Simons Questioned by Investors

By SUSAN PULLIAM and JENNY STRASBURG Investors in a hedge fund run by James Simons are asking questions about why a fund held by Mr. Simons and fund associates is racking up big gains while another held mostly by outside investors is losing money. In a conference call Wednesday, investors asked Mr. Simons about why the Renaissance Institutional Equities Fund lost 17% this year through April, lagging behind the stock market, while another fund -- held nearly exclusively by Mr. Simons and his colleagues -- surged 12%. The fund, known as RIEF, also lost money in 2008 while the internal fund jumped 80%. In his monthly letter to investors, Mr. Simons said RIEF suffered a "performance onslaught" during an "extreme market rally," adding: "We certainly understand our clients' discomfort." Mr. Simons reiterated those views in the investor call. View Full Image Getty Images James Simons was among five hedge-fund managers called to appearbefore Congress last year. It is a rare misstep for Mr. Simons, who is one of the hedge-fund industry's biggest stars. The 71-year-old manager rose to fame on Wall Street using sophisticated computer models to engineer trading strategies that indicate when to buy and sell stocks, bonds and futures. Mr. Simons -- the top-paid hedge-fund manager in 2008, receiving $2.5 billion, according to Alpha magazine -- declined to comment. RIEF, a $5.5 billion fund, invests in U.S. stocks, typically holding many positions for a year in an effort to outperform the S&P 500 Index over the long haul. The other fund at issue, the roughly $9 billion Medallion fund, has a rapid-fire trading style and flexibility to roam the globe to find stocks and other securities its algorithms consider mispriced. The performance gap was even wider last year, when Medallion surged 80% even after its higher-than-average fees were deducted, and RIEF declined 16%. Renaissance managers say RIEF never was advertised to provide the same returns as Medallion, which they say has a different investing strategy. Few Sure-Fire Profits The gulf in returns signals how much the markets in recent months have favored investors whose strategies are tied to fast-action trading among many types of assets. It also underscores the pitfalls of making investments based on a manager's reputation, especially with expectations for making a quick, sure-fire profit. Mr. Simons was among five hedge-fund managers called to appear before Congress last year amid calls from lawmakers for regulation of the industry. The government has said it plans to require hedge funds to register with the Securities and Exchange Commission amid a push to require the $1.3 trillion hedge-fund industry to disclose more information about risks the funds' trading poses to markets and investors. The SEC also is examining hedge-fund trading and whether sophisticated strategies -- including ones driven by computers and known as "quantitative" -- involve manipulative or abusive practices, a person familiar with the matter says. The regulatory interest is part of a broader effort by the SEC to examine whether hedge funds are manipulating trading or engaging in insider trading using complex derivatives called credit-default swaps, the person says. 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. Meantime, some Renaissance investors have voted with their wallet. In 2008, investors pulled out $12 billion from the fund company; total assets have fallen to about $18 billion from a peak in mid-2007 of about $35 billion, according to Renaissance. Mr. Simons launched RIEF four years ago to great fanfare, saying that he could manage as much as $100 billion under the new vehicle, which represented the first time Renaissance had taken outside money in more than a decade. Beating the Index In the Wednesday conference call, with 250 investors and analysts, Renaissance managers and Mr. Simons told investors that RIEF has done what it is intended to do: beat the index over the long term. They note that last year's decline of 16% in RIEF still beat the S&P 500, which swooned 38%, they say. This year through April, however, RIEF's 17% decline lags behind the roughly 3% decline in the same period for the S&P 500. In recent weeks, Renaissance told investors, it has moved some members of its research staff away from Medallion to focus more of their time on RIEF. Write to Susan Pulliam at susan.pulliam@wsj.com and Jenny Strasburg at jenny.strasburg@wsj.com