Rise of the Mega-Fund
"Better service for the customer is for the good of the public, and this is the true purpose of enterprise."
Konosuke Matsushita, founder of Matsushita Electric
At a recent hedge fund conference in New York City sponsored by Absolute Return (November 2006) one of the list of illustrious speakers was Stephen Robert. Mr. Robert is the Chairman of Renaissance Technologies, a hedge fund specializing in quantitative strategies. It is headed by Professor James Simons and has amassed what some would argue to be the best performance numbers in the industry.
The flagship Medallion Fund (which is closed) started out in 1988 and sports an impressive average annual net of fee performance of 34%. There is a hefty 5% management fee and 44% performance fee. Renaissance decided to return outside money to investors and to leave the bulk of investors as insiders/employees. The reason: the fund had become outsized and unwieldly. Incidentally, Medallion has been up 80% so far in 2006.
What happened? Well, back in August 2006 the firm launched the Renaissance Institutional Equity Fund (RIEF). The goal was to target institutional investors so the minimum investment was set at a steep US$20 million. Simons claimed that the focus would continue to follow similar quantitative models used in Medallion except that there would be a twist - lower volatility and lower fees (as well as lower performance). It would focus on liquid US equities and target returns of 600 bps over the S&P 500. It would have exposure of 175% on longs and 75% on shorts, making it a long-biased fund. It would also offer an attractive goal of generating return with two thirds of the volatility of the S&P 500.
The goal has been to create the world first mega-fund managing US$100 billion. It appears to be on the way there. Big institutional investors cannot get enough of it. So much so that the firm is about to restrict inflows to US$2 billion per month heading into 2007, and may consider lowering that amount even more if necessary.
The fee schedule for institutional investors is also interesting and in many ways groundbreaking. There are 4 separate offerings: a) a fixed management fee of 2% p.a. and no performance fee b) a 0.5% management fee and a performance fee of 10% over the S&P 500 benchmark c) a 0.8% management fee and a performance fee of 25% over the S&P 500 benchmark, and d) a 0.5% management fee and a 35% performance fee over the S&P 500 benchmark.
Renaissance is going after the soft underbelly of an institutional investor's assets: that which is dedicated to U.S. equities and which has traditionally been dominated by the "traditionals" or mutual fund market-place. And considering how they, as a group, often fail to even beat their respective benchmarks this is a relatively easy decision for the investment committee of an endowment or pension fund - better returns at lower risk or simply better risk-adjusted returns. This cooincides with data which recently suggested net monthly outflows from US mutual funds.
Mr. Robert suggested at the conference that when one looks to invest in a quant-shop the question an investor should ask are forward-looking:"What factors in the model have changed? What new factors are likely to determine performance going forward?". The best managers will have rational arguments and theories and will not be wed to a single one. Sound advice.
The firm which boasts 50 PhDs, has approximatley 9 dedicated to their RIEF product - making sure that the smooth and automated model continues to generate its targeted risk/return profile. The combo fund (part mutual fund, part hedge fund) is here to stay and with Renaissance Tech AUM now around US$16 billion who is to say they won't be able to raise an additional US$84 billion in the future!
Remember, this type of product and its popularity has inevitable implications for product providers looking to tap Asia's very deep-pocketed institutional investors. More mega-fund wannabes are certainly on the way. Mahalo.
"Better service for the customer is for the good of the public, and this is the true purpose of enterprise."
Konosuke Matsushita, founder of Matsushita Electric
At a recent hedge fund conference in New York City sponsored by Absolute Return (November 2006) one of the list of illustrious speakers was Stephen Robert. Mr. Robert is the Chairman of Renaissance Technologies, a hedge fund specializing in quantitative strategies. It is headed by Professor James Simons and has amassed what some would argue to be the best performance numbers in the industry.
The flagship Medallion Fund (which is closed) started out in 1988 and sports an impressive average annual net of fee performance of 34%. There is a hefty 5% management fee and 44% performance fee. Renaissance decided to return outside money to investors and to leave the bulk of investors as insiders/employees. The reason: the fund had become outsized and unwieldly. Incidentally, Medallion has been up 80% so far in 2006.
What happened? Well, back in August 2006 the firm launched the Renaissance Institutional Equity Fund (RIEF). The goal was to target institutional investors so the minimum investment was set at a steep US$20 million. Simons claimed that the focus would continue to follow similar quantitative models used in Medallion except that there would be a twist - lower volatility and lower fees (as well as lower performance). It would focus on liquid US equities and target returns of 600 bps over the S&P 500. It would have exposure of 175% on longs and 75% on shorts, making it a long-biased fund. It would also offer an attractive goal of generating return with two thirds of the volatility of the S&P 500.
The goal has been to create the world first mega-fund managing US$100 billion. It appears to be on the way there. Big institutional investors cannot get enough of it. So much so that the firm is about to restrict inflows to US$2 billion per month heading into 2007, and may consider lowering that amount even more if necessary.
The fee schedule for institutional investors is also interesting and in many ways groundbreaking. There are 4 separate offerings: a) a fixed management fee of 2% p.a. and no performance fee b) a 0.5% management fee and a performance fee of 10% over the S&P 500 benchmark c) a 0.8% management fee and a performance fee of 25% over the S&P 500 benchmark, and d) a 0.5% management fee and a 35% performance fee over the S&P 500 benchmark.
Renaissance is going after the soft underbelly of an institutional investor's assets: that which is dedicated to U.S. equities and which has traditionally been dominated by the "traditionals" or mutual fund market-place. And considering how they, as a group, often fail to even beat their respective benchmarks this is a relatively easy decision for the investment committee of an endowment or pension fund - better returns at lower risk or simply better risk-adjusted returns. This cooincides with data which recently suggested net monthly outflows from US mutual funds.
Mr. Robert suggested at the conference that when one looks to invest in a quant-shop the question an investor should ask are forward-looking:"What factors in the model have changed? What new factors are likely to determine performance going forward?". The best managers will have rational arguments and theories and will not be wed to a single one. Sound advice.
The firm which boasts 50 PhDs, has approximatley 9 dedicated to their RIEF product - making sure that the smooth and automated model continues to generate its targeted risk/return profile. The combo fund (part mutual fund, part hedge fund) is here to stay and with Renaissance Tech AUM now around US$16 billion who is to say they won't be able to raise an additional US$84 billion in the future!
Remember, this type of product and its popularity has inevitable implications for product providers looking to tap Asia's very deep-pocketed institutional investors. More mega-fund wannabes are certainly on the way. Mahalo.
posted by Franklin Scruggins | 10:23 AM
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