Renaissance Technologies LLC is an American hedge fund firm based in East Setauket, New York, on Long Island, which specializes in systematic trading using quantitative models derived from mathematical and statistical analyses. The company was founded in 1982 by James Simons, an award-winning mathematician and former Cold War code breaker.
Institutional Equities Fund
Institutional Diversified Alpha
|AUM||US$84 billion (2018)|
Number of employees
In 1988, the firm established its most profitable portfolio, the Medallion Fund, which used an improved and expanded form of Leonard Baum's mathematical models, improved by algebraist James Ax, to explore correlations from which they could profit. Simons and Ax started a hedge fund and named it Medallion in honor of the math awards that they had won.
Renaissance's flagship Medallion fund, which is run mostly for fund employees, "is famed for one of the best records in investing history, returning more than 35 percent annualized over a 20-year span". From 1994 through mid-2014 it averaged a 71.8% annual return. Renaissance offers two portfolios to outside investors—Renaissance Institutional Equities Fund (RIEF) and Renaissance Institutional Diversified Alpha (RIDA).
Simons ran Renaissance until his retirement in late 2009. The company is now run by Peter Brown (after Robert Mercer resigned), both of them were computer scientists specializing in computational linguistics who joined Renaissance in 1993 from IBM Research. Simons continues to play a role at the firm as non-executive chairman and remains invested in its funds, particularly the secretive and consistently profitable black-box strategy known as Medallion. Because of the success of Renaissance in general and Medallion in particular, Simons has been described as the best money manager on earth. By October 2015, Renaissance had roughly $65 billion worth of assets under management, most of which belong to employees of the firm.
Academia and researchEdit
James Simons founded Renaissance Technologies following a decade as the Chair of the Department of Mathematics at Stony Brook University. Simons is a 1976 recipient of the Oswald Veblen Prize of the American Mathematical Society, which is geometry’s highest honor. He is known in the scientific community for his work, Chern–Simons theory, which is fundamental in modern theoretical physics, including advanced theories of how invisible fields like those of gravity interact with matter to produce everything from superstrings to black holes.
The firm is an early pioneer of quantitative trading, where researchers tap decades of diverse data in its vast petabyte-scale data warehouse to assess statistical probabilities for the direction of securities prices in any given market. Experts attribute the breadth of data on events peripheral to financial and economic phenomena that Renaissance takes into account, and the firm's ability to manipulate enormous amounts of data by deploying highly efficient and scalable technological architectures for computation and execution, for its consistent success in beating the markets. In many ways, Renaissance Technologies, along with a few other firms, has been synthesizing terabytes of data daily and extracting information signals from petabytes of data for almost two decades now, well before big data and data analytics caught the imagination of mainstream technology.
For more than twenty years, the firm's Renaissance Technologies hedge fund, which trades in markets around the world, has employed complex mathematical models to analyze and execute trades, many of them automated. The firm uses computer-based models to predict price changes in easily traded financial instruments. These models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions. Some also attribute the firm's performance to employing financial signal processing techniques such as pattern recognition. The book The Quants describes the hiring of speech recognition experts, many from IBM, including the current leaders of the firm.
"Quants" with non-financial backgroundEdit
Renaissance employs specialists with non-financial backgrounds, including mathematicians, physicists, signal processing experts and statisticians. The firm's latest fund is the Renaissance Institutional Equities Fund (RIEF). RIEF has historically trailed the firm's better-known Medallion fund, a separate fund that contains only the personal money of the firm's executives.
"Of his 200 employees, ensconced in a fortress-like building in unfashionable Long Island, New York, a third have PhDs, not in finance, but in fields like physics, mathematics and statistics. Renaissance has been called “the best physics and mathematics department in the world” and, according to Weatherall, “avoids hiring anyone with even the slightest whiff of Wall Street bona fides.— Sarfraz Manzoor, The Telegraph, 2013
Renaissance is a firm run by and for scientists, employing preferably those with non-financial backgrounds for quantitative finance research like mathematicians, statisticians, pure and experimental physicists, astronomers, and computer scientists. Wall Street experience is frowned on and a flair for science is prized. It is a widely held belief within Renaissance that the herdlike mentality among business school graduates is to blame for poor investor returns. Renaissance engages roughly 150 researchers and computer programmers, half of whom have PhDs in scientific disciplines, at its tranquil 50-acre East Setauket campus in Long Island, New York, which is near the State University of New York at Stony Brook. Mathematician Isadore Singer referred to Renaissance's East Setauket office as the best physics and mathematics department in the world.
The firm’s administrative and back-office functions are handled from its Manhattan office in New York City. The firm is intensely secretive about the inner workings of its business and very little is known about it. The firm is known for its ability to recruit and retain top scientific talent, for having a personnel turnover that's nearly non-existent, and for requiring its researchers to agree to stringent intellectual property obligations by signing ironclad non-compete and non-disclosure agreements.
In 1978 Simons left academia and started a hedge fund management firm called Monemetrics in a Long Island strip mall. The firm primarily traded currencies at the start. It did not occur to Simons at first to apply mathematics to his business, but he gradually realized that it should be possible to make mathematical models of the data he was collecting.
Monemetrics’ name was changed to Renaissance Technologies in 1982. Simons started recruiting some of the best mathematicians and data-modeling experts from his days at the Institute for Defense Analyses (IDA) and Stony Brook University. His first recruit was Leonard Baum, a cryptanalyst from IDA who was also the co-author of the Baum–Welch algorithm. When Baum abandoned the idea of trading with mathematical models and took to fundamental trading, Simons brought in pioneering algebraist James Ax from Cornell University. Ax expanded Baum's models for trading currencies to cover any commodity future and subsequently Simons set up Ax with his own trading account, Axcom Ltd., which eventually gave birth to the wildly profitable fund — Medallion. During the 1980s, Ax and his researchers improved on Baum's models and used them to explore correlations from which they could profit.
From 2001 through 2013, the fund’s worst year was a 21 percent gain, after subtracting fees. Medallion reaped a 98.2 percent gain in 2008, the year the Standard & Poor’s 500 Index lost 38.5 percent.— Rubin and Collins. June 16, 2015. Bloomberg
In 1988 Renaissance established its most famous and profitable portfolio, the Medallion fund, which used an improved and expanded form of Leonard Baum's mathematical models improved by pioneering algebraist James Ax to explore correlations from which they could profit. Simons and Ax started a hedge fund and named it Medallion in honor of the math awards that they had won. The mathematical models the company developed worked better and better each year, and by 1988, Simons had decided to base the company’s trades entirely on the models.
By April 1989, peak-to-trough losses had mounted to about 30%. Ax had accounted for such a drawdown in his models and pushed to keep trading. Simons wanted to stop to research what was going on. After a brief standoff, Simons pulled rank and Ax left. Simons turned to Elwyn Berlekamp to run Medallion from Berkeley, California. A consultant for Axcom whom Simons had first met at the IDA, Berlekamp had bought out most of Ax's stake in Axcom and became its CEO. He worked with Sandor Straus, Jim Simons and another consultant, Henry Laufer, to overhaul Medallion's trading system during a six-month stretch. In 1990, Berlekamp led Medallion to a 55.9% gain, net of fees — and then returned to teaching math at University of California, Berkeley after selling out to Jim Simons at six times the price for which he had bought his Axcom interests 16 months earlier. Straus took the reins of Medallion's revamped trading system and Medallion returned 39.4% in 1991, 34% in 1992 and 39.1% in 1993, according to Medallion annual reports.
The Medallion fund is considered to be one of the most successful hedge funds ever. It has averaged a 71.8% annual return, before fees, from 1994 through mid-2014. The fund has been closed to outside investors since 1993 and is available only to current and past employees and their families. The firm bought out the last investor in the Medallion fund in 2005 and the investor community has not seen its returns since then. About 100 of Renaissance's 275 or so employees are what it calls “qualified purchasers”, meaning they generally have at least $5 million in assets to invest. The remaining are "accredited investors", generally worth at least $1 million.
Since its inception in March 1988, Simons’ flagship $3.3 billion Medallion fund, has amassed annual returns of 35.6 percent, compared with 17.9 percent for the Standard & Poor’s 500 index. For the 11 full years ended December 1999, Medallion’s cumulative returns are an eye-popping 2,478.6 percent. Among all offshore funds over that same period, according to the database run by veteran hedge fund observer Antoine Bernheim, the next-best performer was Soros’ Quantum Fund, with a 1,710.1 percent return (see table, page 44). "Simons is No. 1," says Bernheim. "Ahead of George Soros. Ahead of Mark Kingdon. Ahead of Bruce Kovner. Ahead of Monroe Trout.— "The Secret World of Jim Simons" 2000
By the year 2000, the computer-driven Medallion fund had made an average of 34% a year after fees since 1988. Simons ran Renaissance until his retirement in late 2009. Between January 1993 and April 2005, Medallion only had 17 monthly losses and out of 49 quarters in the same time period, Medallion only posted three quarterly losses. Between 1989-2005 Medallion had only one year showing a loss: 1989.
Medallion as a retirement fundEdit
[Renaissance] won the [Labor Department]'s permission to put pieces of Medallion inside Roth IRAs. That means no taxes – ever – on the future earnings of a fund that averaged a 71.8 percent annual return, before fees, from 1994 through mid-2014.— Rubin and Collins. June 16, 2015. Bloomberg
Renaissance Technologies terminated its 401(k) retirement plan in 2010 and employees account balances were put into Individual Retirement Accounts. Contributions could be made to a standard Individual Retirement Accounts and then converted to a Roth IRA regardless of income. By 2012 Renaissance was granted a special exemption by the United States Labor Department allowing employees to invest their retirement money in Medallion arguing that Medallion had consistently outperformed their old 401(k) plan. In 2013 Renaissance's IRA plans had 259 participants whose $86.6 million contribution grew to $153 million that year without fees or annual taxes. Renaissance set up a new 401(k) plan and in November 2014 the Labor Department allowed that plan to be invested in Medallion as well.
Renaissance Institutional Equities Fund (RIEF)Edit
In 2005 Renaissance Institutional Equities Fund (RIEF) was created. RIEF has historically trailed the firm's better-known Medallion fund, a separate fund that only contains the personal money of the firm's executives. Renaissance also offers two Renaissance Institutional Diversified Alpha (RIDA) to outsiders. Simons ran Renaissance until his retirement in late 2009. Renaissance Institutional Equities Fund had difficulty with the higher volatility environment that persisted throughout the end of the summer of 2007. According to an article in Bloomberg in August 2007,
James Simons's $29 billion Renaissance Institutional Equities Fund fell 8.7% in August 2007 when his computer models used to buy and sell stocks were overwhelmed by securities' price swings. The two-year-old quantitative, or 'quant', hedge fund now has declined 7.4 percent for the year. Simons said other hedge funds have been forced to sell positions, short-circuiting statistical models based on the relationships among securities.— Bloomberg 2007
On 25 September 2008, Renaissance wrote a comment letter to the Securities and Exchange Commission, discouraging them from implementing a rule change that would have permitted the public to access information regarding institutional investors' short positions, as they can currently do with long positions. The company cited a number of reasons for this, including the fact that "institutional investors may alter their trading activity to avoid public disclosure".
Tax avoidance investigation 2014Edit
In July 2014 Renaissance Technologies was included in a larger investigation undertaken by Carl Levin and the Permanent Subcommittee on Investigations on tax evasion by wealthy individuals. The focus of the tax avoidance investigation was Renaissance's trading strategy — which involved transactions with banks such as Barclays Plc and Deutsche Bank AG — through which profits converted from rapid trading were converted into lower-taxed, long-term capital gains. The strategy was also questioned by the Internal Revenue Service (IRS). The higher rates for the five years under investigation would have been 44.4 percent, as compared to 35 percent, whereas the lower rate was 15 percent, as compared to 23.8 percent.
The IRS contend[ed] that the arrangement Renaissance’s Medallion fund had with the banks, in which the fund owned option contracts rather than the underlying financial instruments, is a ruse and that the fund investors owe taxes at the higher rate. Because Medallion could claim that it owned just one asset – the option – and held it for more than a year, investors could declare their gains to be long-term investments.— Bloomberg 2014
According to the Center for Responsive Politics, Renaissance is the top financial firm contributing to federal campaigns in the 2016 election cycle, donating $33,108,000 by July. By comparison, over that same period sixth ranked Soros Fund Management has contributed $13,238,551. Renaissance's managers have also been active in the 2016 cycle, contributing nearly $30 million by June, with Mercer ranking as the #1 individual federal donor, largely to Republicans, and Simons ranked #5, largely to Democrats. They were top donors to the presidential campaigns of Hillary Clinton and Donald Trump.
During the 2016 campaign cycle Simons contributed $26,277,450, ranking as the 5th largest individual contributor. Simons directed all but $25,000 of his funds towards liberal candidates. Robert Mercer contributed $25,059,300, ranking as the 7th largest individual contributor. Robert Mercer directed all funds contributed towards conservative candidates.
Since 1990 Renaissance has contributed $59,081,152 to federal campaigns and since 2001 has spent $3,730,000 on lobbying.
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