David Shaw is the founder and manager of top hedge fund D.E. Shaw & Co. He started the company in 1988 with $28 million of seed capital. Since then, the fund has grown to massive proportions, making Shaw one of the richest people in the world with a net worth of over $4 billion. 


David Shaw. Photo: D.E. Shaw & Co.

But what really makes Shaw interesting is not just his success as a fund manager but his technical background, a Ph.D. in computer science from Stanford. Shaw spent time at Columbia as a professor researching supercomputers before joining the ranks of Wall Street, eventually using his expertise with computers to pioneer some of the most advanced theories and applications of computational finance. At D.E. Shaw & Co., much of its success today is driven by a focus on computer-generated systematic methods of investing.

The fund -- D.E. Shaw & Co.
The firm currently manages approximately $36 billion of investment capital. Its quantitative and computer-analyzed approach chooses investments that rank well on a series of intensive algorithms. This spots value in hard-to-find areas that a human would be unable to find. The actual calculations and criteria are proprietary and developed by in-house scientists.

However, that does not mean only overlooked, obscure companies make the portfolio -- as of May 2015, the fund held long positions in companies like Apple, Yahoo!, and Time Warner Cable, to name a few. The real magic seems to lie, not just in the stock picks, but also in the weight of each holding and sector. Put and call options also seek growth opportunities while still hedging risk.

According to an article from Bloomberg, D.E. Shaw & Co. has returned 8.6% already during the first quarter of this year, compared with an average 1.9% for hedge funds broadly.  

D.E. Shaw & Co. top 10 holdings by value. Source: InsiderMonkey

Google exec Eric Schmidt shows confidence 
The fund made news recently when in April, The Wall Street Journal reported that Google Executive Chairman Eric Schmidt gave his personal approval of the quantitative investment thesis used by D.E. Shaw & Co. by taking a major stake in the fund. Through the family business called Hillspire, which Mr. Schmidt and his family use as an investment vehicle, he acquired a 20% stake in the fund for $500 million. 

Regarding the partnership, Shaw said, "I've always regarded Eric as a kindred spirit -- someone who shares our belief in the power of groundbreaking innovation, analytical rigor, and extraordinarily gifted employees."

David Shaw today
Dr. Shaw no longer handles much of the day-to-day operations of the fund, though he still commits himself to being its chief scientist. Shaw explained that he likes the research and problem solving that led to its creation, but the day-to-day management that no longer involved as much engineering was making him "stupider" (his words).

Instead, Shaw now focuses on researching computational biochemistry, using his skills in computer-generated problem solving to tackle biological problems more quickly than could otherwise be done. His work includes building machines and processes to speed up molecular dynamics simulations in ways that could have massive ramifications for modern medicine.

As Shaw explains, it all comes down to computer science work. In an interview with the Association for Computing Machinery, he says: 

I love learning about new fields, but in some ways I feel like a tourist whose citizenship is computer science. I think to myself, 'I'm doing computational finance, but I am a computer scientist. I'm doing computational biology, but I am a computer scientist.' 

Shaw has also advised Presidents Clinton and Obama on matters of science and technology, and he holds a number of prizes and academy elections for his work. He is a Senior Research Fellow at the Center for Computational Biology and Bioinformatics at Columbia University, teaching Molecular Biophysics at the medical school.

Shaw is married to Beth Kobliner, author of the book Get a Financial Life: Personal Finance in Your Twenties and Thirties. See this Motley Fool interview to learn more about her newest book, Make Your Kid a Money Genius (Even If You're Not).

Bradley Seth McNew owns shares of Apple. The Motley Fool recommends Apple, Berkshire Hathaway, Facebook, and Yahoo. The Motley Fool owns shares of Apple, Berkshire Hathaway, Facebook, and Yahoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.