PROFILE

Renaissance Technologies LLC is a Long Island – New York based hedge fund sponsor, founded in 1982 by mathematician James H. Simons. The company employs about 275 people – mostly mathematicians, astronomers, physicists and computer scientists. It has offices in East Setauket – New York and in San Francisco and Berkeley – California. Between January 1993 and April 2005, RenTech’s flagship Medallion fund had only 17 losses out of 148 months. The yearly Sharpe Ratio has been recorded at 1.68 and the Medallion Fund had never a down year in its history. RenTech’s total assets under management stood at about $25.5 billion as of June 30, 2011.

Mr. Simons received his bachelor of science in Mathematics from the Massachusetts Institute of Technologies in 1958. At the age of 23 in 1961, he received his Doctor of Philosophy in Mathematics from the University of California, Berkeley. He worked as a research staff at the communications research division of the Institute for Defense Analyses and taught mathematics at both MIT and Harvard. He was appointed chairman of the math department at Stony Brook University in 1968 and won the American Mathematical Society’s Oswald Veblen Prize in Geometry in 1976. Simons’ seminal work on geometric invariants resulted in the Chern-Simons Form (also known as Chern-Simons theory), widely used in String Theory of theoretical physics. The Financial Times named him “the world’s smartest billionaire” in 2006. Mr. Simons retired from RenTech in January 2010 (though he continues to hold the Chairman’s position) and the firm is now run by Bob Mercer and Peter Brown – two computer science Ph.Ds who were doing “code-breaking research for the Defense Department” before joining in 1993.

Renaissance employs mathematical and statistical models for high frequency trading and tries to exploit market inefficiencies when large transactions take place. One of their trading algorithms tries to establish if large transactions have been executed and front runs it. This in turn pushes up transaction costs and related expenses. The hedge funds managed by RenTech charge 5% fixed fee and 44% performance fee – one of the highest in the hedge-fund investment world.

“Jim Simons is without question one of the really brilliant people working in this business. He is a first-rate scholar, with a genuinely scientific approach to trading. There are very few people like him,” said David Shaw, chairman of D.E Shaw and star quantitative trader.

The exact number of funds run by the highly secretive RenTech is not known. It closed outside investment in the flagship Medallion fund in 1993. Medallion is primarily focused on commodities and futures trading and has investments only from the company’s partners and executives. In 1999, Mr. Simons launched Equimetrics, a market-neutral trading strategy fund for institutional investors. In August 2005, the firm launched Renaissance Institutional Equities Fund (RIEF) – its first US equities long-biased new fund in years based on computer models. The new fund was devised on the trading strategies of the Medallion Fund and was “designed to have relatively low volatility, a relatively low beta and average holding times on excess of one year.”

Like other trader money managers, Medallion aims small pricing anomalies and market inefficiencies that can support billions of dollars of trading. Though most quant managers depend on ‘convergence trading’ algorithm – a concept made famous by John Meriwether’s Long Term Capital Management, RenTech follows a different approach. While convergence traders price two different financial instruments on a relative basis, buying one and selling another on the assumption that prices will return to their proper level at some point, RenTech’s model requires that trades pay-off in a limited time-bound fashion. Traders at RenTech conduct rapid-fire buying and selling on a plethora of commodities and financial futures contracts, both US and overseas, including currencies, commodities and mortgage derivatives. An active venture capitalist and private equity investor, Simons sits on the boards of a few companies in the US and Latin America.

As a trader who’s always trying to predict price movements, RenTech tried to rediscover fundamental quant laws such as the Efficient Market Hypothesis. RenTech believes markets are difficult but not impossible to beat. “Efficient market theory is correct in that there are no gross inefficiencies. But we look at anomalies that may be small in size and brief in time. We make our forecast. Then, shortly thereafter, we reevaluate the situation and revise our forecast and our portfolio. We do this all day long. We’re always in and out and out and in. So we’re dependent on activity to make money,” Simons told a Greenwich Roundtable in 1999.

Although RenTech’s trading models are not available, its computer based rapid trading algorithms pick mostly from a universe of 1,500 highly liquid common and preferred stocks and holds a portfolio that’s both long and short and trades efficiently enough to keep transaction costs at a bare minimum. Typically the portfolio holds 1,000 positions with no stock contributing more than 5 per cent of the total weight. Stock index futures are used to mitigate the overall risk and each stock is turned-over one to three times each year. Terming their model as the financial econometric equivalent of ‘blocking and tackling’, he had said: “We search through historical data looking for anomalous patterns that we would not expect to occur at random. Our scheme is to analyze data and markets to test for statistical significance and consistency over time. “Once we find one, we test it for statistical significance and consistency over time. After we determine its validity, we ask, ‘Does this correspond to some aspect of behavior that seems reasonable?’”

However, RIEF and Renaissance Institutional Futures Fund (RIFF) failed to live up to James Simon’s reputation and assets under management dwindled to under $6 billion in 2010 from an all time high of $30 billion in 2007. RIEF lost 6% in 2009 and 16% in 2008 triggering huge withdrawals from investors, mostly people brought into RIEF through bank private wealth investment platforms, and not institutional investors. In 2009 May, the WSJ reported that the SEC was scrutinising RenTech’s book after investors complained of the Medallion Fund consistently outperforming both RIEF and RIFF.

“Other people’s money is like a lever on your anxiety,” Peter Brown of RenTech had said in 2010. Though there had been speculation of the firm shutting down both the RIEF and RIFF funds, they made a strong comeback after the computer programs were tweaked. RIFF, with $3 billion of assets under management, were up 9% on the year in 2011 while RIEF was up a whopping 25% on the year.

Renaissance Technologies Wiki Entry

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