“…is a slow trading fund, investing in commodities, currencies, bonds, and stock indices, and is designed to deliver an attractive return at relatively low volatility. …RIFF, started 13 months ago, did well during its first nine months but has been challenged by the turbulence of this fall, during which its returns were disappointing“.

There’s also generic information available at www.wsj.com obtained by WSJ from RIFF marketing materials:

“RIFF is a modestly-leveraged, slow-trading, global futures fund designed to provide substantial risk-adjusted returns, uncorrelated to US and global equity markets and with medium to low correlation to other asset classes… Targets holding times between nine and 12 months… The RIFF system is completely automated, with the exception of part of actual trade execution. Proprietary algorithms evaluate investment opportunities regularly in an effort to improve the portfolio“.

All of the above makes a good case for a dynamic factor analysis of RIFF returns.

We used fund monthly returns from inception through Dec. 2009 to measure its exposure to several dozen of various market, currency and commodity indices. The system identified the following index combination as the most credible representation of the funds historical factor exposures:

Although we don’t really know what positions the fund actually held, the result represents a straightforward directional strategy: short Credit and lately Energy, long Gold and Emg Mkts. The leverage is not very high; 100% at most. Notable deleveraging of exposures occurred during market turbulence in Aug-Oct 2008. It is possible that some significant restructuring occurred during that time as RIFF suffered significant losses. We show that, despite this, the major exposures remain the same (Gold, Credit, EM) with a slight reversal of other exposures (Equity and Commod).

The credibility of the analysis is very high and the portfolio of systematic exposures (“style” line in chart below) tracks the fund (“total”) very well.

There’s a reason why we performed our analysis through Dec 2009. Once we expanded the date range and added the first two months of 2010, the analysis has shown major exposure shifts and the quality of the analysis started deteriorating very quickly. This could indicate many things including potential rapid restructuring of the fund in the first days of 2010. Such exposure shifts could be related to the recent news that Renaissance management is mulling a shut-down of both RIEF and RIFF.

Using “traces in the sand” we will try to recreate the pieces of the performance puzzle that are otherwise hidden from the investors. These traces represent the fund’s monthly performance numbers, which frequently the most the investors would get from a fund. The chart below represents a dynamic analysis of the fund using Russell style indices and MSCI EAFE as a proxy for Int’l equities.

Although the exposures remain similar to the ones in our 2007 study, one could observe a profound change: the fund is behaving as if it’s net neutral or net short. This could be inferred from the sum of short exposures (about 90% in midcap growth) being about the same or greater than the sum of long exposures above the X-axis. That’s quite a change as compared to exposures 3-4 years ago which indicated a 100% net long allocation. No wonder the fund missed the recent market rally.

Moreover, in April alone, midcap growth stocks (short exposure in REIF) delivered twice the performance of large cap stocks (long exposure) which is reminiscent of the statement about the volatility in the fund conference call. Basically, our analysis of the fund’s returns shows that capitalization is the most dominant factor of the fund’s performance. The chart below translates it in the language understood by finance professionals: performance attribution. Based on our analysis, RIEF April losses are dominated by its net short exposure to midcap growth stocks.

As a reference we provide the following chart that shows how well the portfolio based on exposures “Style” is replicating (in-sample) the fund (“Total”).

Please note, at no time in this analysis are we claiming to know or insinuate what the actual strategy, positions or holdings of this fund were; nor are we commenting on the quality or merits of Renaissance’s strategy or that of any other manager. Instead, we are seeking to demonstrate how MPI’s Dynamic Style Analysis can be used to better understand fund behavior, anticipate performance, identify risks and, possibly, replicate fund performance in certain cases.