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.
As many already know, earlier today Senator Schumer announced the cleverly named Ex-PATRIOT act, which seeks nothing short of exile for anyone who effectively declines their US citizenship for tax avoidance purposes. So far so good. We have, however, one simple question. In light of recent media reports of rampant abuse of various international tax loopholes by US corporations (recall the Double Irish with a Dutch Sandwich), but much more importantly, the glaring abuse of offshore tax shelters by hedge funds - organization such as Paulson & Co., RenTec, York Capital, etc., and financial institutions, such as Lazard, Blackstone, and Credit Suisse, can Senator Schumer please rep, warrant and guarantee that none of his corporate sponsors, i.e., his Top 100 Contributors, have ever engaged in any form of explicit or implicit tax avoidance, tax offshoring, and tax shelter. To facilitate his checklisting, we have presented his top 100 contributors below. Because if he can't, one may be left with the impression that his whole anti-tax tirade and legislation is, you know, hypocritical.
Those who have been around for more than one trading generation (which in the old days was 3-4 years, but in the current centrally-planned, vacuum tube-traded times, is more like 3-4 months), will distinctly recall that the first rumbling of the financial crisis started not with the bankruptcy of Lehman, or even the handoff of Bear (and its massive silver legacy short) to Jamie Dimon, but in August 2007, when days after the market hit its all time high, something went massively wrong in the quant market segment (nobody still knows what it was but many speculate that is was simply every algo being on the same side of the trade and trading out all at the same time following the blow up of the Bear Stearns hedge funds). What the first week of August 2007 was notable for, in addition to massive losses for such legendary quants as RenTec (very well described in Scott Patterson's book titled appropriately enough "The Quants"), was that for the first time ever, the infallible Goldman Sachs... fell. Specifically, its heretofore mythical Global Alpha quant fund, which had the mythical allure of a 33rd degree Freemason dinner, imploded, and crashed, forcing the end of a quant generation, and the beginning of the end of Goldman's aura of invincibility. As Bloomberg recalls those August 2007 days: "Goldman Sachs Group Inc.'s $8 billion Global Alpha hedge fund has fallen 26 percent so far this year, a decline that may prompt more investors to withdraw their money, according to people familiar with the fund...On June 26, Goldman said Eric Schwartz, co-head of asset management since 2003, would step down in the next few months and leave Peter Kraus in charge of the fund unit. Global Alpha decreased 8 percent during the last full week of July and was down 16 percent from the beginning of January through Aug. 3. There is an Aug. 15 deadline for Global Alpha investors who want to redeem money on Sept. 30." Well, the reason we bring all of this up, is because unlike what everyone claims, it is not 2008.... it is 2007 all over again. To wit: Goldman Global Alpha just blew up, for the second and probably last time.
Retail Renaissance Revolt: Best Buy Plunges As Top Line Misses, Cuts Forecast, Comp Stores Down And Sees Pervasive WeaknessSubmitted by Tyler Durden on 12/14/2010 09:09 -0400
Is the retail revolution over? Best Buy, which was seen by many as the best indicator of retail hunger for all sorts of irrelevant Made in China Gizmos is plunging in pre-market trading, now down over 10%, after the company announces a massive top line miss of $11.89 billion in Q3 revenue on expectations of $12.45 billion. We can't remember when a retailer had a nearly 5% miss in top line, and is certainly a major cause of concern for not only the retail renaissance but for... Apple, for whom the store is the second biggest seller. Some other horrendous data points: Q3 comp sales down 3.3%; domestic Q3 comp sales down 5.0%, the company sees year EPS USD 3.20-3.40, saw USD 3.55-3.70, vs. Exp. USD 3.59, and notes domestic sales were softer than expected (as if it wasn't obvious). Broader market futures are also moving lower on the news that the market has managed to extract as much as it could out of a consumer base that is no longer paying its mortgages. Incidentally, how this could be a surprise is stunning: on October 31 we wrote that "TV pricing bloodbath threatens already razor-thin retailer margins" - of course, what is obvious to some, is completely opaque to the robots who only focus on positive headlines news. Perhaps a number for RenTec to tweak that algo a little?
Out of nowhere, a late day selloff in high beta tech names ends the Nasdaq's 8 day winning rally, and causes a red close to the tech index which as we presented over the weekend, has the highest bull/bear ratio since the dot com days. Various rumors are swirling to explain this stunning event, among which one of the more provocative ones is that the universe of Rentec alphaclones (namely the moderate money momos, which have recently taken over the market, and which mimic Rentec RIEF B public holdings, which many believe are broadly indicative of Medallion's portfolio) is slowly starting to pocket year end profits, comparable to the action in gold last week, when gold sold off after a couple of macro funds closed out gold positions at massive profits. Is the now extinct process of profit taking about to reemerge from the ashes? On the other hand, this could merely be a brief respite to what has become the most ridiculous tech-driven momo market in many current traders' lifetimes.
Paolo Pellegrini Is Coming Back As A Quant, Laments Loss Of Traditional Investment Thought In A Fed-Dominated WorldSubmitted by Tyler Durden on 12/02/2010 18:46 -0400
It appears Paolo Pellegrini, the brains behind Paulson & Co. most profitable trade, is coming back... as a quant. As we reported in August, the billionaire manager's former fund - PSQR - had decided to return all capital to investors citing "challenging market conditions." It only took Paolo 3 months to realize that money is no longer to be made in a macro world dominated by central bank infighting, in which a schizophrenic market goes up or down by several percentage points on a daily basis depending on what word feels out of place in any given central banker's speech, and instead will focus on "quantitative disciplines" along the lines of DE Shaw and RenTec. And why not: the only ones left making money in this market are momentum chasing strategies which have millisecond frontrunning arbitrage over the rest of what is left of the heard. As to the visionary's current market views, his mantra is "don't fight the Fed" even as he sees bond trading at ridiculously high levels, although with a caveat: "of course you don’t want to fight the Fed, until the Fed loses control which is what happened obviously in the sub-prime and financial crisis. That is very difficult, though, to predict." As we predicted earlier in the year not only are macro funds soon going to be extinct but the same fate lies in store for the traditional long/short 130/30 group. Very soon every fund will need to have their own quant/HFT group (SAC has already quietly amassed almost 20 HFT pods) just to be able to attract outside investors. After all why else is the woefully underpaid SEC admitting it has no idea how to fix the market now entirely dominated by HFT, and will merely extend its completely worthless "circuit breaker" model for another three months, then another three months, and so on.
Everyone's favorite N-11 expert is shifting to a new position as head of Goldman Sachs Asset Management. Alas, according to Absolute Return + Alpha, the man who pretty much coined the term decoupling has a substantial uphill climb. Based on the AR+A hedge fund score sheet, GSAM ranks almost dead last in the categories of Alignment of Interests and Alpha Generation (in the last category only beaten by quants AQR and RenTec, where Jim Simons praises the HFT role in the Flash Crash. We wonder if he will change his (swan) song once the SEC finally discovers that it was the HFT's fault all along... some time in 100 years).
The quarterly Goldman Hedge Fund Trend Monitor, aka the HF groupthink update, is released, chock full of HF holding trivia, such as that should Apple ever miss its priced to absolute perfection business model, a whopping 181 hedge funds are going to suffer, and 75 HFs, who have Apple as a top 10 holding, are going to get crushed. Also, we uncover the latest top 10 hedge funds ranked by equity assets (DE Shaw, RenTec and Paulson are the new top 3, although with 2,048 and 2,669 holdings for the first two, they are now receiving 2 and 20 for their quant models which as the NYT highlighted recently no longer work). On the other end of the quant spectrum, are the traditional hedge funds, and as of Q2, the typical fund had an average of 63% of its long-equity assets invested in its 10 largest positions, compared to 30% for a typical large-cap mutual fund, 17% for a small-cap mutual fund, 19% for the S&P and just 2% for the Russell 2000. The top 5 most concentrated hedge fund holdings are AutoNation (46% of market cap held by HFs), Sears (45%), AutoZone (32%), Pactiv (28%) and Novell (27%). Also hilarious perpetual LBO candidate Radioshack has hedge funds make up 24% of its market cap. In other words, any bad news here will kill the stock price faster than a HFT can frontrun the exponential pulling of bids. On the other side, or the names most hated by hedge funds, is Brown Forman, where only 0.2% of HFs make up its market cap, followed by Roper Industries, Stericycle, Hormel, and Praxair. From a surprise upside potential perspective, Goldman estimates that the most HF-shorted names is Crown Media, which has a 99 day short interest ratiom followed by Lifeway Foods, Isramco, K-Fed Bancorp, First South Bancorp, and Costar Group. Shorts Squeezes in these names could be violent. Looking at ETFs, the biggest gross long ETF held by HFs is GLD with $8 billion in long ownership, while the most shorted is SPY with $27.6 billion in shorts, indicating that funds are now "hedging" using this proxy for the entire market. Lastly, in confirmation that hedge funds are for the most part worthless "groupthink" contraptions which merely ride a leveraged beta wave, and suck out management fees, Goldman highlights that the "Most Concentrated" basket of stocks has underperformed the "Least Concentrated" stocks materially since February 2007, confirming that HFs have actually destroyed value in both the past 3 years and YTD, by underperforming the market.
- The secrets of the Afghan war released (WSJ)
- BP set to announce Hayward departure (FT)
- Must read: The death of paper money (Telegraph)
- European Banking's Next Focus Is Funding (WSJ)
- U.K. Growth Forecast Cut on Budget Curbs, Ernst & Young to Say (BusinessWeek)
- Taleb: Government Deficits Could Be the Next 'Black Swan' (BusinessWeek)
- Deficits Don't Matter as Geithner Growth Gets Lowest Yield (Bloomberg)
- When will the US go the way of Rome (RCM)
- More CMBS Defaults Coming this Fall as Special Servicers Try to Keep Up (Houseing Wire)
- Unlike the US, Germany can pass a budget, and a strict one at that (Deutsche Welle)
- Excessive debt may sink global stocks to crisis lows (Bloomberg, h/t Naufal)
- BP is the new RadioShack - now reported in Abu Dhabi talks (Reuters)
- US banks face "untold problem" as muni debt swells (BusinessWeek)
- The sevens sins of GLD (Bullion Bulls Canada, h/t Kyle and Robert)
- Deutsche Bank shakes up algos (Traders
On a sunny weekend in September 2008, a bunch of CDS traders were summoned at noon with the advance knowledge that Lehman was filing that midnight and to trade out of Lehman counterparties positions asap. On a sunny weekend in April 2010, a bunch of fat European bureaucrats were summoned to a videoconference to bail out Greece (for the 4th time) and achieved absolutely nothing new (for the 5th time). The latest episode in the Greek tragicomedy adds exactly no information to what was expected to be a firm bailout package: hold on a second but we knew the last weekend of March that should Greece demand help it would be bailed out by the ECB - so just what is new here? Ahh, anything to create the illusion of forward progress. In continuing to munch the non-austerity cake and have it too, the package is not really operational until Greece demands it. Which they won't until creditors put them in involuntary bankruptcy after coupon non-payment. Presumably the final rate agreed upon is 5% for a three year loan: how some bureaucratic soothing words can hope to push the entire Greek curve down by over 200 bps will be very fun to watch. Then again, as the curve will likely continue to be inverted, we dont expect much normalization for the 10 Year, as the country will most certainly be bankrupt by 2020. Lastly, to show just how serious the ECB is this time, any coordination with the IMF will not begin until tomorrow. We sure feel bad for all those traders who are now told by their superiors to buy the Greek €1.2 billion in 6 and 12 month bills on Tuesday, as any hope of return of capital now rests with whatever new insanity Brussels can cook up next. Paulson's gun is now firmly in control of the Greek/ECB, and is now thoroughly empty after repeated own-foot shootings. And while we are on the topic of IMF-assisted suicide, the next full day of Greek strikes is now set for April 22, when Greek civil servants will walk of the job for 24 hours according to an ADEDY union official.
- Fed may seek to avoid lower inflation as officials debate exit (Bloomberg)
- RenTec (and here) finally in the spotlight (WSJ)
- Just a month late, NYT gets on the case of massive looming HY maturities (NYT), discussed previously here and here
- Rich Chinese communist channel U.S. tea party in tax debate (Bloomberg)
- Shhh... don't call it HFT and maybe the SEC won't look (Themis Trading)
- Five lies about the American economy (Reason)
Rentech's RIEF investors can't be too happy. After underperforming the S&P by about 30%, and seeing AUM in the once fabled quant fund evaporate, they now have to contend with disclosure that there is "no assurance that trading of the Medallion Funds may will not have a negative effect on the trading of RIEF." Luckily for a now-retired Jim Simons (speaking of, what non-extradition countries has the billionaire code-breaker taken to vacationing in these days?), those same RIEF investors sure do seem to have a lot of patience.
If you have a hedge fund in dire need of some managed account TLC, call this man (and get ready for daily multi-hour explanations on why you put "this or that" trade to people who have yet to complete remedial math); if you have a strategy to front run mutual funds which may or may not end amicably with the SEC in the form of a few hundred dollar settlement, call this man; if you are in the market for some barely occupied property at 740 park, call this man; If you are a CDS trader with special Deutsche Bank sales coverage connections, call this man; if you work for RenTec and feel like borrowing some of their strategies and making a mint, call this man (by the time you get the non-compete subpoena you will be sitting on a beach, earning 20%).
All you need to know about the man who heads the big quant shop, er pardon hedge fund, at the soon to be bankrupt 666 Fifth.
"While the rest of the country suffers, this stock market is booming." Note the not-so-High Frequency Trader counting the trade tickets.