Excerpts from the May letter (thanks to a disgruntled reader who would rather remain nameless):
The RIEF strategy’s preference for low volatility has been contrary to the voracious appetite for volatile stocks that has persisted for the past two months. This high volatility rally, which can hardly last forever, is at the root of our dismal performance.
I love the term “can hardly last forever.” It only needs to last two minutes longer than you can stay solvent, of course.
Of course it is precisely this predilection of RIEF that helped us avoid much of last year’s pain. While our recent reversal has erased a large fraction of last year’s relative gain, we are still ahead of the index, net of fees, by more than 9% on a 12-month rolling basis and 3.60% annualized since inception, each with a volatility roughly 60% that of the S&P*. We remain confident that RIEF’s portfolio will continue to provide higher long-term return and lower volatility than traditional long-only investing, while, at the same time, serving as an effective diversification for portfolios with large exposure to traditional long-only managers.
Translation: We were short vol. Sort of like LTCM, but not really.
We certainly understand our clients’ discomfort at having to withstand a performance onslaught during an extreme market rally, but we believe patience during this period will be soundly rewarded. In order to address your concerns we are scheduling a client conference call for RIEF investors next Wednesday, May 13th at 1:00pm EDT, where I, together with senior researcher David Lippe, will discuss performance and answer investor questions. Details for this conference call and playback instructions are available on our website: www.renfund.com.
Sincerely,
Jim Simons
So it was a scheduled call. Ah ha!
And the goods:
April / YTD
Series A:
Onshore: -9.38% / -17.31%
Offshore: -9.47% / -17.61%
Series B:
Onshore: -9.25% / -16.86%
Offshore: -9.35% / -17.17%
Series C:
Onshore: -8.64% / -16.95%
Offshore: -8.79% / -17.25%
Series D:
Onshore: -8.33% / -16.86%
Offshore: -8.51% / -17.17%
Returns are for continuing investors.
Boom.
What do you mean math doesn’t _create_ human behaviour?
-J. Merri
Where is the “Dear AQR Investor” letter? What has their YTD been? Anyone?
-17.61 is the new hara-kiri
@2 I was wondering the same thing …
Serious question: What does “short vol” mean? Just that you wrote options?
Sometimes maths hurt, eh Jim?
@5
Oh man. You really should know better than to ask a question in a DB comment section. prepare to get skewered son.
And no, there are other ways to short vol and writing options is one of the least effective ways to do it. OTC VIX index trading is most common for large trades.
I think in this context, it means that REIF was net underweight stocks perceived to be more volatile than the market and/or net overweight stocks perceived to be less volatile than the markets.
In the LTCM context, yes it means that they were short options. They under-estimated the fatness of the tails and consequently got reamed.
So REIF’s version of being short vol doesn’t have the unlimited catastrophic downside potential that LTCM’s verion had, but it can still result in severe under-performance of their benchmark, which is what has happened recently.
Yea, but this is fair warning for those who want to get long this market. Mean reversion is coming
@8 – LTCM “underestimated the fatness of tails and consequently got reamed”
or, more accurately:
LTCM didn’t think that fat tails existed and consequently got reamed.
Does anyone here know how to tie a tie?
- Wells Fargo Associate
10 is right
LTCM was orthodox Efficient Market Hypothesis FTL.
@8 remember their losses were only a few % points of their portfolio. The problem was they had zippo equity. Besides they didn’t lose the most money on short equity vol. They lost it on bond spread trades.
Does anyone here know how to tie a tie?
- Wells Fargo Associate
LTCM is sooooo 90′s.
Past Performance Is Not an Indication of Future Results
It’s like, did you see this headline in the “NYTimes” today, “Billions Withdrawn Before Madoff Arrest.” Of course billions were withdrawn! That’s why he could not withstand a continuation of operations. So this makes me think it’s a handholding call to not get investors to withdraw enmasse.
Why is “Steve Schwarzman” still listed above as a hot topic?
Cliff, Lynn and Jim are a bit more relevant now. Even the King of the Citadel, with his expanding waistline, gets more airtime.
Keep the faith. Remember Kenny got through this call, goddammit, Jimmy will too.
3.60 since inception. fuckin a!
@5:High volatility = stocks with big recent up/down moves. Low volatility = everything else.
Looks like they’re short a bunch of stocks that rallied over the past few months.
@19 and 60% of the volatility of the S&P 500!
Too bad Treasury bonds are up 8% over the last 5 years with 5% of the volatility of the S&P 500.
Your strategy’s Sharpe ratio is better than the the Treasury Bnd Sharpe ratio is the new killing it.
what did RIEF return in 2008?
Listening to the call now. Jim hacked up a lung about midway through. I’m pretty sure he is long tobacco stocks, though of course he would never tell me such information.
More of the same though – the market is wrong, they aren’t. “Heteroskedastic” was thrown in a few times, just in case you forgot who you were listening to.
Let’s call the semantics arbitrator in here. What does this sentence mean?
“… we are still ahead of the index, net of fees, by more than 9% on a 12-month rolling basis and 3.60% annualized since inception, each with a volatility roughly 60% that of the S&P*.”
Does the +3.6% mean up 3.6% since inception Aug 05 or does it mean +3.6% on average each year above the S&P, which, in fact, was down for the period?
Who puts money in this black hole?
@23 – “the market is wrong, they aren’t.” Seriously, did they really try to fob that shit off on their LPs?
Haven’t any of these pocket-protector-wearing dumbfucks read Keynes?:
“The market can stay irrational longer than you can stay solvent.”
Lookout below!
@20
That is NOT how hedge funds and big institutional traders short volatility. Go take an introductory derivatives course at the local community college.
Answer:
What are OTC trades?
i-bank guys, GTFOOH
Traders don’t lose money. High volatility rallies do.
Black Swan ey Jim. Talebs Black swan protected fund breaks even 95% of the time. Its up over 200% in this volatility. Math works, when you work math right.
Captain, the fund cannae take much more of this, we must reduce the position.
@7 Go back to Yahoo! Finance, person who is pretending to a DB regular telling a n00b that he/she asked an inappropriate question.
-Another Yahoo! Finance person
@32
7 here
I would never consider myself a DB or Yahoo! Finance regular. Both places are full of pathetic wannabes.I was just letting the poor soul know what was coming.
Guy Who has no Internet Finance Haunt
So let me get this straight, Ren has returned money market return rates since the 05 institutional fund came out, and did so while charging their LP birth rights, and for this you get higher volatility than a money market itself.
Nice…
it’s really interesting that they stuck to their vol-sensitive strategy (whatever it is) while at the same time they had to have known there would be still be more high volatility periods during this shitstorm.
“[My pedigree in] Mathematics, [your lack of] Common Sense, and Good Luck [figuring out my scam]“.
Plot Medallion and Fairfield Greenwich returns on the same chart; tell me which is the fake.
Here is some math: RIEF = true returns; Medallion = bogus returns.