For more than three decades, one of the world’s most successful hedge fund firms, Renaissance Technologies, has been shrouded in mystery, its secrets closely guarded by employees so loyal that few ever leave the firm. Its founder, Jim Simons was an NSA codebreaker before deciding to use his renowned math skills to make some money in the financial markets. Over the next 30 years, he and his team of scientists and mathematicians (he refuses to hire finance or business graduates) went on to build a $65 billion hedge fund that has consistently generated spectacular returns.

Adding to the enigma that is Renaissance Technologies are the highest fees charged in the hedge fund industry. While most hedge funds charge 2% management fees and 20% performance fees, Renaissance charges 5 and 44%. This translates into $3.2 billion in annual management fees regardless of how the fund performs. It is estimated that Simons has taken home as much as $2 billion in annual pay. The question is often raised as to how Simons can justify these high fees. Although the reclusive Simons is content in letting the results speak for themselves, this is a breakdown of how he might go about justifying his fees.

What Exactly Does Renaissance Technologies Do?

Few people can even pretend to know exactly what Renaissance does to generate outsized returns, primarily because its proprietary quantitative strategies are a closely guarded secret. What is known is that the Renaissance trading models execute as many as 39 million trades a year in stocks, options, futures, currencies and other financial instruments to find small price anomalies that result in profits. At any given time, its portfolio holds thousands of positions, but none of them are held for very long. In a rare public appearance, Simons revealed the following, “… we look at anomalies that may be small in size and brief in time. We make our forecast. Then shortly thereafter, we reevaluate the situation and revise our forecast and our portfolio. We’re always in and out and out and in. So, we depend on activity to make money.” Once it discovers an anomaly, the firm builds a high-frequency trading model that incorporates the data, and the model determines what to buy and sell. The traders then execute the trades.

To those knowledgeable in the intricacies of such an operation and the massive amount of brainpower required to execute it, the fees are more than justified.

The End Justifies the Fees

By some estimates, Renaissance returned an average annual return of 71.8% between 1994 and 2014. From 2001 through 2013, the fund’s worst performance was a 21% gain. Even more stunning was its 98.2% gain during one of the worst stock market crashes in decades, when the S&P 500 lost 38.5%. If you were lucky enough to have invested with Renaissance during the last two decades, you might conclude that the high fees were worth it. At a time when many hedge funds have been reducing their management fees due to poor performances, Renaissance can point to a consistent track record of over-performance.

When asked about his high fees in an interview, Simons said, “We made good returns. People got very mad: ‘How can you charge such high fees?’ I said, ‘OK, you can withdraw.’ But, ‘How can I get more?’ was what people were asking.” This is not quite a justification for charging high fees, but it came very close to “because we can.” As with anything else, it comes down to supply and demand. If, as the best performing quantitative fund on the planet, the firm can charge a 5% fee and still attract the investors, then it should do so.