Jim Simons was telling his old friend who helped make him a multibillionaire that he could no longer help run the firm.
RITHOLTZ: The secret sauce, if anything, is that ability to attract incredible talent from all manner of academia and technology and science, isn’t it?
ZUCKERMAN: They have a lot of sauces and they are secret and impressive. The collaborative — they’re much more collaborative than most firms. They don’t try to predict where the market is going.
It’s all relationships, it’s groups of stocks versus groups of stocks, 4,000 or so long, 4,000 or so short. They have many. But among — the most impressive things about that firm is they still can recruit almost anyone for any area and they get superstars from academia and other places.
RITHOLTZ: Quite fascinating. One of the things I found so fascinating from the book that I did not previously put together in my head but should have but the book made it clear, Jim Simons is really an outstanding builder of teams.
He was deputy director at the subdivision of the National Security Agency code group. I’m drawing a blank on their name.
ZUCKERMAN: CRD it was called at that time.
RITHOLTZ: CRD. Then at Stony Brook, he takes what was essentially a modest state school in New York, builds into a powerhouse mathematics department like a world-class math department filled with Nobel laureates and others. And then at Renaissance, he builds another spectacular team. Is it fair to describe him as an architect more than anything?
ZUCKERMAN: I think that’s fair. So, listen, Jim Simons has his faults. He’s not a perfect individual. But he’s quite impressive in his ability to both do the math and the science and when he wants to ease (ph) so he can do the algorithms.
But more importantly, his ability to manage talents and someone internally said to me, Greg, it’s not he’s genius but his ability to manage genius.
RITHOLTZ: Which is not easy to do.
ZUCKERMAN: It’s really not easy. When you think about these really quirky personalities which really jumps out at you I think when you read the book, how many unusual odd, headstrong, stubborn top scientists they’ve hired and they’re pretty wealthy, they could leave and go somewhere else and he was able to create this incentive for them to stay and work together, not just stay there but they work together.
And like you suggest, you can see that pattern early on his career. He was great as a department chair by keeping people happy, all the different personalities, same kind of thing where you can’t really force someone as a professor to do what you like them to do. You got to create incentives and that’s exactly what is done at Renaissance. And I think in some way, you could learn management skills from him as much as you can learn how to create algorithms.
RITHOLTZ: So, one of the interesting parts of the development of Renaissance was what took place in the mid-90s. So, he is — Mercer and Brown, Peter Brown, are working on the equities portion and they’re not making a whole lot of progress.
It’s expensive, it’s time consuming and it’s simply not delivering the sort of returns that everybody has hoped for. And so, in ’95, Simons says to Brown and Mercer, quote, “get your system to work in the next six months or I’m pulling the plug” unquote. How close was the entire equities portion of Renaissance to never becoming what it became?
ZUCKERMAN: It was very close and one has to also recall or remember or note that Jim Simons had remarkable patience. So, he has this optimism that most people don’t share. He encourages his people.
People were giving up internally about trying to figure out equities. People were saying it’s a waste of our resources, stop distracting us, and Simons kept encouraging his team. And yet, as you know, even he was at his wit’s end and ready to move on and gave his employees and staff, Bob Mercer and Peter Brown, a matter of months to figure it out because they had tried and failed over and over again.
And there was a quirk, there was …
RITHOLTZ: There was an error in the code.
ZUCKERMAN: There was an error in the code that a guy named David Magerman who’s a colorful individual …
RITHOLTZ: You have to tell — so, let’s — I was fascinated by that part of the book. So, everything seems to make sense abstractly but it’s losing money, it’s not making money. And one day, one of the more junior guys decides to literally go through the algorithms through the actual lines of code, line by line by line by line, and ultimately finds an error where one of the S&P prices is fixed, meaning it’s supposed to update automatically and it doesn’t. It’s an entry number instead of a variable that pulls the data inaccurately.
ZUCKERMAN: That’s exactly right. So, this guy David Magerman was — had just been hired a few years earlier from IBM. Early on, he got some — he had some accomplishments and got some respect internally. But then he blew it.
He made a series of dome errors, mistakes. Basically, he was doing things he shouldn’t be doing. At one point, he almost pulled the plug in the whole system. It was embarrassing. He was embarrassed. He was close to getting really getting pushed out of there and he’s the one who said, you know what, maybe I can look at this system and find what the bug is.
And as you suggest, it was static. It wasn’t updating. The system wasn’t updating, incorporating the newest S&P 500 prices, which is sort of a surprise in itself. You think of these top giants in science. They shouldn’t have made this kind of dumb mistake and yet they did.
RITHOLTZ: There’s thousands of lines of codes. Mistakes happen, right?
ZUCKERMAN: Yes. But you think of Renaissance and Medallion and Jim Simons and who are they — they’re like you and I or they’re not like me.
RITHOLTZ: This was before they became Renaissance. This was really when they were also ran (ph).
ZUCKERMAN: Yes. But it also is a reminder that even the giants make dumb errors, too.
RITHOLTZ: Are fallible, it’s true.
ZUCKERMAN: Right. And, yes, so, Magerman picked up on the mistake internally. He finally got some respect because he brought it over to Bob Mercer and it was Mercer’s math. He kind of got it wrong and he kind of — took his credit by Mercer. There’s some appealing aspects to his personality as well.
He owned up to it and said, yes, I screwed this up. Let’s fix it. And they’re off to the races.
RITHOLTZ: And literally, as soon as that’s fixed, the thing becomes a money printing machine.
ZUCKERMAN: Yes. It’s remarkable. It went from managing Medallion that was about $800 million or so at that time and equities was like $30 million, $40 million to $10 billion of the greatest hedge fund in mankind modern financial history. So, it was a small tiny error that he picked up on and the rest is history.
RITHOLTZ: So, other firms that are on the quant space like D.E. Shaw, they had a big head start over Renaissance. What was it about Jim Simons that allowed him to catch up to people like David Shaw?
ZUCKERMAN: There are a lot of things. They do better. Renaissance does a lot of things better than everybody else. There’s a certain urgency within the firm that you feel when you’re there and you talk to people that you don’t really necessarily get elsewhere.
There’s a collaboration that you see internally, one model that other firms don’t share. There’s a sense of humility. They don’t take too much risk. They pulled back risks during crisis when things are — even the time when people are saying it has to put on more risks, they’re generally speaking pullback.
They use leverage. The use heavy leverage. People don’t really focus on how much leverage but they are 10-billion fund that can get over a hundred billion dollars when they see the opportunities. I can go on and on. They really have the best trading ability to see what their impact on the overall market is.
RITHOLTZ: Meaning, they have the ability to execute trades without moving prices.
ZUCKERMAN: That and they know when there moving the prices and when they won’t so they can play with their signals and try to make them — and try to make sure their activity isn’t picked up on by rivals. They have some signals that they are internally are proud of and think people aren’t aware of.
And they’re sophisticated upwards (ph). These are mathematical relationships and it’s one thing that I think everyone should realize that it’s not like they’ve got some secret sauce about when IBM goes up every day. These are mathematical relationships between groups of stocks in any relationship to indexes, relationships to each other, relationships to factors.
It’s complex complicated stuff but they have certain unique insights that others don’t. It’s just like seeing the world just a little bit with a better — with glasses when everybody else isn’t wearing and they can see things that others can’t.
RITHOLTZ: Quite interesting. There’s a quote from one of the researchers, am I pronouncing this right, Penavick (ph)?
RITHOLTZ: I love this quote, quote, “Our entire premise was that human actors will react the way humans did in the past and we have learned to take advantage of that.” How much of that is reflected in their algorithms?
ZUCKERMAN: Yes. So, almost all of what they do is based on predictive models that incorporate historic returns, historic moves in the market and they could be recent returns, they could be from the late 1800s. They don’t usually use those but they’re there if they want them to.
So, they’ve got the better data and it’s cleaner than other people and they were cleaning it way before anybody else and they cared about this stuff more. But right, the genius of Renaissance is that we, as investors, our behavior is somewhat repetitive and maybe it rhymes.
Now, it’s not clear going forward whether that will continue. So, things have changed. We’ve got — as we all know, passive investing is dominating the market. Active investors don’t play the same role, factor investing, et cetera.
So, will Medallion’s models, will Renaissance’s models continue to trounce the market? Even internally, they’re not 100 percent sure.
RITHOLTZ: And most of what they’re doing, they’re not high-frequency traders, they’re not long-term investors but they’ll buy and sell almost a pair traded in groups of stocks and hold it for days or weeks. That’s pretty typical.
ZUCKERMAN: That’s a good way to look at it. Generally speaking, on average, it’s about a two-day holding period but they’ll get two weeks, too. They’ll do fast trading. They’ll do what looks like high frequency but really isn’t in that they’re doing that usually to break up their trades. So, they’re doing a rapid fire within seconds …
RITHOLTZ: But they’re not in and out necessarily.
ZUCKERMAN: No. They’re not flash boys. They’re medium frequency as what people call it in the industry. They — frankly, their technology is good but it’s not great.
You would think they would have the best of everything and they sort of poke fun at each other internally that they’ve got good technology but it’s not cutting edge necessarily. They’re not co-locating and all that kind of stuff.
RITHOLTZ: Well, they don’t have to though. They’re not sniffing out other trades and front running them. They’re executing their own strategies.
ZUCKERMAN: That’s exactly right. So, people do get them confused with kind of the flash boys. But, yes, generally speaking, it’s about two days or so as the holding period.
RITHOLTZ: And we talked about in the early days Jim Simons was sort of a macro tourist. He still occasionally overrides the system. Tell us about when that happens and why does he think his flawed human instinctual judgment is better than the system.
ZUCKERMAN: It is unusual, a little bit surprisingly. They generally speaking never override their models and they take pride …
RITHOLTZ: But we can’t say never, can we?
ZUCKERMAN: Generally speaking, exactly. In times of crisis, the firm will pull back when they’re not sure, when they’re worried, and that’s part of that humility. So, they would have this arrogance that our models will survive the LTCM kind of thing.
RITHOLTZ: They’re not John Meriwether and that team at all.
ZUCKERMAN: Right. They get scared like you and I and even though internally, there are people that say, don’t ever mess with the models, people like Simons, he doesn’t run things day to day but in terms of crisis I described in the book, there’s panic — there was panic there like any other kind of trading firm and in those kind of times, he overruled his colleagues and he said, yes, we’ll probably make money here if we stick with our models but I’m worried about surviving.
And if you think about it, they also borrowed a lot of money. So, they’ve got lenders, banks and others, and those banks get nervous if they pull back on them, they’ll all affect things. So, Simons — that’s part of Simons’ genius that, again, he can manage really well, too, and deal with investors and borrowers as well.
RITHOLTZ: How much leverage did they use?
ZUCKERMAN: It depends. It ranges if they’re excited about the market and opportunities and if they’re not. But they could do 10 times or even more. It depends on what the opportunities are.
RITHOLTZ: And 10 times sounds like a lot. A long-term capital management was 100X. The big Wall Street banks in the subprime era were 40X. So, 10X almost sounds modest.
ZUCKERMAN: Also, you got to remember, they’re long and short all the time. Everything is hedged. They’re long, again, about 4,000 and short about 4,000 on average equities.
So, then leveraging up is not like you and I going along Microsoft and leveraging up. It’s different.
RITHOLTZ: It’s pretty balanced and the odds are against anything untoward happening.
ZUCKERMAN: Yes. And the thing to remember about Renaissance is they only get it right barely more than 50 percent of the time and they’re aware of that. So, on the one hand, their Sharpe ratio is crazy great which allows them to leverage up and borrow this money and it’s pretty impressive in its own right.
But also as a reminder, they realized they’re not hitting home runs every single day. It’s like a casino. They’re making small amounts all the time.
RITHOLTZ: Quite interesting. And it sort of laughable today but you listed in the book a number of fairly famous investors and hedge fund managers today who, in the early days of Renaissance, Jim Simons went saying, hey, I’m raising this fund and I’d like to have you be an investor and they pretty much, across the board, said no, left him out of the office. Bruce Kovner, Paul Todor Jones, who else famously said no to Simons?
ZUCKERMAN: So, Donald Sussman is the key one. Donald Sussman is one the most respected investors on Wall Street. He backed D.E. Shaw. He’s backed a lot of famous investors over the years.
And he’s really well impressive guy in his own right, got a great track record and Simons came to him hat in hand in 1990 saying, I think I’ve got it, I think I figured it out, I’d like some backing from you. And it wasn’t that Sussman disagreed, it wasn’t that he was necessarily skeptical of Jim Simons but he already invested in D.E. Shaw.
He didn’t want to invest in a competitor and there wasn’t much of a track record at that point. And 1988 is really when they decided to go all in on quantitative investing using big data, using algorithms as opposed to using some of the instinctive intuition-type trading.
And so, there wasn’t much of a track record in 1990 when Jim Simons went to speak to Donald Sussman. So, you can’t blame him too much. But, yes, he — there were a number of pretty well-respected investors I talked about in the book who had an opportunity to invest in Medallion and passed on it.
RITHOLTZ: And then a few years later or maybe it’s 15 years later, Simons goes to the outside Medallion investors and says, hey, thanks for the capital but here, we’re going to give this back to you. We can’t use it anymore.
A, what was the thinking there and, B, what was the reaction of the investors? They must have been pretty stunt.
ZUCKERMAN: So, they, again, have these remarkable models that allow them to know how much they can make in certain size, how much they impact the market, they’re pretty sophisticated, and they realize that at 10 billion or more, they’re going to really not be able to have those kind of returns.
Now, you and I would probably say, fine, instead of being up 66 percent a year, we’ll be up 35 percent a year and we’ll grow this AUM here and make the money. But, no, they wanted this hedge funds to be just for them and to have this outstanding remarkable return.
So, they proceeded to kick, as you suggest, kick their LPs out, kick their investors out, and they were not happy. They weren’t thrilled. Some of them said, I stuck with you, Jim, through the difficult times and here you are kicking me out, and he kicked out his friends, too. He kicked everybody out.
ZUCKERMAN: And he basically was just …
RITHOLTZ: A little cold.
ZUCKERMAN: Jim Simons is a fascinating guy. He’s a scientist. He cares about society. He’s a huge philanthropist. He does all kinds of really interesting things in education and science. He also really, really loves money and he …
RITHOLTZ: As a tool for what it can do.
ZUCKERMAN: Or just loves it. Let’s not go overboard.
RITHOLTZ: Like for an academic that it comes across …
RITHOLTZ: … that he is much more motivated by accumulating cash than the typical academic.
ZUCKERMAN: My God, there’s no comparison. Quite honestly, he always had one foot in the world of academia, one foot out. He was always doing businesses and quite interesting, I read about him, in the book, he pursued trading and pursued business not full time and they never really worked out completely. But he always had this outside interest.
So, yes, he always really was focused on getting rich and he wanted to change the world with that money but he also just playing like getting wealthy. So, here they were with — staring at the possibility of seeing the return slow down and he said, I’d rather kick out my investors then risk the possibility of our returns dropping.
RITHOLTZ: And you described earlier lots of colorful characters in the book. Simons is really one of the most colorful characters of everybody. He’s chain smoking two packs of merits a day. There’s a hilarious story about a group of institutional investors from a healthcare company that are there for some — just kicking the tires to give Renaissance money and there’s also a birthday cake involved. Tell that story.
ZUCKERMAN: Sure. That’s the Robert Wood Johnson Foundation. They’re dedicated to public health and they came at Renaissance’s Long Island offices to talk about investing in RIEF, that’s one of their outside funds, this was early on when they were raising money for it.
They were impressed. They were having a nice lunch. People around the table, Simons comes in to finish off the sale, everyone was all excited. The salesmen at Renaissance can see their commissions. They can’t imagine who much they’re going to be making from this big investment.
And Simons, as you suggest, is chain smoking. He doesn’t care. He doesn’t care. He smokes …
RITHOLTZ: Always has cigarette in his hand.
RITHOLTZ: One cigarette.
ZUCKERMAN: And he’s also almost 82. So, it hasn’t really impacted his life. So, he’s in this meeting and Simons looks around …
RITHOLTZ: No ashtrays.
ZUCKERMAN: No ashtrays. He’s looking for an ashtray but he needs to ash somewhere and he sees this big fancy cake that had been wheeled in to end the dinner — the lunch and everyone’s going to have a piece of it.
So, he reaches over and he yanks his cigarette deep into that cake and he’s Jim Simons, he just gets up and waves goodbye and that thing is sizzling as he exits the room and everyone just looked at each other and the Renaissance salesmen are just dumbfounded and …
ZUCKERMAN: … have — because they’ve lost their commission. They’re sure. These are — this is the Robert Wood Johnson Foundation dedicated to public health. So, obviously, this guy just ashed in a sizzling vanilla cake right in front of them. They’re not going to write a check. But they did nonetheless.
RITHOLTZ: Returns speak for themselves, right?
RITHOLTZ: And in the book, I was shocked to read this, someone says to Simons, you’re a scientist, don’t you know about the dangers of smoking? What was his response?
ZUCKERMAN: He said to them, it’s not clear if it’s tongue-in-cheek, it probably wasn’t, but he researched his genes and according to his work, his research, he was — he’s one of these unique people that can actually withstand all the chain-smoking that he does inflict on his body.
RITHOLTZ: He claims his predisposition is to not get lung cancer genetically. He has the lucky whatever it is gene that means you can smoke without ill effects.
ZUCKERMAN: Yes. And he’s fooling himself a little bit like Bob Mercer with his pseudoscience outside of the office and it’s one thing that’s going to jump out in the book that these guys are like you and I in so many ways.
They’ve got their foibles. They get emotional. They get fights with their wives and screw the (ph) matches with their colleagues. And Jim Simons, yes, has convinced himself that he won’t be impacted by smoking and to his credit, it hasn’t impacted him. So, once again, he may be right.
RITHOLTZ: Greg, can you stick around a bit? I have a bunch more questions.
ZUCKERMAN: Sure. I’d be happy to.
RITHOLTZ: We’ve been speaking with Greg Zuckerman, author of “The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution.” If you enjoy this conversation, be sure and come back for a podcast extras where we keep the tape rolling and continue discussing all things Renaissance Technologies related.
You can find that at iTunes, Google Podcast, Stitcher, Spotify, wherever you’ll find our podcasts are sold. We love your comments, feedback and suggestions. You can write to us at firstname.lastname@example.org or give us a review over at Apple iTunes.
Check out my weekly column on Bloomberg.com. Sign up for my daily reads at ritholtz.com. Follow me on Twitter @ritholtz. I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.
Mark Ellwood: Hello, I’m Mark Ellwood.
Nikki Ekstein: And I’m Nikki Ekstein. And what are we?
Mark Ellwood: We’re the Travel Genius.
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Mark Ellwood: Our podcast us all about great travel stories and even better travel tips and we’re back for a second season that will be in your podcast feeds on November 6th.
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Mark Ellwood: So, join me, Mark Ellwood.
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RITHOLTZ: Welcome to the podcast. Greg, thank you so much for doing this. I have to tell you, I really, really enjoyed the book not just because I’m fascinated by Renaissance and I’ve had a handful of dealings with Jim Simons without his involvement, he and I have never met.
But when I was a high school student trying to figure out where to go to school, I looked towards Stony Brook and there goes the outgoing math department Chairman. If you would have met him, you would never have given him a penny.
The joke about all these people who passed on him, he had the scruffy beard and yellow fingers from — nobody — I can see how people wouldn’t have taken him seriously.
RITHOLTZ: But I have to tell you, I — ad this is a funny story that I can’t verify about the alumni department at Stony Brook. I can’t even share (ph) it publicly because I don’t know if it’s true but if it is, it’s pretty hilarious.
I really enjoyed the book. I normally take a ton of notes and the books are always marked off and underlined with Post-its and here’s a question and here’s a topic. There really is zero writing in the book because I’ve read it like a thriller.
It’s a fascinating tale about really an amazing story with really interesting people. You did a really nice job on this.
ZUCKERMAN: Thank you.
RITHOLTZ: What was the process like writing this? This had to be quite a monstrosity to put together.
ZUCKERMAN: It was hard. It was the hardest thing I ever did to my life.
ZUCKERMAN: By far.
RITHOLTZ: I could totally see that.
ZUCKERMAN: There were the challenges of getting people to talk and even when they started talking, understanding what they were telling me and I’m not a math guy, I had to understand, this is a different language, quant, to some extent.
ZUCKERMAN: And 0even at that point, trying to make it into a narrative. As you suggest, I tried to appeal — I want to try to appeal to everyone, the quant-type people, mathematicians, scientists, but also just the average nonfiction readers. So, I would …
RITHOLTZ: I think you accomplished that.
ZUCKERMAN: I did. There were a few times where I’m working all night in my basement and I hear some sound upstairs and I’m like, my kids left the TV on again, and then I go up to turn it off and there’s no TV on then I realized that sound — those sounds are the birds getting up in the morning.
RITHOLTZ: You’ve just been pounding your way all night.
ZUCKERMAN: And it went through the night and part of it is because I was fascinated by the story myself and these characters are interesting and intriguing and what they accomplished and the challenges that ever came and the drama behind the scenes that I wasn’t aware of. So, it was the hardest thing ever did but also it was rewarding and fascinating to me.
RITHOLTZ: In the early phases of this, did you ever reach a point where you said, this is just going nowhere, I have to pull the plug on this.
ZUCKERMAN: Many times.
RITHOLTZ: Came close?
ZUCKERMAN: Too many times. Yes.
ZUCKERMAN: Yes. I mean, I wasn’t close to giving up but I couldn’t figure out how it’s going to make it happen and then I would have a breakthrough. Someone would be kind enough to share with me and talk to me and maybe beyond the record, maybe it wouldn’t. But that would keep me going and that would give me encouragement and deal with all the people slamming the door on my face subsequently because then there would be somebody kind enough to share right after that.
RITHOLTZ: When you spoke to people off the record, how do you use that if you’re telling to somebody, I’m not going to quote you, I’m not going to use this? How do you work that into the story? Does it just give you enough background or what do you do with off-the-record conversations? And was Simons on or off the record with you?
ZUCKERMAN: Right. So, I don’t you off the record. Off the record, the way we define it at the “Wall Street Journal” means you can’t use that information. But I was upfront with all these people in saying, I’d like to use your information on background, meaning I can use it.
RITHOLTZ: I won’t quote you.
ZUCKERMAN: Right. But I won’t name you, I won’t quote you, I won’t site you. And I said, I’ve been around a little bit so I have a certain reputation, and I said, I’m not going to burn you. There’s no incentive for me to burn you. I’m not going to name you, not going to tell anybody at Renaissance that we’re talking.
So, I got people sufficiently comfortable. And Jim Simons is pretty darn open and frank and transparent. I have to tell you about what he wanted to speak about. Again, I want to make clear that he wasn’t opening the kimono and telling me all his signals. I had to get that stuff on my own and his — and how he dealt with certain things and the setbacks and the narrative and the drama behind the scenes. But he was quite cooperative about other things and I have to thank him for that.
RITHOLTZ: So, the early cancellations, the Cosa Nostra Simons don’t say anything, after you speak with Simons, do you circle back with the early councilors and were they a little more open at that point?
ZUCKERMAN: No. They still wouldn’t talk to me.
ZUCKERMAN: So, I had to keep pushing.
RITHOLTZ: Even after Simon says, all right, I’ll finally talk to you.
ZUCKERMAN: You know what, on average day (ph), we’re even concerned about the possibility that Jim might get angry with them. Yes, well, you say that Jim is talking to you but how do I know that’s true, how …
RITHOLTZ: That’s Jim.
ZUCKERMAN: Yes. But he’s got too busy. This guy — he’s got a lot going on. He’s not going to call up and say, can I talk to Greg. They already did. You told me I can’t talk to Greg but now can I talk to Greg, it wasn’t worth their while.
So, I had to keep finding other people and quite honestly, a lot of the people early on at the firm and in his life were old and elderly …
RITHOLTZ: They don’t care. You’re 80 something and you’re like I’ll say who I — what I want to, what I want and everything (ph).
ZUCKERMAN: Yes. They’ve accomplished a lot in their own right. I mean, these are scientists that are big names, holy names in some of these fields. It’s hard to — you have to focus on the fact that even setting aside when it came to Wall Street in investing, these people are really accomplished in their own right. So, they’re proud of what they’ve done and some of these people don’t mind talking.
RITHOLTZ: That’s really quite fascinating. I have a quibble with you.
RITHOLTZ: Is Jim Simons really the man who solved the markets or is he the guy who just figured out here’s how to apply mathematics as a way to extract profits from the markets? I didn’t get the sense that he figured out the markets. The markets are just a means to an end for him.
ZUCKERMAN: Yes. To the extent that he’s recorded these remarkable returns.
RITHOLTZ: Eye-popping. Eye-popping returns.
ZUCKERMAN: Yes. To that extent, he saw the market but right, there’s no hidden understanding that jumps out at you that he knows that you and I don’t know. He’s as flummoxed by the day-to-day moves as anyone else. What he does and his colleagues really do understand is that what impacts prices. There’s a lot more than you and I are aware of.
Now, they’ve got whole levels of factors that aren’t included in the AQRs and the stuff you can buy off the shelf, et cetera. So, they are — they have a better understanding of the market I would argue than anyone else. But maybe it’s a little overstated to say they completely solved it.
RITHOLTZ: So, the other thing that I thought was really intriguing in the book is despite these guys making boat tons of money just so much compared to what they would have made had they stayed at either IBM or academia, they’re making four and five and 10X plus whatever the Medallion funds is running off.
Some of the squabbles about money especially in the later history of the firm, so, I described the firm as having four phases. The early macro tourism phase then there’s a later phase where they figure out how to trade currencies, commodities, and futures. And then when Mercer and Brown cracked the equity code as the third phase then the fourth phase, they started bringing a lot of Russian computer scientists and other academicians.
This like fourth generation of the company really degenerates into this heady jealous backbiting envy to the point where a bunch of them go to Simons and say, you’re making too much money, we demand some of it. How the hell does anyone get away with that?
ZUCKERMAN: Yes. They were people telling Jim Simons he made too much money. There are people saying he should step down. There are people — it was a something of a coup. They try to …
RITHOLTZ: How does he not just say, you, you, and you, you’re fired. Go back to making $90,000 as a teaching assistant.
ZUCKERMAN: Because — I keep going back to the point that Jim Simons loves money and they were really valued employees. So, they could have been jerks but he gets past that. And he’s a great manager. He wasn’t insulted by that.
Listen, if you’re going to hire some of the top scientists in the world, you’re going to get the personalities that come with that and he embraced that. So, he wasn’t insulted. He doesn’t take themselves so seriously. He actually gave back some equity and he said …
ZUCKERMAN: … maybe you guys are right and I’m taking …
ZUCKERMAN: … too much of a cut, and I give him credit for that. So …
RITHOLTZ: It was amazing.
RITHOLTZ: In the book, I’m like I just don’t know because normally, employees like that are so cancerous. They could destroy a company with the sort of heady envious jealousies that you described in the book. I found that to be just completely shocking and his — I guess he resolved it in a way that was pretty reasonable.
ZUCKERMAN: Yes. He, again, has a great instinct when it comes to people. So, it’s not — he’s not just like this quant focus on money and numbers and algorithms. He understands people and what drives them and he thought he could work with some of the people leading the coup.
Yes, they were headstrong and tempestuous and difficult but they had potential as managers and he was right. He actually created — he turned them into pretty good manager. So, for whatever reasons, he’s got these talents on both side of the equation.
RITHOLTZ: So, who’s running Renaissance Technologies now? It’s not Jim Simons as CEO and it’s not Robert Mercer.
RITHOLTZ: Who’s running the day to day?
ZUCKERMAN: It’s Peter Brown who was a former IBM scientist.
RITHOLTZ: Used to work closely with Mercer.
RITHOLTZ: And was considered the more wild of the two.
ZUCKERMAN: Yes. And when he took over, when Bob Mercer stepped down, people internally were concerned because as I said, Peter Brown is little bit tempestuous and gets emotional sometimes. I described a couple of scenes in my book where he panicked and …
ZUCKERMAN: … he got nervous and he got scared. This was years ago and he learned from those lessons and later on when — in market difficulties, he didn’t react that same way.
But people worried about Peter Brown taking over and to his credit, he’s aware of his flaws and his weaknesses and he’s been leaning, and we’re talking the last few years, the last couple of years, he’s been leaning on his colleagues, his senior colleagues much more than anyone had expected and it’s worked out nicely.
RITHOLTZ: I imagine Brown is Mercer without the politics or at least in actuality because he’s still working closely with Mercer.
ZUCKERMAN: Yes. But very different personalities.
RITHOLTZ: For sure.
ZUCKERMAN: Bob Mercer is this cool customer. You don’t really — you can’t read him. Even his colleagues don’t really understand. He’s so unemotional. They don’t understand where he stands on certain issues. You do not wonder when it comes to Peter Brown. So, in some ways, they offset each other. They work — really, they melted and they meshed really well together.
RITHOLTZ: And what is Jim Simons doing today day to day at Renaissance?
ZUCKERMAN: So, he barely goes in the office and yet he makes about $1.5 billion a year.
RITHOLTZ: It’s good. So, why retire?
ZUCKERMAN: Pretty good gig. Yes. But really, it’s sad to say he’s not very hard at work. He runs a foundation and it’s really active, one of the biggest supporters of science in the country. They’re very active when it comes to things like autism research and they’re cutting edge — they backed all kinds of cutting-edge approaches.
He supports, he funds, he subsidizes the salaries of high school math and science teachers in New York City, 10,000 of them, because he doesn’t want so many leaving to go work …
RITHOLTZ: What is it – what does that causes — subsidizes every time (ph)?
ZUCKERMAN: Well, I forget (ph) how many each year but, yes, it’s huge, about millions of dollars. I mean, he’s worth $23 billion. But to his credit, he’s on the cutting edge of all kinds of different approaches when it comes to science education …
RITHOLTZ: They published “Quanta” which is a basic …
RITHOLTZ: It’s fundamental science and mathematics magazine which really — who else covers that sort of stuff?
ZUCKERMAN: And he’s also trying to subsidize the work — and he’s subsidizing the work of scientists trying to get at the beginning of life and how this world began, the first moments of our existence, of this universe existence. They’re trying to build out in Chile, all kind of …
RITHOLTZ: Massive array, right?
ZUCKERMAN: Exactly, of ability to see, go back in history and see through the massive telescopes to see what happened. So, he’s on the cutting edge of all kinds of different science and he’s just as focused on that as he was trying to crank out the 66 percent returns at the Medallion fund.
RITHOLTZ: The current theory of the Big Bang is under assault because it’s — some of it doesn’t seem to work and some of the work that Simons is doing is to try and figure out if not the Big Bang then how did the universe come into existence.
ZUCKERMAN: Yes. I mean, himself isn’t a believer in the Big Bang and yet he’s funding efforts to test if it actually — if there’s some proof to it.
RITHOLTZ: Because deep down inside, he is a scientist and show me the day, just show me the evidence and if you can’t disprove it, then that’s the best we have to work with.
ZUCKERMAN: Right. The Renaissance story, the Jim Simons story really is a story about the scientific method. If you think about society today and you think about the White House, it’s all about narratives. And if you think about Wall Street, too, Theranos and WeWork knows and people get carried away with the narrative …
RITHOLTZ: Stories, yes.
ZUCKERMAN: … and leads to problems. It leads to real issues. Whereas there’s something to be said, I become a believer in the scientific method where it’s about data, it’s about proof, and that is to me one of the lessons off of the Renaissance Jim Simons story.
RITHOLTZ: Quite fascinating. So, we only have you for a finite amount of time. Let’s jump to our favorite questions. We ask this of all of our guests, sort of our speed rounds. Tell us the first car you ever owned, year make and model.
ZUCKERMAN: Never owned a car.
ZUCKERMAN: I grew up in Providence, Rhode Island outside of — my dad taught at Brown University. Nothing really going on. The most exciting thing was we’d walked to campus, my high school friends and I, and try to hit on girls usually unsuccessfully. So, that required legs and not automobile. So, yes, I didn’t really have a car.
RITHOLTZ: Wow. What’s the most important thing people don’t know about Greg Zuckerman?
ZUCKERMAN: I’ve got this a separate life where I write books for young people with my two sons. We wrote two books called “Rising Above” where we’ve interviewed sports stars who overcame challenges in their youth, racism, sexual abuse, physical abuse, all kinds of different emotional and other types of challenges, and we asked them how they did it. And to us, it was really inspirational and we share those stories in our books.
RITHOLTZ: Tell us who your early mentors were in the field of journalism.
ZUCKERMAN: Yes. So, I never really had great mentors quite frankly. I’ve had a series of bad bosses early in my life before it gave me …
RITHOLTZ: Who’s your current bad boss?
ZUCKERMAN: No. Now, my bosses are great. It’s the early on we’re talking. So, early on, I wasn’t — I stumbled into this profession.
RITHOLTZ: Really? What were the original plans?
ZUCKERMAN: I was going to go work on Wall Street. I was reading books like Adam Smith and Ray Dirks. You know this guy Ray Dirks?
RITHOLTZ: The name is vaguely familiar.
ZUCKERMAN: He had this famous case, it went to Supreme Court. He was an insurance analyst who were shorting and …
ZUCKERMAN: … and it was a famous case, it went to Supreme Court and he won and he left an impression on me with a book. I was buying Barons as a — at young age. In camp, I was trading stocks. I was a guy who’s going to go work on Wall Street.
And I didn’t really do any summer kind of job. I was working in camps and didn’t have any experience. My dad was an academic and I graduated and I did well at Brandeis University. I did well and I couldn’t even get an interview on Wall Street. It was 1989. It was after the market had crashed a couple of years earlier and I stumbled around.
I started some businesses and some work, some didn’t. And then I went in one day and interviewed to be a financial journalist and I’m like, wait, I love writing and I love Wall Street. They’re going to pay me to write about Wall Street. How great is that?
RITHOLTZ: So, what writers influence the way you think about writing either articles or books?
ZUCKERMAN: So, James Stewart, first and foremost, everything he’s done.
RITHOLTZ: Lost in a “Wall Street Journal” reporter, right?
ZUCKERMAN: And then he went — he’s at “The New York Times” now, book author, “Den of Thieves.” He wrote a book called “Follow the Story” which is about writing and I’ve read and reread that book numerous times. So, that guides me.
There’s an editor at the Journal named Mike Siconolfi who I’ve learned a lot from. He’s investigative editor. He had — we had a Pulitzer package that we won this past year and he was the editor of that group and he left a big influence on me.
RITHOLTZ: Since you’ve mentioned a couple of books, tell us about your favorite books, what do you enjoy to read, Wall Street related or not, when you’re not researching your own books.
ZUCKERMAN: So, Paul Auster, Philip Roth, fiction there.
RITHOLTZ: Give us some titles. When you say Philip Roth, I immediately think of “Portnoy’s Complaint.” But what else do you read?
ZUCKERMAN: “American Pastoral” is great. There’s really nothing much that — from him that I don’t love and won’t read. I’m reading Patti Smith right now.
RITHOLTZ: Her autobiography just came out.
ZUCKERMAN: Yes. Right. That’s the — right, I’m reading the earlier one. But she’s brilliant in her own right. “Catcher in the Rye” at young age left a huge influence in me in terms of being an outsider and that’s what, as a journalist, I see myself.
My job is to kind of poke holes and look at the foibles and mistakes and accomplishments of others, people in the world of finance, that sort of my position in some ways. I saw myself in that character, the Holden Caufield character to some extent.
RITHOLTZ: What was the first author that you mentioned before Philip Roth?
ZUCKERMAN: Paul Auster. Paul Auster is a fiction writer who’s brilliant as always. He gets to some …
RITHOLTZ: Give us a book title.
ZUCKERMAN: “Brooklyn Diary” is a good one. He has so many. “Brooklyn Diary” is a good one.
RITHOLTZ: All right. We’ll go with that. Tell us about a time you failed and what you learned from the experience.
ZUCKERMAN: So, many. So, I got a tip that there was a guy who’s running a fraud named Bernie Madoff and that was …
RITHOLTZ: What year was this?
ZUCKERMAN: Probably 2003.
RITHOLTZ: All right. So, there was already the Baron story but nobody really picked up on it in a big way.
RITHOLTZ: Right. When did that Baron piece come out …
ZUCKERMAN: … maybe 2001 and …
RITHOLTZ: Good source for it, too.
ZUCKERMAN: It was a good source in the industry but didn’t have firsthand knowledge. So, I started making some calls and …
ZUCKERMAN: … it was early in the process, I got a call from Bernie Madoff’s right-hand person and they said, I hear you’re making calls on Bernie. Why don’t you come in and meet with him, and I was torn.
At that point, I hadn’t had enough research. So, I said, I want to meet Bernie but let’s do it in a week or two. Well, Greg, he travels a lot. There aren’t going to be many opportunities. If I were you, I’d really take advantage.
So, I went in met with Bernie …
RITHOLTZ: Was he charming?
ZUCKERMAN: He was charming but not convincing. I asked him a series of tough questions. I came out of it unconvinced that it was legit. But I thought he was front running. I didn’t think it was a complete fraud.
RITHOLTZ: Not a Ponzi but he was — because they were legitimate trading operation, weren’t they?
ZUCKERMAN: Right. And I thought they were front running that legitimate trading and that’s where you get that smooth returns.
ZUCKERMAN: And I wasn’t the only one on Wall Street who had that thought and there’s no excuse I shouldn’t pursue that story. And I blew it, I should have kept working on and …
RITHOLTZ: So, what was the lesson?
ZUCKERMAN: The lesson is to keep pushing and if you got an instinct to pursue it, un listen. Some of the best stories quite frankly are those that editors were lukewarm on and then I kind of kept going at it.
RITHOLTZ: Give us an example.
ZUCKERMAN: I wrote a front-page story — I came up with a front-page story about John Paulson and his tremendous trade, the subprime trade, and people internally were kind of like, well, he must have cheated, there’s no way he would have done it in a legitimate way.
I wrote a — I broke the story on the London whale and even internally, they’re like Jamie Dimon, JPMorgan, there’s no way they could have that kind of — embrace that kind of risk.
I did a story about a family about a brother of a woman in Cantor Fitzgerald who died on 9/11 and I wanted to tell the story of how — he wanted to tell the story about how his sister died on 9/11 and I started researching and people like, you’re never going to find out exactly how she died. And, you know what, you work hard enough and that’s the lesson. Sometimes, you can actually piece things together.
RITHOLTZ: All right. So, let’s go back to our speed round. What do you do for fun when you’re not researching and writing books? What do you do to kick back and relax?
ZUCKERMAN: I’m obsessed over to New York Yankees with my son Eli and played a lot of sports. I’m on a softball team. I’m on a basketball team.
RITHOLTZ: Still playing basketball.
ZUCKERMAN: Yes. Not as well as I used to. I’ve learned to come off the bench. It’s been humbling. Yes. Obviously, I’m a short cute guy. It’s not like …
RITHOLTZ: Like 40 is where that all goes to hell.
ZUCKERMAN: Right. At that point where you have a good run for cutting (ph) and you’re kind of happy. But I’m pretty competitive.
ZUCKERMAN: So, hey, listen, if I could contribute then I’m proud at this point. I don’t need to start and dominate like I was a quick good pass first point guard back in the day and if I can come off the bench and help, that’s fine, too.
RITHOLTZ: That’s kind of fun. Let’s talk about journalism a little bit. What do you most optimistic about today and what do you most pessimistic about?
ZUCKERMAN: I’ll start with most pessimistic.
RITHOLTZ: That’s an easy question, right?
ZUCKERMAN: Yes. It’s a difficult time in some ways for journalists where a time where it’s more — it’s open seas in some extent. You can criticize. You can be open in your criticism.
So, I wrote a story about Jeff Gundlach a couple of years ago.
RITHOLTZ: DoubleLine, the fastest-growing mutual funds ever, $200 billion, the new bond kind.
RITHOLTZ: So, in case people don’t know who he is.
ZUCKERMAN: And my story was sort of obvious, it was they had peaked at AUM, they lost some money. People were — it wasn’t like a flood of money and returns were good but they’re no longer great.
And I wrote this story and they were — they came back hard at me, both privately and publicly. So, he gets on this conference call and he starts insulting me. He calls — he says — Mother Zucker he calls me publicly and …
RITHOLTZ: Mother Zucker.
ZUCKERMAN: Mother Zucker. It was kind of amusing.
RITHOLTZ: That is amusing.
RITHOLTZ: You got to like that.
ZUCKERMAN: Yes. You got to like that.
RITHOLTZ: So, there won’t be “The Greatest Bond Trader Ever?” “The Man Who Solved the Bond Markets” not coming anytime soon?
ZUCKERMAN: I’ll still do that book. Sure, if he does something special out of the new challenge. I like the challenge. But I do think there’s a new freedom that people have again not just on Wall Street but in society to be critical of the media and me included. The flip side is there’s a new appreciation, too. There’s a …
RITHOLTZ: For sure.
ZUCKERMAN: … renewed appreciation of what we do and I sense that as well. Readership is up both of the “Wall Street Journal” where I am and elsewhere.
RITHOLTZ: “Washington Post” “New York Times” all the — “Atlantic New Yorker” all the subscriptions are through the roof because they’ve been covering the new new thing which is the Trump administration calling journalists the enemy of the people.
ZUCKERMAN: Exactly. And to some extent, he’s right. We are going to miss him. He brings news, he creates news every single day. It’s exhausting. It’s emotionally draining for us. But it does sell papers and we are going to miss that.
RITHOLTZ: So, we had an interesting conversation about politics in the 2020 election and a bunch of people were talking about what could lead to Trump losing his reelection campaign. And my position was Trump fatigue, I was praying after the 2016 (sic) election, all right, now that’s over, we can get back to normal.
I think it’s — I’ll use the word exhausting. People just want to get back to normal. It’s never ending and it’s too much.
RITHOLTZ: Whether you agree with it or disagree with it, it’s like, you know what, I’d like to go through a day where the president is not three front-page stories every day.
ZUCKERMAN: Yes. The question is do people feel that way in the swing states and our country …
RITHOLTZ: So, it’s Pennsylvania and Ohio.
ZUCKERMAN: it’s fascinating. Yes.
RITHOLTZ: Basically …
ZUCKERMAN: I don’t even know Ohio — I think Trump has got Ohio.
ZUCKERMAN: Maybe Pennsylvania. Yes.
RITHOLTZ: Wisconsin and Michigan are going the other way. It’s Pennsylvania, Ohio and …
ZUCKERMAN: New Hampshire maybe, a toss of it. It’s quite small but it doesn’t mean as much.
RITHOLTZ: But if you look at it, he won three states by 77,000 votes and that put him over the top.
RITHOLTZ: So, whatever we talk about nationally is relevant. How those three states going to vote?
ZUCKERMAN: It’s fascinating.
RITHOLTZ: So, that’s Pennsylvania, Ohio, Florida, plus Michigan and Wisconsin.
ZUCKERMAN: The real question to me is if he loses, what does he do and what happens.
RITHOLTZ: That’s fascinating.
ZUCKERMAN: Does he leave?
RITHOLTZ: And what happens with — no. So, my wife is in the same camp as you. There’s no way on God’s green Earth he stays if he loses and P.S., I think the Secret Service would march him out of the White House.
Our job is to protect you but also to uphold the Constitution and …
ZUCKERMAN: Most people agree with you. I agree …
RITHOLTZ: I don’t see that as a threat.
ZUCKERMAN: You talk to people on Wall Street. You talk to people in D.C. I was just down in D.C. …
RITHOLTZ: I think that’s a really far-fetched threat.
ZUCKERMAN: Agree. Agree. I was throwing it out there to let you know…
RITHOLTZ: No. I know. I just — there are bunch of people who wonder about that.
ZUCKERMAN: Yes. It’s something — listen, if you’re a macro tourist as I am and to some extent looking at where the …
RITHOLTZ: The politics. Me, too.
ZUCKERMAN: Right. You got to at least consider all kinds of possibilities nowadays more than ever.
RITHOLTZ: Right. To say the least. And what are you most optimistic about with journalism?
ZUCKERMAN: I just spoke to a group down in the D.C. area students and it’s easier to have a voice. You can start a podcast. You can start a blog. You can break news locally. You can be on Twitter. You can …
RITHOLTZ: Did it. Did it. Did it. Did it.
ZUCKERMAN: I’m sorry?
RITHOLTZ: Did it. Did it.
ZUCKERMAN: Did it. There you go. Right. Right.
RITHOLTZ: Yes. You can do any of those things.
ZUCKERMAN: Yes. There are new ways to have a voice that in the past there weren’t. You don’t have to be in a mainstream meeting. It’s early to have influence and have impact.
And you still can have impact and improve things and write about people and that’s one thing I was told journalists, focus on the people. You can get at important themes through the individuals and they make for the most memorable stories at least the way I look at it.
RITHOLTZ: We didn’t talk about the John Paulson trade at all. So, I’m going to move this back to the earlier part. This will be the last question of the regular discussion. But I want to bring it up here.
So, you write a book about John Paulson, “The Greatest Trade Ever” but I find there’s some really interesting oddities about the trade. Not that it’s not legit but whether or not it was really John Paulson who deserves all the credit.
Paolo Pellegrini …
RITHOLTZ: … is his research assistant.
RITHOLTZ: Seems to be the person who comes up with the idea, brings to Paulson, has to twist his arm a little bit to get him behind it. The trade makes literally 5 billion, 6 billion …
ZUCKERMAN: Yes. Yes.
RITHOLTZ: … for the funds. Paulson, and I don’t remember if this was your book or your article or somewhere else, it’s all a blur, Paulson gives Pellegrini a bonus check for $250 million, am I remembering that correctly or was it more?
ZUCKERMAN: It was 175. It’s a funny story where …
RITHOLTZ: OK, $175 million.
ZUCKERMAN: Right. Right.
RITHOLTZ: And Pellegrini’s response is, 175 million, I quit. Is that fair?
ZUCKERMAN: It wasn’t right then. It was later on he quit and it wasn’t …
RITHOLTZ: How much later was it?
ZUCKERMAN: It was a good six months later and it wasn’t necessarily — he was OK with that …
RITHOLTZ: He was?
ZUCKERMAN: Yes, 175 million, how do you be upset about that?
RITHOLTZ: Well, because it’s not even 10 percent of the 6 billion.
ZUCKERMAN: Agreed. But he was fine with that. Listen, Paulson was the one taking the risk if the trade had blown up, it wouldn’t have blown up, but if it hadn’t worked out, then Paulson would have to close down his fund product.
ZUCKERMAN: So, Pellegrini was OK with that. I think the big argument is that Paulson, I don’t give him so much credit for being short housing. There were a lot of people, if you recall, you probably …
ZUCKERMAN: Yes. There were a lot of that worry about housing. What I do give John Paulson credit for is figuring out a way to express that trade, express that bearishness and that, to some extent, is Paolo Pellegrini. I agree.
ZUCKERMAN: Pellegrini told John Paulson, hey, boss, there these things called CDS contracts, really, what are they? So, Paulson had no idea what CDS contracts and that obviously was the key to the greatest trade ever.
So, I give Pellegrini a lot of credit in the book and otherwise for coming up with a way to express that trade but I also give John Paulson tremendous credit for — he was a 50-year-old guy who didn’t know anything about the debt markets and he threw himself into learning about how to express that trade when lots of other people were sticking with equities and shorting equities.
RITHOLTZ: Right. Right. So, the postscript to Paulson is two subsequent hedge fund performances. Pellegrini launches his own fund, quickly raises billion dollars as the guy behind the Paulson trade. I think the first year, he just shoots the lights out like 88 …
ZUCKERMAN: Good memory. Yes.
RITHOLTZ: Some crazy number. The second year, they’re barely up for eight percent, six percent, something like that. The third year, they’re negative. They returned the money and he basically retires to some island in the Caribbean. More or less accurate?
ZUCKERMAN: More or less. Yes.
RITHOLTZ: So, that’s astonishing. Paulson on the other hand, the fund scales up to $46 billion. He becomes a macro tourist in golds and other things. It’s a terrible bet. He’s a big buyer at the peak. The fund puts up some pretty crappy numbers for a couple of years and now the fund is back to what single digit billions, is that right?
ZUCKERMAN: And it’s mostly his money, too. Yes.
RITHOLTZ: Right. So, it’s become a family office and he proceeded to lose $20 billion or $30 billion. So, someone said, and I haven’t verified this, but careerwise, net-net, he’s a money loser for his outside investors.
ZUCKERMAN: I think it’s close. And I would argue that he missed the lesson of the greatest trade ever, why is it called — why do I called it the greatest trade ever? Because it had limited downside and remarkable upside and frankly, that’s what he did his whole career.
Even when he was a risk arb, he was getting into positions a little riskier than most other risk arbs but they had potential for upside, a new buyer comes in in a merger deal, and limited downside because I already had a deal. His whole career, he was doing those countries until he did the greatest trade ever and then he took on all this new money and he start betting on banks and on pharmaceutical companies with — and gold, lots of upside but also lots of downside.
RITHOLTZ: The exact opposite of what Simons did with Medallion, hey, this won’t scale and we want to make sure we are upside and downside …
ZUCKERMAN: That’s a great point.
RITHOLTZ: … risk reward is balanced. The greatest trade led to the man who did not solve the market and that basically created what is now ostensibly a hedge fund but really a family office for the Paulson fortune.
ZUCKERMAN: Yes. It’s a great point. John Paulson is a very good investor but he got too big and how many times have we seen that same story.
RITHOLTZ: Over and over and over.
ZUCKERMAN: Over and over. And it’s — these guys are fallible like anybody else. You could be smart but take on too much money and then you’re going with your second-best idea and with your third-best idea, et cetera, and he missed that lesson.
Everyone thinks I’m the exception because I’m — I got the greatest trade ever and I caught this one before other people and they’re wrong and it’s tough to take on that AUM and as you suggest, Jim Simons capped — at least the Medallion fund, he capped that. So, maybe he learned that lesson.
RITHOLTZ: For sure. And our last two questions, what sort of advice would you give a recent college grad who is interested in either becoming a journalist or a book author or covering Wall Street and finance?
ZUCKERMAN: Well, this is a broader recommendation for young people in general, find the people, find the individuals in whatever area you’re interested in who are the pacesetters, who are the key individuals, people that you respect and reach out to them.
Send them a note. Hey, I’d love to buy a cup of coffee. You have 20 minutes of your time. People are generous with their time. You’d be surprised. I’m sure you found it, too. People on Wall Street, senior people want to help, want to give back, are much more generous with their time than you might think.
Don’t be intimidated. If you got genuine interest, reach out to them. Tell them why you’re interested in the area, form a relationship and learn from them.
RITHOLTZ: And our final question, what is it that you know about the world of writing and journalism today that you wish you knew 25 years or so ago when you were first getting started?
ZUCKERMAN: That your relationships are the most importance thing you’ve got and you’ve got to develop them, you’ve got to be kind to people that are kind to you, I always was but it’s been reinforced to me. But also the fact that our reputations are created and re-created almost on a daily basis.
So, you can be doing poorly at your job. I’ve had times in the “Wall Street Journal” where I was low man on the totem pole and people didn’t really give me good assignments and you can change that. That’s the beauty of it. You go break a story. You can change. You can — your reputation can transform.
And if you goal it (ph), and your reputation isn’t back to tubes (ph), don’t make any mistakes but don’t lose hope. Just tomorrow is a new day. Go break a story.
RITHOLTZ: Quite fascinating. We have been speaking with Gregory Zuckerman, the author of “The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution.”
If you enjoy this conversation, well, be sure and look up an inch or down an inch on Apple iTunes where you could see any of our previous 258 conversations we’ve had over the past five plus years.
We love your comments, feedback, and suggestions. Write to us at email@example.com. Go to Apple iTunes and give us a review. I would be remiss if I did not thank the crack staff who helps put together this conversation each week. Karoline O’Brien is my audio engineer, Atika Valbrun is our project manager, Michael Batnick is my reluctant head of research, Mike Boyle is my producer, I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.