Renaissance

A Serious Issue: RenTec’s Losses

Bloomberg reports that RenTec’s $18 billion Renaissance Institutional Equities Fund has declined twelve percent since May. A lot of people are all, “It looks bad but it’s actually amazing how small Ren’s worst drawdowns are,” and yeah, if you want to be all clinical about it, it is amazing—amazing that there could be supposedly clear headed thinkers out there, veterans even (I was quoting my close personal friend, Julian Robertson just then) who still fail to get it. Any loss, big or small, for RenTec, means fewer cigarettes in James “18 Packs A Day” Simons’s pockets. Cuts are going to have to come from somewhere, and we all know Big J isn’t going to stop funding autism research, or giving money to Stony Brook, or buying bull ride rounds for everyone at Matty T’s Roadhouse. He’s going to start smoking less. That’s not something we want to see happen so Carney’s agreed to take a later flight and drive out to Long Island with a couple of cartons, on me. If you care at all about the bearded one’s black lung, you’ll do the same. If you don’t have the time to make the drive to Setauket, call the Dealbreaker delivery service line, at 203-890-2000. We’ll get the job done.
Simons, Mandel Post Biggest Drop in Hedge Fund Slump [Bloomgerg]
NEW YORK – Renaissance Technologies Corp.’s grand experiment – a quantitative net long hedge fund designed to manage as much as $100 billion – lost about one-third of its assets since August because of hot-footed wealthy individual investors.
Assets in the Renaissance Institutional Equities Fund dropped 32% to about $19 billion from a high of around $28 billion, the result of massive redemptions after performance was whipsawed by last summer’s rough markets (Pensions & Investments, Aug. 20).
Performance for the year was flat, gross of fees; after fees, the fund was down 0.93%.
Sources said the brief period of tumultuous underperformance was enough to spook nervous high-net-worth investors – especially Europeans – who had poured money into RIEF.
The problem, sources said, was a case of mistaken identity and unrealistic expectations.
Those wealthy individuals – and their brokers and advisers – apparently assumed that by investing in RIEF they would be tapping the performance of New York-based Renaissance Technologies’ fabled Medallion Fund. The flagship hedge fund averaged returns more than 30% annually since inception in 1988 and 120% last year, sources said.
But the $6 billion Medallion Fund invests only Renaissance partners’ money; it has no outside investors.
“A lot of investors got into RIEF because they thought they were going to get a piece of Medallion. … Renaissance made it clear from the outset that RIEF was a very different fund, managed completely differently than Medallion,” said a senior executive of a hedge fund of funds that has not invested in RIEF. The source asked for anonymity.
Investors attracted
Sources said investors in RIEF also were attracted to the idea of investing in a fund associated with James H. Simons, Renaissance’s founder and president.
“The combination of stupendous performance (by Medallion Fund), a closed fund, and Jim Simons’ impeccable reputation was irresistible. Brokers could sell investments in this fund like hot cakes to high-net-worth clients in their wealth management programs,” said the chief executive officer of a hedge fund of funds, who asked not to be identified.
“The fund was sold as a kind of walking-on-water strategy and when the fund got wet last year, thanks to market conditions, that hot money walked out,” said the source.
RIEF’s growth in its first two years was so strong that monthly inflows had to be capped at $2.5 billion, the sources said. Even Renaissance Technologies executives were surprised, said Stephen Robert, chairman and CEO of Renaissance Institutional Management LLC, New York, the subsidiary that manages RIEF.
“If you had said 21/2 years ago, when we were planning RIEF’s introduction, that assets would approach $30 billion so quickly, we wouldn’t have believed you,” Mr. Robert said. “Because investors bought into RIEF so fast, there were some who clearly did not understand the strategy and got nervous after the quant quake last summer. And a good number were short-term investors, and we’ve always said you need a three- to five-year investment horizon for this fund.”
Mr. Robert said RIEF had “significant” redemptions, but declined to quantify them. An examination of the firm’s most recent ADV filing with the Securities and Exchange Commission shows the redemptions probably were between $8 billion and $9 billion.
Mr. Robert said the majority of the redemptions came not from institutional investors, but from investors brought into RIEF through bank private wealth investment platforms.
“There is a bright side to the redemptions.” Mr. Robert said. “We now have a more stable client base made up of institutional investors that have a longer investment focus. And the fund’s smaller size augurs well for performance.”
Mr. Robert said RIEF “has done what we said it would do” and was never intended to be an absolute-return fund because beta exposure is built into the model. Rather, RIEF was designed as a substitute for a long-only U.S. equity investment because it promises modest market outperformance and modest downside protection for investors with a three- to five-year investment horizon.
Performance target
RIEF’s performance target is 500 basis points annually above the return of the Standard & Poor’s 500 index, gross of fees, with lower volatility – 10.5 compared with the S&P 500’s historical volatility of between 15 and 16. Because the fund is 100% net long (175% long, 75% short) with beta of 0.4, Mr. Robert said it does reflect market drops, although the extent of the downside is lessened.
RIEF was seeded with about $600 million of company and partner money on July 1, 2005, and has outperformed every year but the most recent one, averaging between 450 and 500 basis over the S&P 500 since inception.
Investment consultants and hedge fund-of-funds managers said RIEF’s beta exposure makes it difficult to fit into a hedge fund portfolio.
“RIEF is really hard to bucket” into a style category, said a hedge fund analyst at a consulting firm who asked for anonymity. Echoing the remarks of several hedge fund-of-funds executives, the analyst said, “Because RIEF is beta-oriented, there are structural problems when you try to fit it into a hedge fund-of-funds portfolio. It doesn’t fit into a market neutral slot and it doesn’t fit into long/short equity. It’s just hard to lever it into your portfolio.”
“RIEF is a `between’ in the sense that it has too much beta for a hedge fund and while it might add alpha on the long-only side, it has a lot of tracking error,” said alternatives consultant Stephen L. Nesbitt, CEO of Cliffwater LLC, Marine del Rey, Calif. “RIEF looks risky from the hedge fund perspective and looks risky from the long-only perspective” because of its tracking error to the S&P 500.
Mr. Robert said RIEF’s inflows have slowed and may stay depressed until performance picks up. But he said the firm’s newest fund, the Renaissance Institutional Futures Fund, which was launched in October, already has attracted $5 billion in assets from institutions and private wealth platforms and has a full pipeline of potential investors.
GRAPHIC: Art Credit: Stephen Robert feels some investors didn’t really understand the strategy.
LOAD-DATE: March 7, 2008

James Simons Will Sell Stakes For Cigs

jamesimons.jpgMarket/lady friend/mahjong troubles got you down? Cheer up—you now have the unique opportunity to own a tiny part of Renaissance Technologies (provided, of course, that you’re an institutional and/or sophisticated investor, which we’ve been told by Ad Sales you all are, which would explain how you’re able to spring for those pricey six-packs of Mike’s H.L. with such ease). The greatest hedge ever run out of Setauket, Long Island is said to be planning a minority stake sale in the coming weeks (though, predictably, the sale has been denied, for now). While AQR and KKR (and DVR and DDR) have reportedly been proceeding cautiously with their planned IPOs in the wake of some fireworks in the credit market, James Simons is confident things will work themselves out, and that there will be a demand for a little piece of James at home, as well as in Asia and the Middle East. (Rep from Goldman: “it’s not just the Ladies that Love Cool James, that’s all I’m saying.”)
The $30 billion fund is apparently going with stake sales similar to those of super secretive SAC, as they would allow them to raise capital but not be forced to reveal any major information about RT’s 7th grade math-based trading schemes. Despite having momentarily jumped on the summer losses bandwagon, Renaissance’s flagship Medallion is said to be up for the year.
Bullish US hedge fund may sell stake [FT]

You Are Not Special

rogersandking.jpgKids today. They all want jobs in hedge funds and private equity, and, what’s more, they don’t just want to work in the aforementioned fields—the little punks want to run them. They all want to be James Simons, they all want to be Steve Schwarzman; they all want wicked cool beards, they all want to tower over the crowd at a perch of 5’6”. Where do they get off?
There are two and a half reasons for the career aspirations of today’s youth. 0-1 is that Simons made $1.7 billion last year, with the combined income of the top 25 HF managers exceeding $14 billion. So that’s somewhat appealing. (Schwarzman also did okay for himself). 1-1.5 enables 0-1: favorable tax treatment, i.e. 35% v. 15%, the latter of which saved Simons a few hundge mill in taxes last year. If you’re a kid and you’re saying to yourself “15 or 35, what shall I do?” you probably don’t need much time to come up with an answer. (We know 15 is for carried interest and not total income, we’re just trying to make a point, so settle down trigger finger commenters and save your vitriol for whatever grammatical error is bound to come next).
1.5-2.5 boils down to stupidity and arrogance being a bad combination. Robert Frank writes that the market is a “winner-take-all market— essentially a tournament in which a handful of winners are selected from a much larger field of initial contestants.” Why is the field so overcrowded? Because people overestimate themselves and think that they, not the guy next to them or the guy next to him, have what it takes to earn $1.7 billion/yr. Apparently more than 90% of workers believe they are more productive than their average colleague.
It’s probably true that 90% of your colleagues are incompetent and lazy. But who’s reading Dealbreaker.com right now when you could be doing work? This “overconfidence bias,” according to Frank, puts talented people into an oversaturated field when their skills could be better used elsewhere (like I-banking!), adds no economic value and puts us further and further from achieving our goal of peace in the Middle East. That’s why he advocates making the “after-tax rewards…a little less spectacular,” so that less people want to work in hedge funds and P.E. and raises the attractive quotient of other fields, “ones in which extra talent would yield substantial gains.”
Raise the tax. Don’t raise the tax. Whatever. Let’s attack the problem at the root and lucky for us, the Wall Street Journal has a list of HF and PE enemies on hand. Who or what caused an entire generation to ballpark its earning potential at $1 billion-or-so/yr? Mr. Rogers.
That’s right—you can send your pipe bombs to the estate of late Fred Rogers, who told all small children that they were “special,” even the ugly ones.

“Mr. Rogers spent years telling little creeps that he liked them just the way they were. He should have been telling them there was a lot of room for improvement. … Nice as he was, and as good as his intentions may have been, he did a disservice.”

Indeed! Because of Mr. Self-esteem and that puppet king in the bizarre alternate universe, everyone thinks they can eat $40 crab legs. And you know who else is to blame? The parents. Too much “A for effort,” not enough “you’re a moron.” Too much “I believe in you,” not enough “You will fail.” Too much, “You can be Stevie Cohen when you grow up,” not enough “hopefully McDonald’s is hiring.”
The overcrowding of these fields as a result of coddling and child-rearing techniques that foster confidence and self-worth is a problem that must be stopped.

A Career in Hedge Funds and the Price of Overcrowding [NYT]
Blame It on Mr. Rogers: Why Young Adults Feel So Entitled [WSJ]

Simons: book smarts better than Street smarts

Renaissance founder James Simons, the 69 year old former MIT and Harvard Math professor, likes to keep things in the academy of higher learning, and higher returns. This noble search for veritas has produced a few years of $1bn+ take home pay, which is some tenure track. Does Simons even dip into the Wall Street talent pool? No, according to his keynote address at the International Association of Financial Engineers annual conference in New York:

We hire physicists, mathematicians, astronomers and computer scientists and they typically know nothing about finance. We haven’t hired out of Wall Street at all.

Is this proof that the machines, or at least the cyborg quants (that kid who never talked in your freshman dorm, who you only saw in the hall bathroom, and not to shower) have won? Arguably the most successful hedge fund in the world completely ignores Wall Street (and the US, as most new hiring is done from the international talent pool), and even gets away with asking people to drop their drawers when investing.
Renaissance has varying fee structures but is most known for the 5 and 44 gouging in the $6bn Medallion Fund, which we still think counts as gouging, just on principle, despite the post fee 33% annual returns in the 15 years prior to 2004 (at least according to marketing materials – what happened in 2005 anyway?). We don’t begrudge it, we know the returns are still nuts, and if people will pay it, Simons is more than entitled to jack those fees up, but 5 and 44 sets that disturbing precedent for the cocky hedge fund manager who’s had a couple of good years (in this market – real tough…) and starts charging an insane amount (then takes a bath in the next market correction). Hedge fund fees are going up across the Street (along with the minimum liquid net worth requirement from $1mm to $2.5mm), making hedge funds even more inaccessible to the mid-level rich, opposed to the very rich.
The 2005 vintage RIEF fund, which consists of 3,000-4,000 mostly long positions on any given day has lower fees, and a reported capacity of $100bn (imagine $5bn a year just in management fees, or at least $2bn+).
Renaissance hedge fund: Only scientists need apply [Reuters]