Author Topic: Jim Simons rennaisance technologies - is value învesting not the only way ?  (Read 8717 times)

ratiman

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Apparently Rentech set up a "joint back office"  with a broker and the leverage limit in that scenario is 7.6:1, which I misremembered as 6:1. But Rentech enjoyed much more leverage than that. From the senate report:

"If RenTec had utilized a normal prime brokerage trading account at Deutsche Bank or Barclays, it would have been subject to the margin limits in Regulation T.  But by using the basket option structure, which RenTec used to trade securities in virtually the same manner as normal prime brokerage trading accounts, the hedge fund claimed it could operate free of the federal margin rules imposing leverage limits.  Because the basket option accounts were opened in the name of the banks and the account assets were also held in the name of the banks, the banks treated funds deposited into those accounts as supplying money to themselves rather than lending money to the hedge funds, which meant the federal leverage limits did not apply.  The banks took the position that they were not lending money to the hedge funds, even though the hedge funds paid financing fees for use of the bank funds; the hedge funds’ premiums provided collateral to secure the financing; and the banks described the options as a way to provide financing to their hedge-fund clients. RenTec used the billions of dollars deposited into its option accounts by the banks to conduct millions of trades per year, and reported to the IRS that Deutsche Bank made “available to Renaissance” leverage as high as 17:1, secured only by the assets purchased with the borrowed money.  At its peak, with bank financing, RenTec’s basket option securities portfolio reached an outstanding notional value of more than $50 billion. The banks and hedge funds claimed the option accounts could operate entirely outside of the federal margin rules, even though those accounts operated in the same way as prime brokerage accounts subject to margin rules.  Circumventing margin rules by relabeling a prime brokerage account as an “option” account is not, however, a legitimate business purpose."
 


ratiman

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Having now read this, I still don't get how the underpayment of taxes by $6.5 billion (according to the IRS) isn't a bigger part of the story. $6.5 billion is a lot of money! There is only one footnote to the senate report on Rentech's tax situation, and Zuckerman mostly takes the side of Rentech that all the liability had been shifted to the broker and the most Rentech could lose was the collateral. That's not the position of the banks, the senate, or the IRS. Zuckerman also omits the juicy quote from the Deutsche Bank lawyer that operating as a "front" for a hedge fund would be illegal. Zuckerman's explanation for the "basket option" thing is that after 2000, Rentech wanted less risk, but if Rentech wanted less risk, why did it hugely increase leverage after 2000? That's not how to reduce risk. One explanation is that it at once increased leveraged and moved to a safer shorter term strategy, but would the strategy have been worth pursuing without exceeding leverage limits? Hard to know, but the answer is probably no.

You could say that the options strategy didn't affect the fund's returns, just the post tax returns, but untaxed cap gains are a zero-interest loan from the IRS, and zero interest loans will affect returns.

Of course, it's not really fair to criticize the book for what it's not. But what I find strange is that Simons has mostly skated by without nearly any bad press about his tax situation. I guarantee if the Kochs or Icahn or Kovner owed the IRS billions, that would be the story, not philanthropic donations. My guess is that Zuckerman's book is part of a premeditated press strategy to get ahead of the bad press about the tax payment. The first line of Simons obituary will probably be "Jim Simons, a billionaire who paid the largest tax penalty in IRS history, . . . "
« Last Edit: February 27, 2020, 11:33:49 AM by ratiman »

ValueArb

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I don't understand the fuss. Jim Simons is a smart guy, but limiting yourself to $5B - $10B maximum is a huge advantage over Warren Buffett. Simons is evidence for my thought that Warren should have limited Berkshires size, or gone back to investment partnerships to keep control over the portfolio size.

Can you imagine if Warren was still running the Buffett Partnerships and getting 25% of annual gains? He'd probably be worth close to $300B.

And neither statistical arbitrage nor market making is technical analysis, you can trade with a lot of leverage if you have order flow info and control what is happening on your positions.
Nothing in this world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent