Renaissance may lift veil - a bit

Highly secretive Renaissance Technologies Corp., hit by performance problems and huge redemptions in its largest open hedge fund, may concede greater transparency in the strategy for large institutional investors. Renaissance Institutional Equities Fund's -12.6% return in the first half this year sharply lagged behind the S&P 500's 3.19% for the same period. The second quarter was especially bad: The long-short equity fund returned -4.73%, versus the index's 15.93%, according to performance data from eVestment Alliance LLC. The RIEF strategy is designed to outperform the S&P 500, gross of fees, by 400 to 600 basis points over a rolling three-year period, with lower volatility (10.5, versus the S&P 500's historical volatility of 15 to 16). That short-term underperformance is “disappointing” to James H. Simons, RenTech's iconic chief executive, chairman and founder. RIEF's assets plummeted 81% to $5 billion for the two-year period ended June 30, down from a peak of $27 billion. The outflows stem largely from high-net-worth “hot money” that came into the fund via bank distribution channels, hedge funds of funds and institutional investors taking advantage of the fund's easy redemption terms to make up for tight liquidity conditions. RIEF offers unrestricted monthly redemption, something Mr. Simons insisted on when the fund was established. “I never liked lockups when I was on the other side of one, and didn't want them for these funds. Investors have been withdrawing from the funds because they can, especially with RIEF not doing so well this year,” Mr. Simons said. Given RIEF's performance problems and the declining assets of its institutional arm, RenTech officials could offer large institutional investors a new investment vehicle with more transparency — a huge concession from the tight-lipped hedge fund manager. The driver behind this move is Matthew H. Scanlan, formerly the managing director and head of the Americas institutional business at Barclays Global Investors. In February, he became president and chief executive of Renaissance Institutional Management LLC, the RenTech subsidiary that manages quantitative long-biased funds, and has begun to imprint his institutional perspective on the firm's management. “Matt has begun to make important changes to how we present our strategies to institutional investors, and he has been urging us to offer some degree of transparency as we plan to do in the new [RIEF] structure,” Mr. Simons said.

DIDN'T HAVE TO DO IT

RenTech — best known for its fabulously successful $10 billion Medallion Fund, a hedge fund that reportedly returned 80% last year and has been closed to external investors for years — simply didn't have to offer investors transparency. Sources said that many investors in slow-trading RIEF and its sister fund, the Renaissance Institutional Futures Fund — a global futures and forwards fund — assumed or hoped they would be getting a little of Medallion's nanosecond-trading success, and didn't insist on transparency when they handed over their money. But “in the wake of [Bernard] Madoff, everyone wants more information about their investment strategies,” Mr. Simons said. “Historically, we did not provide investors with a lot of details about the strategies, because we're a target for reverse engineering, and we have a lot of trade secrets around here to protect. But it is possible to be a bit more open,” he said. “We are looking at a new [RIEF] structure for large institutional investors that would offer some disclosure. We don't have the exact details ready yet. We're still tinkering with the model, but it will offer more information for large institutions that agree to appropriate confidentiality arrangements,” Mr. Simons said. The move to give institutional investors even a little peek into one of the firm's “black box” quantitative strategies is a big concession for RenTech. Institutional-investment consultants have decried RenTech's lack of transparency since RIEF's introduction in 2005. One consultant, who asked not to be identified, said that RenTech's prospects for institutional success are low unless it offers some degree of transparency. “We've tried to get to know them, without much success,” the consultant said. “They will not give away any transparency, and we just don't know what's under the hood. RenTech just ends up being so much more work that we're better off looking at other managers for our clients.”

SLUMP MUST END

Transparency notwithstanding, the “real issue is that [RIEF] has to pull out of its slump,” Mr. Simons said. “We came into 2009 looking very good, well ahead of the S&P [500], and during the first couple of months of this year, we were going like gangbusters. But in March and April, we did poorly,” he said. “The fund has its own mind and doesn't like some of the stocks that the rest of the world likes. People are very skittish right now.” The fund is 100% net long — going 175% long, versus 75% short — with a beta of 0.4. RIEF met its performance goal in all but two of the past five quarters on a rolling three-year basis, according to an analysis of data from eVestment Alliance by sister publication Pensions & Investments. In the second quarter of 2008 and the second quarter this year, the fund still outperformed the S&P 500, but by less than 400 basis points. RIEF's average outperformance of the S&P 500 over a rolling three-year period was 599 basis points, according to P&I's analysis. Although redemptions and negative performance in RIEF and RIFF combined to lower firmwide assets 53% to $17 billion as of June 30, from a peak of $36 billion in mid-2007, sources said RenTech executives might not be worried about the fate of the two RIM funds, because Medallion remains so successful. About 35% of RenTech's re- maining assets are managed for institutional investors, according to a source with knowledge of the firm, who asked not to be identified. Mr. Simons' himself admitted that “the life of the firm does not depend on these [RIEF and RIFF], but I like these funds. I have a lot of personal money invested in them as do other Renaissance employees.” Mr. Simons, 71, also said the firm's success doesn't depend on his presence, noting that his own retirement “won't be too terribly” far away. He said that over the past few years, he has moved many of the firm's day-to-day operations to co-presidents Peter Brown and Robert Mercer, “I could step out without the walls falling down,” Mr. Simons said. Christine Williams is a reporter for sister publication Pensions & Investments.