Renaissance Technologies' Data Speaks for Itself

Renaissance Technologies is likely the best performing hedge fund of all time. I love the fact that their homepage looks like it was designed by an intern in 1995. (An interesting sidenote, I once interviewed at their FOF Meritage.)

Rentech is famous for only hiring PhDs in physics and statistics and other incredibly hard subjects - and Simons is one of the most famous mathematicians in the world. I am not going to do a long overview here because I have written about Simons numerous times on the blog and there are much better articles on Rentech/Simons on Bloomberg and Seed. However, a couple quick notes for perspective are below.

The flagship Medallion fund, which trades everything from corn futures to government bonds, has returned nearly 40% a year NET of 5% management fees and 44% incentive fees and hasn't had a down year since inception in the late 1980s. Yes, you read that correctly - so you can see why people are interested in what they are doing.

From the Bloomberg article:

What can he say about Medallion's trading strategy?
"Not much,'' Simons says with a chortle, and then takes a drag on one of the Merit cigarettes he often smokes.
What kind of instruments does it trade?
"Everything.''
How many different strategies does it use?
"A lot.''

Therein lies the problem - 13F filings should be useless in tracking Simon's equity trades because none of the instruments they trade actually shows up on the 13F. In August 2005, Simons started Renaissance Institutional Equities Fund, or RIEF, which invests in U.S. stocks. I don't think their performance has been that stellar, and as far as I know, they are built more like a DFA quant shop that is trying to beat their benchmarks. So, NOT what you want exposure to. But, like always, I will let the data speak for itself. Top 10 holdings, back to 2000, equal weighted through 12/19/2008:

Renaissance Technologies
Annualized Return: -9.8%
Volatility: 19.5%
MaxDD: -69.1%
(Max DD is maximum peak to valley drawdown, measured monthly.)

S&P 500
Annualized Return: -3.7%
Volatility: 15.7%
MaxDD: -44.1%

This is not a good candidate for replication.

Any funds that get the majority of their profit through:
1. International positions
2. Derivatives
3. Arbitrage strategies
4. Rapid fire trading
are not good candidates for 13F replication. You want the pure stock pickers. This is one reason why AlphaClone is so useful - it is just as important to know what doesn't work as what does work.

I am going to write a follow up on the strategies I tracked in real time on World Beta since 2006 in a future post. If anyone else has suggestions for a future post, or algorithm to test, leave a comment or send me an email.

Comments

[kotika98:]

RIEF is not a stockpickers fund, you got that much right. But based on what we hear, they are doing very well, thank you very much. And charging very reasonable fees to boot.

Jan 01 08:55 AM

[kotika98:]

As a suggestion of what to test, why not run the 13F portfolio for the quarter subsequent to the filing, and just for fun - for the quarter *preceding* the filing. Each quarter, you must update the portfolio. Since 2005 that would be roughly 12 quarters - alot of work but perhaps worth it.

Jan 01 08:58 AM