Friday, May 15, 2009

Is There More Than Meets The Eye At RenTec?

Today, the WSJ finally picked up the story on one of the most interesting and exciting funds of the past decade: Renaissance, or affectionately known in geek circles as RenTec. Frequent readers of Zero Hedge are aware that there is likely much more than meets the eye at the uber secretive East Setauket campus.

The WSJ reports that, among other things, the SEC has been recently poking around RenTec's books, maybe trying to answer the $64,000 question of how Medallion consistently outperforms RIEF and RIFF.
In April, the SEC began an examination of Mr. Simons's fund company, Renaissance Technologies, looking at its books and records, along with the other information that the SEC typically requests as part of such a procedure for funds registered with the agency. The examination is "routine" in nature, a person close to the situation says; there is no evidence that the SEC believes Renaissance has done anything wrong.
What is strange, is that in a post script to its April 8th letter to investors, Jim Simons had the following little piece of microfont info:
P.S. Renaissance recently updated its Form ADV Part II, as required by the SEC. We do not believe that any of these changes are material. [TD: emphasis, and legiblity, added.]
Any time anyone tells you something is "not material," well, you know the rest. Zero Hedge decided to investigate just what may have been so out of place in RenTec's SEC Form ADV that it needed to amend it. To our amazement, we stumbled upon this very curious disclosure in RenTec's Section 11.E, where to a question of:
Has any self-regulatory organization or commodities exchange ever: found you or any advisory affiliate to have been involved in a violation of its rules (other than a violation designated as a "minor rule violation" under a plan approved by the SEC)?
The answer is an emphatic Yes radio button.

Following up with the Regulatory Action Disclosure Reporting Page yields even more mysteries:

Just who is this mysterious Nova Fund L.P. that was found to be in regulatory breach and was being housed at RenTec up until the moment, when, coincidentally, the SEC decided to ask some question of Mr. Simons? Wikipedia has this to say about Nova:
The Nova Fund historically has traded NASDAQ stocks only, executing purely electronically, with a desk staffed by 1-2 traders overseeing operations. In the mid-1990s, Nova was one of Instinet's largest volume customers. On one day in 1997 Nova executions accounted for 14% of the share volume of the NASDAQ.
Does everything start to come full circle: A high frequency trading fund under the Simons umbrella found to be in breach of SEC regulations (and subsequently "fired" by RenTec), a fund in fact that traded (likely until very recently) massive volumes on the NASDAQ. But wait - wasn't Medallion RenTec's hi-fi fund? Just what is going on here... and can one draw any analogies between this NASDAQ liquidity provider and what may be going on currently with the NYSE's SLP program, and its biggest liquidity provider: Goldman Sachs?

An for the pièce de résistance, an observant reader demonstrates that Nova Fund was, in fact, not only a fund that generated 40% returns annually (this is where the alarm bells go off) but also subsequently subsumed by Medallion itself! From the publicly posted resume (?) of the gentleman who created the Nova Fund:
[The] Nova Fund, an aggressive, market-neutral hedge fund trading U.S. equities using statistical arbitrage. Organized, staffed and directed the business unit which traded the fund until February 1995. Rate of return was over 40% during its pilot program. In 1997 this fund was absorbed into the Medallion Fund, the firm’s flagship multi-strategy fund.
Lastly, pulling up FINRA's Brokercheck on Nova reveals just what has happened at the fund:
NASD Rules 2110, 3010 and 6955(A): Without admitting or denying the allegations, the respondent consented to the entry of findings that it failed to submit to order audit trail system ("OATS") required information on 397 business days during the review period. The firm's supervisory system did not provide for supervision reasonably designed to achieve compliance with respect to the applicable securities law and regulations concerning OATS. Specifically, the firm's supervisory system did not include written supervisory procedure providing for the identification of the person responsible at the firm to ensure compliance with the applicable rules; a statement of the steps that such person should take to ensure compliance; a statement as to how often such person should take such steps; and a statement as to how enforcement of such written supervisory procedures should be documented at the firm.

nova fund -

Zero Hedge is continuing its own investigation and will present readers with any results as they become available.

Disclosure: no holdings of any kind in RenTec or derivative securities or LP interests. Sphere: Related Content
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