December 20, 2006

We’re Full, Don’t Need Any More Investors

-- By Pushpa Sathish, Staff Writer

House Full – That’s the notice posted on the doors of Renaissance Technologies Corp. The hedge fund, which had a sterling year after increasing its assets by four times to reach the $16 billion mark, is refusing to accept new investors and their money. Why? Because it wants to manage better the hoard it already has!

An investigation into the poor performance of its Institutional Equities Fund, Renaissance found that returns were more forthcoming when it remained a relatively small fund. Too much money in equity strategies is obviously not a good thing, as Ted Aronson will confirm. A main player in the $30 million Aronson+Johnson+Ortiz quantitative hedge fund that closed shop last year under similar circumstances, he says that there is certain evidence that there are capacity constraints on even the best products.

It’s a known fact that hedge funds zealously guard their trading secrets; with the quantitative, mathematical strategies that Renaissance leverages, keeping operations under wraps becomes harder as the money invested in trades increases.

Quant funds such as Renaissance make heavy use of algorithmic trading, or timed trades in small quantities through multiple brokers to hide their intentions. But while algorithmic trading can hide trades in large-cap stocks, big execution orders are hard to mask in smaller stocks. Furthermore, rival hedge funds frequently look to profit from trading against competitors by observing "footprints" -- moves that drive down returns for those looking to hide such trades.

Small wonder then that Renaissance is turning away those knocking on its doors!

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