Back on January 30, just days before the first market correction that took place less than a week later in the February 5 VIXtermination event that wiped out the entire universe of volatility ETFs, we reported that Renaissance Technologies - one of the most profitable hedge funds of all time - warned that there is "significant" risk of a correction in prices and is preparing for "possible market turbulence."
In a letter to clients, Ed Hubner - RenTec's head of risk control - cautioned that while accelerating global growth, corporate tax reform and a business-friendly administration in the U.S. have contributed to market gains, "it’s not clear these factors justify current valuations, especially in light of sovereign debt levels."
Furthermore, in an eerie prediction of the imminent surge in the VIX, Hubner also warned that "In addition, the downward technical pressure on the VIX, due to the growth of strategies that bet against market volatility, and lower correlations within the S&P 500, shouldn’t be confused with unshakable economic calm."
Hubner also noted that "while the fear of missing out may not be a concern for equity investors, increasing euphoria mixed with a bit of complacency certainly is" and that "Historically low levels of volatility may well have given investors a false sense of security in the nearly two years since the last market correction."
In retrospect Hubner was spot on, and nearly one year after making these predictions, Renaissance is reaping the benefits of its cautionary foresight and according to Bloomberg, the Renaissance Institutional Equities Fund, or RIEF, gained 8.5% in 2018, and even after losing 2.1% last month as U.S. stocks broadly plummeted it dramatically outperformed the S&P 500 Index which tumbled 9% in December and generated a total return of 4.4% in 2018.
Renaissance, which manages $58 billion in assets much of its money belonging to company employees, is the world’s biggest quantitative hedge fund and its outperformance came as most of its peers were whipsawed by volatile markets, resulting in one of its worst years ever for the hedge fund industry.
RIEF, which unlike the legendary Medallion fund is open to outside investors and manages $27 billion in assets and which trades only U.S.-listed shares, wasn't the only outperformer: another of the company's funds, the Renaissance Institutional Diversified Global Equities Fund, or RIDGE, gained 50bps last month and ended the year with a 10.3% gain. The outperformance of the fund, which follows a market-neutral strategy, is remarkable considering that most other market neutral and systematic funds suffered dramatic losses in December which dragged most of them into the red for the year as we reported last week.