Could Jim Simons’ Renaissance Technologies Face an SEC Investigation?

Posted on 02/07/2021

Renaissance Technologies LLC, the world’s largest quantitative hedge fund firm, was founded by Jim Simons. Recently Simons stepped down as Chairman of his hedge fund.

Renaissance Technologies has a history of tangling with the U.S. government. Renaissance Technologies is involved in a massive tax case with the U.S. IRS (Internal Revenue Service) regarding basket options. The IRS Office of Appeals rejected a tax-avoidance maneuver involving so-called basket options. This involves around US$ 6.8 billion in back taxes, according to an estimate by U.S. Senate investigators.

SEC Probe Risk

Renaissance Technologies is known for quantitative investing and the famous Medallion fund. The Medallion fund returned 76%, according to a fund investor. However, the hedge fund’s external funds performed poorly in 2020, according to HSBC’s weekly hedge fund scoreboard. The Renaissance Institutional Diversified Global Equities Fund (RIDGE) lost 22.62% YTD from December 25, 2020 and the Renaissance Institutional Diversified Alpha lost 33.58% in the same period.

From the HSBC hedge fund report of 2021 for the January 2021 monthly return period, the Renaissance Institutional Equities Fund International LP B returned -9.46%, while the Renaissance Institutional Diversified Alpha Fund LP A returned -5.39%.

Complaints can be made that the Medallion fund for friends, family, and employees could have a superior algorithm, while the limited partners of the other funds continue to see worse performance in their funds. Bloomberg reports that its Renaissance funds available for outside investors have been hit with at least US$ 5 billion in redemptions.

East Setauket, New York-based Renaissance Technologies answered its dismal returns in a December letter, which Bloomberg was able to look at: “Although recent performance has been terrible and worse than prior performance would have suggested was likely for 2020,” the hedge fund said, its model “anticipates that in track records as long as ours, some risk-return ratios every bit as bad as the ones we are now seeing are not shocking.”

The broader lesson is that “one should expect even good investments to perform horribly from time to time.”

Test Case

This serious type of discrepancy between internally managed funds and capital run for outside investors is truly unprecedented. Will the U.S. Securities and Exchange Commission (SEC) investigate? The SEC investigated Michael Platt’s BlueCrest Capital Management Limited. BlueCrest Capital Management was caught secretly transferring its best traders from managing outside capital to just running the firm’s own money. According to the SEC’s order, BlueCrest created proprietary fund BSMA Limited to trade the personal capital of BlueCrest personnel using primary trading strategies that overlapped with BlueCrest Capital International’s. As set forth in the order, members of BlueCrest’s governing body, which made the relevant decisions regarding BSMA, had a 93% ownership interest in BSMA that peaked at US$ 1.79 billion compared to its ownership interest of approximately US$ 619 million in BlueCrest Capital International. In December 2020, Platt got hit with a US$ 170 million fine. In 2019, Forbes estimated Michael Platt’s net worth to be US $8 billion.

“BlueCrest repeatedly failed to act in the best interests of its investors, including by not disclosing that it was transferring its highest-performing traders to a fund that benefitted its own personnel to the detriment of its fund investors,” said Stephanie Avakian, Director of the SEC’s Division of Enforcement in the December 2020 press release. “This settlement holds BlueCrest responsible for its conduct and furthers the SEC’s goal of returning funds to harmed investors.”

Keywords: RenTec.

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