© 2007, Markov Processes International, LLC Page 2
RIEF Strategy Close Up
Although few details are known about the fund’s strategyoutside of its 200 employees, in the series of recentinterviews [6-8], Simons has shed light on the way theInstitutional Fund is managed. On the one hand, RIEF istaking advantage of proven computer models, tradingsignals and risk management techniques of theRenaissance Medallion fund, which has an exceptionaltrack record and is closed to outside investors. On theother hand, unlike Medallion which is investing acrossmultiple asset classes, RIEF is investing primarily in3,000 to 4,000 U.S. public equities and making long-termbets with a significant holding period, as compared with“rapid-fire” trading of the Medallion. The fund is makinglong and short bets maintaining a moderate leveragelevel. Overall, risk of the RIEF is described as slightlylower than that of the S&P 500 Index, although the fundis not intended to track the index. In other words, thefund is presented as having low volatility and lower risk than the market and represents a long-short strategy witha relatively low turnover.It is worth noting that over the past two years thestrategy accumulated in excess of $26B in assets. Thefund launched on August 1, 2005 with $600M and thedemand was so high that it put a cap of $2B on monthlyinflows. In November 2006, it had $14B undermanagement and added another $12B in the followingyear–a record number for a hedge fund.Historical performance and risk of the stated strategyare easily assessed using the fund’s historical return
and those of the S&P 500, since August 2005 (thefund’s inception). Annualized returns since the fund’sinception through June were 15.35% for their B series(net of fees) and 19.03%
gross of fees, compared to12.95% for the S&P 500 (Figure 1).
Annualized standard deviation for the same period wasmarginally lower gross of fees, at 6.52%, compared to6.74% for the S&P 500 (Figure 2). The remainder of the analysis is conducted using the gross of fees series.
Created with MPI Stylus™
Risk (Annual StdDev)
As of June 200701234567
T o t a l A n n u a l i z e d S t d D e v , %
2005 - 20076.525.756.74Renaissance Inst'l Equities Fund LLCRenaissance Inst'l Equities Fund LLC, Ser BS&P 500 Index
A typical due diligence analysis of such a fund wouldinclude calculations of its MPT statistics (alpha, beta,Sharpe Ratio, etc.) along with numerous ratios andgain/loss statistics. The issue with such statistics is thatthey often have little predictive power, can bemisleading and result in a false sense of security–thelast thing a hedge fund investor needs in a time of crisis.For instance, one may decide to use the fund’s beta toestimate its losses in July. Thus, beta vs. the S&P 500index computed through June is 0.43, and is well in linewith the fund’s strategy of maintaining a low marketrisk. Given that the S&P return for July was -3.1%, wewould have estimated July’s return for the fund to bearound -1.3%. Since the fund’s return was actually lessthan -4%, it demonstrates once again that low beta of hedge funds has to be taken with a grain of salt. It mustbe said that low beta values of hedge funds are similarto those of balanced mutual funds such as VanguardWellington
, thus implying lower systematic risk. Whatis usually neglected is that - compared to mutual funds-corresponding R-squared values are very low for hedgefunds (e.g., 20% for RIEF) placing little trust on thebeta number itself.
Renaissance RIEF returns were obtained from a hedge funddata vendor
Wellington’s beta vs. S&P 500 Index is 0.6 with theR
Created with MPI Stylus™
As of June 200702468101214161820
T o t a l A n n u a l i z e d R e t u r n , %
Aug-05 - Jun-0719.0315.3512.95Renaissance Inst'l Equities Fund LLCRenaissance Inst'l Equities Fund LLC, Ser BS&P 500 Index