Renaissance RIEF April 2009 Performance Puzzle
Back in 2007, we published a research report “The Law of Large Numbers“ with an analysis of the Renaissance Technologies RIEF fund and showed how a similar strategy would have performed during previous recessions and major market downturns. Thus, it shouldn’t come as a surprise that the RIEF has lost about 17% through April and 8-9% in April alone as it was reported by The Wall Street Journal and various blogs. Yet, both the investors and the media seem puzzled by the fund’s results while the fund management itself has yet to provide an explanation of what has happened. The only clue was the statement from Dr. David Lippy as recorded in the May 13 Renaissance RIEF investor telephone conference that “high volatility stocks have outperformed low volatility stocks.” Interestingly, this comment does confirm in layman’s terms our 2007 findings about the strategy. I strongly encourage performance measurement professionals and investment research analysts to read both the letter and the call transcript. It’s a fascinating reading with not a single request from investors of a basic attribution analysis for this $20B US equity portfolio as if we’re back to pre-MPT days 50 years ago.
Using “traces in the sand” we will try to recreate the pieces of the performance puzzle that are otherwise hidden from the investors. These traces represent the fund’s monthly performance numbers, which frequently the most the investors would get from a fund. The chart below represents a dynamic analysis of the fund using Russell style indices and MSCI EAFE as a proxy for Int’l equities.
Although the exposures remain similar to the ones in our 2007 study, one could observe a profound change: the fund is behaving as if it’s net neutral or net short. This could be inferred from the sum of short exposures (about 90% in midcap growth) being about the same or greater than the sum of long exposures above the X-axis. That’s quite a change as compared to exposures 3-4 years ago which indicated a 100% net long allocation. No wonder the fund missed the recent market rally.
Moreover, in April alone, midcap growth stocks (short exposure in REIF) delivered twice the performance of large cap stocks (long exposure) which is reminiscent of the statement about the volatility in the fund conference call. Basically, our analysis of the fund’s returns shows that capitalization is the most dominant factor of the fund’s performance. The chart below translates it in the language understood by finance professionals: performance attribution. Based on our analysis, RIEF April losses are dominated by its net short exposure to midcap growth stocks.
As a reference we provide the following chart that shows how well the portfolio based on exposures “Style” is replicating (in-sample) the fund (“Total”).
Please note, at no time in this analysis are we claiming to know or insinuate what the actual strategy, positions or holdings of this fund were; nor are we commenting on the quality or merits of Renaissance’s strategy or that of any other manager. Instead, we are seeking to demonstrate how MPI’s Dynamic Style Analysis can be used to better understand fund behavior, anticipate performance, identify risks and, possibly, replicate fund performance in certain cases.