Separate studies conduct returns-based analyses of Renaissance and Amaranth
Oct 1st, 2007 | Filed under: Performance, Analytics & MetricsMichael Markov, CEO of Markov Processes International says that the Law of Large Numbers was the “last great gift of the Renaissance”. In a twist of irony, says Markov, the Law of Large Numbers also explains why “a simple combination of factors can mimic the performance of a large and well-known hedge fund”. That fund? Renaissance Technology’s $25 billion “Renaissance Institutional Equities Fund” (RIEF).
Markov studied RIEF’s August performance to understand the types of factor exposures undertaken by RIEF. He found that the need to liquidate positions at the worst possible time (an oft-cited reason for August’s mayhem) “may only be a part of the story.”
But how useful is the examination of factor exposures when a fund strays unexpectedly from its typical exposures? In a separate study, Bhaswar Gupta and Hussein Kazemi fund out what, if any, information might have been gleaned from the historical return stream of Amaranth in order to predict that fund’s eventual demise.
Renaissance: Over-diversified?
Renaissance’s RIEF fund was undoubtedly caught up in the August run for the exit. But “the rest of the story”, according to Markov, was uncovered using his firm’s proprietary returns-based factor model. In a nutshell, he plugged RIEF’s returns into his model “in an attempt to see if some of the losses could (or should) have been anticipated.”
You may recall a similar analysis conducted by Professor Ross Miller of the State University of New York at Albany on another monolithic fund, Fidelity Magellan (see posting “Magellan a Frankenfund: Professor“).
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