March 3, 2008

Some Hints from the World’s Largest Hedge Fund

Filed under: Uncategorized — by TraderMade @ 12:54 pm
Tags: , ,

I have just read this wikipedia entry on Renaissance Technology (, an investment management firm founded by John H. Simon. It’s the world’s largest hedge fund, handling assets worth USD 35.4 billion.

Some interesting points:

  • It uses market modelling, mechanically process market (price) data to generate trade decisions.
  • It trades easily traded financial instruments, not exploiting any complex instruments.
  • The models generally perform badly in highly volatile market.
  • They don’t use high leverage.

Some excerpt from the wikipedia entry:

Scientifically based investment strategy
For over two decades, Renaissance has been at the forefront of research in mathematics and economic analysis. Renaissance employs more than 150 scientific specialists, including mathematicians, physicists, astrophysicists and statisticians, half of whom have a PhD, who review market data to find statistical relationships that predict the price movements of commodities, currencies and stocks. These employees come from countries as diverse as Japan and Cuba [3].

Renaissance 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. Renaissance represents a validation of the quantitative trading model and trades with such high frequency that it (the Nova fund, specifically) accounts for over 10% of all the trades occurring on NASDAQ some days.

It is worth noting that Nova trades execute purely electronically on direction from a computer model. Medallion fund trades are (in large part) executed through a trading desk, whose goal is to increase the value of the positions the model directs the desk to take by timing market trends and executing in novel fashions (including intra-desk trading).

Renaissance trades at margin levels uncharacteristically low among hedge funds. This allows them to significantly reduce exposure risk, while the efficiency of their computational model allows for consistently high returns.

Like many other quantitative funds, their RIE Fund had difficulty with the higher volatility environment that persisted throughout the end of summer 2007. According to an August 10th article in Bloomberg by Katherine Burton, “James Simons’s $29 billion Renaissance Institutional Equities Fund has fallen 8.7 percent so far in August 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.”

It has just received approval from the Securities and Exchange Board of India (Sebi) to operate in the nation’s stock markets as a foreign institutional investor (FII), according to a report in the Business Standard. (CNBC).



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