Quant Giant RenTec Has Best Month Ever In October Thanks To... Shorts
For all purists still stuck in a world in which humans are the most efficient allocators of capital, and where, under Ben Bernanke's centrally-planned New Normal, shorting stocks has become blasphemy, the following table showing the monthly return of quant giant RenTec's chief equity fund open to the outside world, the Renaissance Institutional Equities Fund (RIEF B), whose AUM has ballooned to $8.7 billion in the past few years, will come as a shock. Because the quant strategy-driven fund, which does not look at fundamentals but purely at technical relationships and quant arbs, just posted its best month in history in October returning 8.65% nearly doubling the 4.60% return of the broader market.
But the truly stunning aspect of RenTec's October performance is that it was not driven by a highly levered beta position (2x leverage on the S&P would do it easily) which is how virtually everyone else does it (a strategy that works great as long as the market is going higher), but instead thanks to that nearly forgotten aspect of a "hedge" fund's exposure - shorts.
Where did RIEF’s alpha come from? The answer is that it came from the short portfolio. In fact, we made so much alpha in the short portfolio that we made positive profits from our short positions despite the S&P 500’s 4.6% return in October. Drilling down further, we note that almost half of RIEF’s alpha was made in the Barra Biotechnology and Drugs industries. Within those industries, RIEF is short in many of the smaller and (presumably) more speculative names. Those issues fared particularly poorly in October as the two industries combined had a cap-weighted return of 2.8% but a flat-weighted return of -4.3%. Since RIEF is long overall in Biotechnology and Drugs, but made its alpha in the short portfolio, the fund’s gains are a result of stock selection rather than sector or industry selection.
The good news: alpha generation still works. The bad news: one has to be a math genius or a robot to figure out how to do it. For everyone else - especially those 90% of hedge funds underperforming the S&P for the fifth year in a row - the Pied Piper of Marriner Eccles has an unbeatable deal on all time high beta-chasing margin debt.
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