Renaissance’s declining hedge funds

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Renaissance Technologies’ Medallion fund, which has been closed to outside investors since 2005, remains the stuff of legend. But the hedge funds they offer to foreigners have collapsed in size.

FT Alphaville understands that the Renaissance Institutional Equities Fund (RIEF) currently manages about $19.6 billion, down from about $35.8 billion at the start of 2020.

Even that pales with the collapse of the Renaissance Institutional Diversified Alpha Fund (RIDA) and Renaissance Institutional Diversified Global Equities (RIDGE), which shrank so much they were merged earlier this year. Five years ago, RIDA and RIDGE managed $15 billion and $14.3 billion, respectively. Today, the combined RIDA fund manages just $3.6 billion.

In total, nearly two-thirds of Renaissance’s foreign assets under management have evaporated over the past five years, falling from $65.1 billion to $23.2 billion today. Renaissance declined to comment.

This is not NEW news. Assets in these funds are actually up slightly from their 2023 lows. Most of the exodus occurred in 2020-21 after an unusually shaky performance by Renaissance when Covid-19 rocked the markets. RIEF fell 19.9% ​​in 2020, while RIDA lost 31.9%.

The performance was so bad that the hedge fund manager sent a rare but not very telling letter to investors, trying to explain the reversal as just one of those things that happens:

While recent performance has been dire and worse than prior performance for 2020 would suggest, in a track record as long as ours, some risk-reward ratios as bad as the ones we’re seeing now aren’t shocking. . . Obviously, large positive or negative returns are more likely when volatility is high, as that is basically the definition of volatility.

Instead, Medallion ended 2020 up 76%, the WSJ reported at the time. External funds use very different strategies than Medallion, which trades more frequently with much less capacity (which is why it’s only been internal money for almost two decades), but the optics haven’t been great.

This resulted in Renaissance hemorrhaging money, even though performance picked up in 2021. RIEF and RIDA returned 14.6% and 20.1% respectively that year.

What’s interesting is that while performance has leveled off, the money has continued to flow ever since. The last two years have been average to poor for RIEF and RIDA, but not catastrophic. And so far this year, the former is up 19.8 percent and the latter is back 17.4 percent, according to a person familiar with the matter.

While RIEF’s assets have risen from a 2023 low of about $16.8 billion, the gains appear to have been all or almost all due to performance, not flows.

The issue of Renaissance’s internal vs external funds came up in FTAV’s conversation with AQR’s Clifford Asness last year. He’s blown away by Medallion—both the strength and consistency of its returns are without parallel in the hedge fund industry—but, having redesigned his public funds, Asness thinks they’re pretty standard hedge funds that pull fairly well-known factors.

As he told us:

Their whole challenge is capacity. They kicked out all the outside investors (from Medallion) and are taking several billion dollars out of the market every year for a pretty small group of people. No sneeze at that, but their problem they’re trying to solve is quite different from ours.

. . . When they do something on an institutional scale for outside investors, they seem human. They look like solid amounts, but not amazing. Nothing from their Medallion fund seems to go into their more public stuff. There, they’re just like the rest of us pedestrian bus drivers.

This seems like a decent summary of what happened to Renaissance’s external funds (whether pedestrians can be bus drivers aside).

For years he was able to easily raise money for RIEF, RIDGE and RIDA based on Medallion’s fantastic but limited capacity results. Yes, investors were told what the differences were – there’s a decent summary of what the various funds do in this 2020 SEC filing – and the massive losses in 2008 disabused investors of any idea they’d get Medallion. But investors clearly hoped so some from that Medallion the magic was still present in the public funds.

After all, the Renaissance rocket scientists are good at what they do, and for a long time the three external funds have also done well. The returns were not like a medallion, but they were very good. Remarkably, RIEF’s results remained solid and RIDA’s were at least positive even in 2018-19 when the ‘quantum winter’ hit the likes of AQR. That added to the feeling that Renaissance was untouchable – the quantum GOATs.

But the financial chaos unleashed by Covid short-circuited many of the longer-term, higher-capacity strategies led by Renaissance and shattered the illusion of near-invincibility.

This should not have come as a surprise given how unprecedented the pandemic has been. As a former RenTech executive told Bloomberg in 2020: “Revival is not magic. If Martians invade, they don’t have a model for Martians invading.”

But once an illusion is shattered, it’s hard to restore. Investors are again painfully aware that Renaissance’s external funds are nothing like Medallion, so the money has continued to decline in the years to come.

That said, the revenue that RIEF and RIDA have made this year is not “pedestrian bus quants” stuff. RIDA is already enjoying its best year in at least a decade, and another decent month will mean RIEF will also have its best year of 2012 since 2012.

Eventually, the quantum summer will likely unfreeze RenTech flows as well.

Further reading:
— How did Jim Simons’ company make $100 billion? (WSJ)