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Rentec's RIEF Collapses In 2009, Even Firm Admits It May Be Medallion Fodder
Jim Simons is long retired, and probably not a second too soon. As Renaissance writes in its December monthly comment, "RIEF's performance in 2009 was disappointing. The fund did not participate in the market's above-average gains, largely because of its propensity to short high-beta stocks." It further elaborates "RIEF's tendency to be long low-beta stocks and short high-beta stocks is not so much a strategic choice as a natural consequence of forming a fully-invested, low-volatility portfolio. A low-volatility portfolio must have a low beta against the S&P since the volatility of a portfolio is at least its beta times the volatility of the S&P 500. To achieve a low beta, it is mathematically necessary to have either a low-beta long book or a high-beta short book, and natural to do both." The letter concludes "while we believe that RIEF generates sufficient alpha to outperform long-term average market returns of approximately 10% per year, it is implausible that RIEF will generated sufficient alpha to outperform during a period where the S&P 500 returns 23% in only seven months." Well, in 2009, RIEF's expensive strategy proved to be a massive failure. RIEF is basically one big mean-reversion model, and the longer the reversion does not occur, the greater the pain for investors. Which means basically since inception.
Amusingly even an advanced Ph.D. degree is insufficient to figure out how RIEF did for the full year following a detailed read of the December letter. The math wizards in East Setauket may be great at pattern modelling (we jest), but they really suck at providing critical facts: there is no actual YTD performance, but just an annualized December performance (which still is horrendous). Tracking the assorted monthly returns indicates that the fund which at one point was hoping to be the PIMCO of the equity world, underperformed the S&P by a stunning 30%. Did anyone think Simons retirement was due to finding a metric ton of Parliaments in his back year and a decision to dedicate his latter years to emphysema research?
And even as yet more RIEF investors can't wait to bail on the biggest flawed experiment in quant hype, Simons tries to soothe investors' nerves: "While 2009 was obviously a challenging year for RIEF, we believe that much of the Fund's value proposition has been validated over the last few years." Certainly, if the value proposition was to constantly underperform the S&P and to pad the returns of Medallion, then we completely agree.
Speaking of the latter, we can't help but bring attention to a particular piece of disclosure which Renaissance added in one of its recent offering materials. To wit:
USE OF MATHEMATICAL MODELS BY RIEF AND MEDALLION FUNDS The Medallion Funds
and RIEF both use mathematical models to trade. Although these models employ
some of the same or similar signals, they are used very differently in each
model and produce dissimilar results. Medallion has a much shorter time horizon
for its predictive signals, has a much shorter holding period for its positions
and trades in a more diversified universe than RIEF, which helps to reduce the
impact between the two systems. Renaissance has periodic checks to attempt to
ensure that the impact of each system’s trading is not materially adverse to
the other. However, no assurance can be given that the trading of the Medallion
Funds will not have a negative effect on the trading of RIEF.
First Goldman getting cozy with the semantic legalese, now Rentec... Should the SEC be looking into the implications of potential front-running of RIEF by Medallion, based on that last disclaimer sentence? We don't know - we leave it up to Mary Schapiro. After all, she is so good at nothing she does.
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LEAVE MARY SCHAPIRO ALONE!!!!!!
Just kidding, she's almost as useless as, uh, I dunno, can't think of anything else that uselesss off the top of my head!
As useless as Fat Larry Summers (think Fat Tony Salerno...)
at a Harvard endowment investment committee meeting?
She IS useful. Not to imply she is doing her job. Not to imply she shouldn't be frog-marched.
Useful to whom? I'm curious too.
Who still cares about RIEF? It is stunning to see anyone would waste time analyzing a (now) insignificant fund.
In stating "RIEF is basically one big mean-reversion model, and the longer the reversion does not occur, the greater the pain for investors," you hit the nail on the head.
More interesting, though, is RenTec's disclaimer, which starts by saying:
This implies that the mathematical trading models could adversely effect EITHER fund, but the next sentence offers only a unilateral disclaimer:
Why include only one half of the argument... unless, of course, the system is designed to not move bilaterally.
Anyone know what the returns were for Medallion in the same time period?
38.0% through Oct. 31.
A little dated but not many talking of this either:
Hedge Funds Hold Investors ‘Hostage’ After Rebound
“We don’t object to the illiquidity,” Papastavrou said in an interview. “We object to how some managers are abusing the situation and holding investors’ money hostage to generate fees.”
About $77 billion in hedge fund assets that were frozen during the credit crisis are still restricted, according to estimates by Credit Suisse Tremont Index LLC, even after the biggest stock-market rebound since the 1930s and a record rally in credit markets revived demand for some assets considered illiquid a year ago. D.E. Shaw & Co., Highland Capital Management LP and Harbinger Capital Partners LLC are among firms that have yet to return money to clients.
Highland Capital, the $24.8 billion firm run by James D. Dondero and Mark K. Okada out of Dallas, said it’s struggling to return money because investors can’t agree on the terms of the liquidation. Highland has yet to return all money to investors who put in redemption requests before the firm said in October 2008 that it’s liquidating two hedge funds.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a10Gkfcz.sLo&pos=10
One robot gain is another robot loss.
Game Over.
p.s. All hail a new robot
I bet the returns would have been significantly better had HAL 9000 not been controlling the market.