The following is a guest post by Sebastian Mallaby, the Paul A. Volcker Senior Fellow for International Economics at the Council on Foreign Relations and the author of More Money Than God: Hedge Funds and the Making of a New Elite. The opinions expressed are his own.
If only U.S. lawmakers were better acquainted with Jim Simons. If they understood this hedge-fund billionaire, the financial regulation now emerging from Congress might look different.
Simons is a poster child for the hedge-fund industry. His team of scientists in Long Island manages a black-box fund called Medallion, which has been up every year since 1990, usually posting gains of well over 50 percent. In several years over the past decade, Simons is said to have earned more than $1.4 billion—the amount, in today’s dollars, that J.P. Morgan accumulated during his entire lifetime. The legendary Morgan was known as Jupiter because of his godlike power over Wall Street. Hence the title of my history of hedge funds: More Money Than God.
The golden algorithms that drive Medallion’s profits derive partly from the mathematics of code-breaking, and partly from the related field of computerized translation. But lawmakers don’t necessarily need to know that. All they need to grasp is that Simons and his scientific colleagues are not the sort of people whom you find on Wall Street—and that the flaws that brought on the financial crisis are much less pronounced at hedge funds.
Crises occur when everybody crowds into the same misguided trade—emerging-market assets in the mid 1990s, mortgage securities in the mid 2000s. But Simons doesn’t follow crowds; he is a nonconformist and contrarian. When he worked for the Pentagon’s code-cracking unit, he not only refused to respect his overlords’ Vietnam policy—he denounced it in the New York Times, and was fired for his outspokenness. He chain-smokes intensively and refuses to wear socks. He seldom drives without exceeding the speed limit.