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Rentec's RIEF Collapses In 2009, Even Firm Admits It May Be Medallion Fodder

Tyler Durden's picture





 

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:

#840000;">USE OF MATHEMATICAL MODELS BY RIEF AND MEDALLION FUNDS #241e20;">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.
#241e20;">

 

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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Sun, 01/24/2010 - 13:18 | Link to Comment Anal_yst
Anal_yst's picture

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!

Sun, 01/24/2010 - 13:28 | Link to Comment Problem Is
Problem Is's picture

As useless as Fat Larry Summers (think Fat Tony Salerno...)
at a Harvard endowment investment committee meeting?

Sun, 01/24/2010 - 13:53 | Link to Comment Dirtt
Dirtt's picture

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.

Sun, 01/24/2010 - 13:30 | Link to Comment Anonymous
Sun, 01/24/2010 - 14:24 | Link to Comment Unscarred
Unscarred's picture

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:

Renaissance has periodic checks to attempt to ensure that the impact of each system’s trading is not materially adverse to the other.

This implies that the mathematical trading models could adversely effect EITHER fund, but the next sentence offers only a unilateral disclaimer:

However, no assurance can be given that the trading of the Medallion Funds will not have a negative effect on the trading of RIEF.

Why include only one half of the argument... unless, of course, the system is designed to not move bilaterally.

Sun, 01/24/2010 - 18:06 | Link to Comment Anonymous
Sun, 01/24/2010 - 19:38 | Link to Comment Unscarred
Unscarred's picture

38.0% through Oct. 31.

What's interesting here is we see Bloomberg's estimate for Jim Simons' secretive fund, Medallion. This quant fund at Renaissance Technologies is not open to outside investors and has garnered RenTec's highest returns. Medallion had a stellar 2008, finishing up over 80%. They did well in 2009 it looks like as well, as Bloomberg estimates they were up 38% and made $1.1 billion through the first ten months of 2009.

 

RenTec's other fund, RIEF, is a contrast to Medallion in two major ways. Firstly, RIEF accepts investments from outsiders while Medallion does not. Secondly, RIEF's performance has been quite lackluster when compared to that of Medallion. However, one does need to keep in mind that each fund is pursuing a different strategy and as such they are not comparable. Their RIEF fund had a rough 2009 due to the large swings in 'junk' stocks and was amongst the worst hedge fund performers when we last checked on it back in August.

 

So, their Medallion fund had a solid year while RIEF had a rough 2009. Overall, it is just intriguing to see estimates for Medallion. This fund is closely guarded and has an aura of mystique as it is often talked about for it's stellar returns. As we detailed previously, founder Jim Simons' was set to retire from the firm he founded at the end of 2009.

Sun, 01/24/2010 - 18:16 | Link to Comment Anonymous
Sun, 01/24/2010 - 20:28 | Link to Comment Comrade de Chaos
Comrade de Chaos's picture

One robot gain is another robot loss. 

 

Game Over. 

 

p.s. All hail a new robot 

Mon, 01/25/2010 - 16:47 | Link to Comment Anonymous
Do NOT follow this link or you will be banned from the site!