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.