Losses in its institutional hedge fund prompt firm to offer limited transparency
Highly secretive Renaissance Technologies Corp., hit by performance problems and huge redemptions in its largest open hedge fund, may concede greater transparency in the strategy for large institutional investors.
Renaissance Institutional Equities Fund's -12.6% return in the first half of the year sharply lagged the Standard & Poor's 500 index's 3.19% for the same period. The second quarter was especially bad: The long-short equity fund returned -4.73% vs. the S&P 500's 15.93%, according to performance data from eVestment Alliance LLC, Marietta, Ga.
The RIEF strategy is designed to outperform the S&P 500 index, gross of fees, by 400 to 600 basis points over a rolling three-year period with lower volatility (10.5 vs. the S&P 500's historical volatility of 15 to 16).
That short-term underperformance is “disappointing” to James H. Simons, RenTech's iconic CEO, chairman and founder. Renaissance Technologies is based in New York and East Setauket, N.Y.
Over the past two years, RIEF's assets have plummeted 81% to $5 billion as of June 30, down from a peak of $27 billion. The outflows stem largely from high-net-worth “hot money” that came into the fund via bank distribution channels, hedge funds of funds and institutional investors taking advantage of the fund's easy redemption terms to make up for tight liquidity conditions.
RIEF offers monthly redemption which has never been restricted, something Mr. Simons insisted on when the fund was established.
“I never liked lockups when I was on the other side of one and didn't want them for these funds. Investors have been withdrawing from the funds because they can, especially with RIEF not doing so well this year,” Mr. Simons said in an interview.
Given RIEF's performance problems and declining assets of its institutional arm, RenTech officials could offer large institutional investors a new investment vehicle with more transparency — a huge concession from the tight-lipped hedge fund manager.
The driver behind this move is Matthew H. Scanlan, formerly managing director and head of the Americas institutional business at Barclays Global Investors. He became president and CEO of Renaissance Institutional Management LLC, the RenTech subsidiary that manages quantitative long-biased funds, in February and has begun to imprint his institutional perspective on the firm's management.
Mr. Simons agreed: “Matt has begun to make important changes to how we present our strategies to institutional investors, and he has been urging us to offer some degree of transparency as we plan to do in the new (RIEF) structure.”
Didn't have to do it
Renaissance — best known for its fabulously successful $10 billion hedge fund, the Medallion Fund, which reportedly returned 80% in 2008 and has been closed to external investors for years — simply did not have to offer investors transparency. Sources said many investors in slow-trading RIEF and its sister fund, Renaissance Institutional Futures Fund — a global futures and forwards fund — assumed or hoped they would be getting a little of Medallion's nanosecond trading success, and didn't insist on transparency when they handed over their money.
But “in the wake of (Bernard) Madoff, everyone wants more information about their investment strategies,” Mr. Simons said.
“Historically, we did not provide investors with a lot of details about the strategies because we're a target for reverse engineering and we have a lot of trade secrets around here to protect. But it is possible to be a bit more open,” said Mr. Simons.
“We are looking at a new (RIEF) structure for large institutional investors that would offer some disclosure. We don't have the exact details ready yet, we're still tinkering with the model, but it will offer more information for large institutions that agree to appropriate confidentiality arrangements,” Mr. Simons added.
The move to give institutional investors even a little peek into one of the firm's “black box” quantitative strategies is a big concession for RenTech. Institutional investment consultants have decried RenTech's lack of transparency since RIEF's introduction in 2005.
One consultant who insisted on anonymity said Renaissance's prospects for institutional success are low unless its offers some degree of transparency. “We've tried to get to know them, without much success,” the consultant said. “They will not give away any transparency, and we just don't know what's under the hood. RenTech just ends up being so much more work that we're better off looking at other managers for our clients.”
Slump must end
Transparency notwithstanding, Mr. Simons said the “real issue is that the fund (RIEF) has to pull out of its slump. We came into 2009 looking very good, well ahead of the S&P (500 index) and during the first couple of months of this year, we were going like gangbusters, but in March and April we did poorly. The fund has its own mind and doesn't like some of the stocks that the rest of the world likes. People are very skittish right now.”
The fund is 100% net long — going 175% long vs. 75% short — with a beta of 0.4.
RIEF met its performance goal in all but two of the past five quarters on a rolling three-year basis, according to a Pensions & Investments' analysis of data from eVestment Alliance. In the second quarter of 2008 and the second quarter of 2009, the fund still outperformed the S&P 500, but by less than 400 basis points.
RIEF's average outperformance of the S&P 500 over a rolling three-year period was 599 basis points, according to P&I's analysis.
While redemptions and negative performance in RIEF and RIFF have combined to drop firmwide assets 53% to $17 billion as of June 30 from a peak of $36 billion in mid-2007, sources say RenTech executives might not be worried about the fate of the two RIM funds because Medallion remains so successful. About 35% of Renaissance's remaining assets are managed for institutional investors, according to a source with knowledge of the firm who declined to be identified.
Mr. Simons' himself admitted that “the life of the firm does not depend on these funds (RIEF and RIFF), but I like these funds. I have a lot of personal money invested in them, as do other Renaissance employees.”
Mr. Simons, 71, also said the firm's success does not depend on his presence, noting that his own retirement “won't be too terribly” far away. He said that over the past few years, he has moved many of the firm's day-to-day operations to Peter Brown and Robert Mercer, co-presidents.
“I could step out without the walls falling down,” Mr. Simons said.