(Bloomberg) — Jim Simons added $2.6 billion to his vast wealth in 2020. His clients weren’t so fortunate.Investors in three hedge funds run by Simons’s Renaissance Technologies lost billions of dollars as the firm’s computer models were flummoxed by the market’s gyrations. Meanwhile, Simons ranked second on Bloomberg’s list of the highest-paid managers, and was the only one in the top 15 whose clients didn’t make money last year.
Read more: Chase Coleman leads $23 billion payday for 15 managers
The secret to his success: access to a Renaissance strategy that’s closed to outsiders. The legendary Medallion fund gained 76% last year, according to Institutional Investor, while the public offerings racked up double-digit losses.It’s a stark disparity that has led some observers to wonder if Simons’s 15-year experiment to bring his brand of quantitative investing to the masses no longer works.
Investors, including some employees, have yanked at least $5 billion from the three public funds since Dec. 1. After a further 9.5% dip in the $26 billion Renaissance Institutional Equities Fund in January, investors said they expect more will follow.
Investors said they were surprised by the firm’s reaction to the losses.
Executives didn’t apologize for last year’s declines on a recent client call, according to people who heard it. Nor did they provide adequate explanations for why the models hadn’t worked or how they would be fixed, said the people, who asked not to be identified because the call was private. Instead, officials said it was simply a matter of odds: Over such a long history, the funds were bound to have a bad year. They also reminded clients that the funds have bounced back from losses before.
Decades of Success
Renaissance started the Medallion Fund in 1988, and for most of the next two decades, that was its sole focus. The firm employs about 100 Ph.Ds, astrophysicists, statisticians and computer scientists who create models that trade stocks, bonds, commodities and currencies — forecasting price moves by finding faint signals amid the market noise.After a few years of trial and error, Simons and his band found that shorter-term trades, from seconds to a few months, worked best. It was like the weather: Predicting the chance of rain in the next hour is a lot easier than foreseeing a storm two weeks away. They made changes, and the fund consistently cranked out returns of roughly 40% a year.
But Simons realized that Medallion would never work if it was too large, and he returned profits every year to keep the size around $10 billion. Renaissance began to limit access to external clients, and by 2005 only insiders remained.
That year, the firm started the institutional equities fund, known as RIEF. It didn’t pretend the new offering would duplicate Medallion, but would instead mostly bet on rising shares and hold the positions for as long as a year — and with a lot less leverage. The initial goal was to beat the S&P 500 by 4 to 6 percentage points; that target later changed to a risk-adjusted return that on a gross basis would exceed the index “over the long term.”
Clients flocked to the funds. Despite warnings of lower returns, they still expected it would have some of the Medallion magic.While RIEF has outpaced the S&P in nine of the past 16 years, the 19% loss for 2020 lowered its annualized return since inception to 9.1% with returns reinvested, compared with 9.7% for the index. After January’s decline, the fund needs to return about 37% to get back to even.
Some clients are unhappy about the huge difference between Medallion and the public funds. Others, however, said that the newer offerings have historically performed well, and given the inherent differences in strategy they shouldn’t be expected to match Medallion’s numbers.
Stepping Back
The client outflows mount as Simons, 82, continues to step away from the firm, having relinquished his role as chairman last year, though he remains on the board.
He’s been described as a benevolent father figure, one who would organize company trips to Bermuda or Vermont, and encourage employees to bring their families. Former staffers praise his people skills, and said he inspires and motivates the team.
His earnings last year came entirely from Medallion’s success, according to Bloomberg calculations.
Now with a net worth of more than $23 billion, according to the Bloomberg Billionaires Index, he has become one of the biggest donors to the Democratic Party, as well as a major philanthropist. He co-founded the Simons Foundation in 1994 with his wife, and has pledged to donate the majority of his wealth to charities.
For more articles like this, please visit us at bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
©2021 Bloomberg L.P.
