Oct. 9 (Bloomberg) -- James Simons, the billionaire founder of hedge-fund firm Renaissance Technologies Corp. who helped pioneer investment strategies that use computer models, plans to retire as chief executive officer by the end of the year.

Bob Mercer and Peter Brown, the current co-presidents of the East Setauket, New York-based firm, will take over as co- CEOs on Jan. 1, 2010, according to a letter sent to investors yesterday. Simons, 71, will stay on as non-executive chairman.

“I have led the organization and its predecessor for 31 years, and it is definitely time to pass the torch,” Simons said in the letter, a copy of which was obtained by Bloomberg News. A spokesman for Renaissance confirmed details of the letter and declined to comment further.

Simons, a former military code cracker who uses statistical models to buy and sell securities, options, futures, currencies and commodities, built Renaissance into one of the largest hedge-fund managers by 2007. While his Medallion fund, which invests employee money, gained about 80 percent last year as financial markets collapsed, he lost money in two funds for outside investors that he started over the past four years.

Renaissance ranked as the ninth-biggest hedge fund in 2008, managing $20 billion, according to Absolute Return magazine. The firm managed more than $30 billion in 2007.

Professors, Engineers

Before founding Renaissance, Simons was chairman of the mathematics department at Stony Brook University, part of the New York state university system. He abandoned academia in 1977 to start what would become Renaissance, hiring professors, code breakers and statistically minded scientists and engineers who had worked in astrophysics, language recognition theory and computer programming.

In the so-called quant funds that he helped make popular, scientists mine data from financial markets looking for relationships among stocks, bonds, derivatives and commodities. They search for signals that will foretell whether a price is likely to rise or fall.

Some forms of computerized trading that use high-speed orders to exploit tiny price swings have drawn scrutiny from policy makers who argue they undermine fairness and transparency. Nasdaq, the second-largest U.S. stock market, and Bats, the fourth-biggest, stopped offering so-called flash orders after Democratic Senator Charles Schumer of New York urged the Securities and Exchange Commission to halt the practice.

Overtaking Paulson

Simons, who overtook John Paulson as the world’s best-paid hedge fund manager last year with an estimated income of $2.5 billion, according to Alpha magazine, will remain the firm’s main shareholder. He has no plans to reduce his investment, said a person familiar with the firm.

Simons’s $5.5 billion Renaissance Institutional Equities Fund, known as RIEF, fell 9.5 percent this year through September after losing 16 percent in 2008, the person said. The fund seeks to outperform the Standard & Poor’s 500 Index of the largest U.S. companies by between 4 percent and 6 percent on an average rolling basis. This year is the first that the fund underperformed since it was started in 2005. The S&P 500 index has gained 17 percent this year through September.

Simons’s $2.5 billion Renaissance Institutional Futures Fund, or RIFF, gained 1.6 percent this year after losing 12 percent in 2008, the person said, while his $9 billion Medallion fund has gained about 12 percent this year through June. Hedge funds globally have returned 17 percent this year through September after posting average losses of 19 percent in 2008, according to Chicago-based Hedge Fund Research Inc.

Language Technology

Hedge funds are mostly private and unregulated pools of capital where managers can buy or sell any assets, participating substantially in the profits of the money invested.

Brown and Mercer were both hired by Renaissance in 1993 from the IBM Thomas J. Watson Research Center, where they were language technology experts.

Simons was born in 1938 and grew up in Brookline, Massachusetts, a suburb in Boston. He graduated with a bachelor’s degree in mathematics from Massachusetts Institute of Technology and completed his Ph.D. in math from the University of California, Berkeley.

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net;

Last Updated: October 9, 2009 00:01 EDT