04/29/2009

Renaissance Lifts Its Veil, But Just a Crack

James Simons' notoriously secretive Renaissance Technologies is taking a small step toward transparency - a sign that even the most-successful fund operators are feeling pressure to provide more information to investors in the wake of Bernard Madoff's fraud.

Two Renaissance funds have instructed their auditor, PricewaterhouseCoopers, to provide limited partners with verification of investment valuations and of the banks that hold fund assets in custody. The auditor will supply the confirmations upon request on a quarterly basis. The affected funds are the long-biased Renaissance Institutional Equity Fund and Renaissance Institutional Futures Fund, a commodities vehicle.

Simons, a quantitative-investment specialist, is as well known for secrecy as he is for producing spectacular returns. The move toward transparency clearly comes in response to demands that hedge funds be more open in the aftermath of Madoff's $60 billion Ponzi scheme. Still, the step is relatively small, and it may not go far enough for large institutional investors.

For example, after getting burned by Madoff, Union Bancaire Privee said in December that it would pull out of any hedge fund that didn't use an independent administrator to verify its net asset value. One fund operator used by UBP, Millennium Partners, quickly hired administrator GlobeOp. Another, D.E. Shaw, is looking into hiring an outside administrator. But Renaissance has so far decided that hiring an outside administrator is unnecessary.

Renaissance apparently doesn't want any firm beyond its auditor to have access to too much information about its funds. Simons, who founded his East Setauket, N.Y., firm in 1982, presumably still worries that details of his trading strategies will leak out, hurting his competitive edge.

It's not known whether Renaissance's new policy will satisfy UBP. Both firms declined to comment. But some hedge-fund specialists, speaking generally, said that even giant operators like Renaissance will come under increasing pressure from investors to take steps such as hiring an administrator.

After the Madoff debacle, institutional investors are no longer going to be willing to take things at face value, said one due-diligence specialist at a large bank. "Have I been to Renaissance more than once? Yes. Does it look real? Sure. Does that mean anything? No."

Calpers said in March it would press investment managers to set up managed accounts and other types of vehicles that would give the giant pension system more control over assets. Meanwhile, the retirement plan of Utah is trying to persuade other institutional investors to unite in exerting pressure on hedge funds to adopt investor-friendly terms, including more transparency. Calpers isn't a Renaissance investor, according to its latest annual report. Utah doesn't identify its specific hedge-fund investments in its latest annual report.

After running up huge returns for years, Renaissance has taken its lumps in the deep market slump. Its long-biased fund, which is designed to exceed the return of the S&P 500 stock index, was down about 15% for the year through April 24. That was worse than the 4.1% decline in the S&P 500. Last year, the fund was down 16%, far outperforming the nearly 40% plunge in the S&P 500.

The fund's assets have dwindled to $5.9 billion, from a peak of $26 billion last year. Of the remaining assets, roughly $1 billion represents stakes held by the firm's employees, with outside investors accounting for the rest.

Details about the performance and size of the commodities fund are unknown. But poor performance last year prompted Renaissance to reduce that vehicle's fees.

Renaissance also operates a third vehicle, Medallion Fund, that invests only the capital of Simons and Renaissance employees.

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