A Serious Issue: RenTec's Losses

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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

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