The Past of the Futures (Renaissance RIFF) Fund

While the RIEF fund has opened up a bit to investors, there’s virtually no information available on the Renaissance Futures RIFF fund started in 2007. RIFF, started 13 months ago, did well during its first nine months but has been challenged by the turbulence of this fall, during which its returns were disappointing.

In his Nov. 2008, testimony before the House Committee on Oversight and Government Reform, Jim Simons said about RIFF that it is a slow trading fund, investing in commodities, currencies, bonds, and stock indices, and is designed to deliver an attractive return at relatively low volatility. There’s also generic information available at www.wsj.com obtained by WSJ from RIFF marketing materials:

• RIFF is a modestly-leveraged, slow-trading, global futures fund designed to provide substantial risk-adjusted returns,
• uncorrelated to US and global equity markets and with medium to low correlation to other asset classes
• Targets holding times between nine and 12 months
• The RIFF system is completely automated, with the exception of part of actual trade execution.
• Proprietary algorithms evaluate investment opportunities regularly in an effort to improve the portfolio.

All of the above makes a good case for a dynamic factor analysis of RIFF returns.

We used fund monthly returns from inception through Dec. 2009 to measure its exposure to several dozen of various market, currency and commodity indices. The system identified the following index combination as the most credible representation of the funds historical factor exposures:

Although we don’t really know what positions the fund actually held, the result represents a straightforward directional strategy: short Credit and lately Energy, long Gold and Emg Mkts. The leverage is not very high; 100% at most. Notable deleveraging of exposures occurred during market turbulence in Aug-Oct 2008. It is possible that some significant restructuring occurred during that time as RIFF suffered significant losses. We show that, despite this, the major exposures remain the same (Gold, Credit, EM) with a slight reversal of other exposures (Equity and Commod).

The credibility of the analysis is very high and the portfolio of systematic exposures (“Style” line in chart below) tracks the fund (“Total”) very well.

There’s a reason why we performed our analysis through Dec 2009. Once we expanded the date range and added the first two months of 2010, the analysis has shown major exposure shifts and the quality of the analysis started deteriorating very quickly. This could indicate many things including potential rapid restructuring of the fund in the first days of 2010. Such exposure shifts could be related to the recent news that Renaissance management is mulling a shut-down of both RIEF and RIFF.