At Berkshire Hathaway’s live-streamed annual meeting Saturday, chief executive Warren Buffett laid out a grim, pandemic-spooked outlook. He also took the opportunity to quibble with Renaissance Technologies founder Jim Simons’ hedge funds.
Buffett’s comments on Simons were in response to an e-mailed question asking whether the era of indexing was over, given the steep losses posted by the Standard and Poor’s 500 Index during the Covid-19 bear market in stocks.
That may have irked Buffett, who criticized active management compared with the passive alternatives that, despite his own stock-picking prowess, he has long favored for other investors.
“One side has high fees, that think they can pick out stocks,” he said. “And the other side has low fees. I know which side is going to win out over time.”
Investors, he suggested, fall for promises of superior returns by proponents of active management.
“You have to realize that it’s in a great many people’s interests to convince you that they can do something,” he said, warning that “a certain percentage of them will do it from luck.”
Buffett then cited the former codebreaker and Stony Brook University math department chairman.
“A few people will do it from skill and that’s what makes it so enticing that you can find the Jim Simons or somebody that’s going to produce extraordinary returns,” Buffett said. “And Jim and his group have done it by brain power, but that’s very unusual.”
Buffett nevertheless took aim at the Renaissance hedge funds’ high fees. “They are going to charge you a lot money,” he warned. The firm’s flagship Medallion Fund comes with a 5 percent management fee and takes up to 44 percent of the profits as a performance fee.
However, the Renaissance Institutional Equities Fund and other firm offerings that are open to outside investors charge fees that are well below average — 1.5 percent or less for management and 10 percent of profits.
The Oracle also questioned Renaissance’s ability to operate on a large scale. “They are going to actually maybe close up their fund,” Buffett said, adding that Renaissance “can’t do it with really huge amounts of money compared to how the record has been established in the past.”
The Medallion fund currently has about $10 billion in assets, and has generated a 39.1 percent annualized return from 1988 through 2018, according to Wall Street Journal reporter Gregory Zuckerman’s 2019 book The Man Who Solved the Market. The fund is closed to new outside money, and nearly all of its investors are current Renaissance employees.
As for the firm overall, where hordes of PhDs and other employees mine enormous amounts of historical market data in search of often subtle predictive signals, Renaissance currently manages some $75 billion in assets, according to Absolute Return, an industry publication.
A spokesman for Renaissance declined to comment on whether the firm was planning to close any of its non-Medallion funds to new investors.
An email sent to Berkshire Hathaway was not returned by press time.
Buffett’s experience with Long-Term Capital Management may have jaundiced his views of quantitatively oriented, PhD-heavy hedge funds.
“Long Term Capital Management had a lot of real smart people working for them too,” says Bill Smead, chief investment officer at Smead Capital Management in Seattle, which owns Berkshire stock. “Buffett was offered a chance to clean up that mess.”
LTCM, with two Noble-prize winning economists on board, imploded in 1998 amid the Russian debt crisis. Buffett was approached to take over the highly leveraged fund, which was ultimately rescued by a group of Wall Street banks.
Medallion, whose performance benefits from market volatility, has been posting particularly impressive returns as the coronavirus has wreaked mayhem in global markets. Year to date through April 14, according to a Wall Street Journal report, it returned 24 percent. Renaissance’s other funds are generally designed to modestly outperform the markets over the long-term.
Three of them— Renaissance Institutional Equities, Renaissance Institutional Diversified Alpha, and Renaissance Institutional Diversified Global Equities — had each lost between 7 and 9 percent for the year through April 17.
For their part, Berkshire Hathaway class A shares lost 14.7 percent year to date through April 14.
Simons himself has in the past drawn a contrast between Buffett’s investing process and his own. In a 2007 interview with Bloomberg Markets magazine, he described Renaissance’s approach as similar to the extensive farming he once practiced in Colorado, where center pivot irrigation was used to grow wheat on thousands of acres—and a particular stalk of wheat has relatively little importance on overall results. “You’re working on statistics,” he said at the time.
By contrast, he likened Berkshire’s stock picking to intensive farming, where every plant is vitally important to overall performance. “It’s two completely different ends of the spectrum,” he said.
Ten years after the Long-Term Capital Management rescue, in his 2008 annual letter to shareholders, Buffett wrote that investors should be wary of models based on market history.
“Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive,” he wrote. “Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.”
