Renaissance Technologies’ flagship hedge fund Medallion has dipped its toes into the wild world of cryptocurrency trading, in a sign that the computer-driven investment group is willing to play in more esoteric markets to generate its industry-leading returns.
The $75bn hedge fund group disclosed in a regulatory filing that Medallion — a highly successful fund only open to Renaissance’s own employees — was dabbling in bitcoin, the original cryptocurrency.
While Renaissance said that it would limit its trading activities to cash-settled bitcoin futures traded on the CME, the Long Island-based investment group founded by former Cold War codebreaker Jim Simons stressed the risks of the nascent asset class.
“The underlying commodity for these futures transactions, bitcoin, is a relatively new and highly speculative asset,” Renaissance said in the filing. “Bitcoin and futures based on bitcoin are extremely volatile, and investment results may vary substantially over time.”
From the filing it is not clear how active Renaissance is in bitcoin, or whether it has bought any of the cryptocurrency futures, only that it is now “permitted to enter into bitcoin futures transactions”, according to a separate section on the risks and trading styles of its various funds. Its other funds, which manage money for external investors, make no mention of bitcoin. A spokesman for the hedge fund declined to comment.
Cryptocurrencies like bitcoin remain at the fringes of the mainstream finance industry, but hungry for new potentially profitable assets to trade, Wall Street has been gradually bringing them into the fold.
Big trading firms like DRW are now making markets in cryptocurrencies, and even traditional investment groups like Fidelity have launched “digital asset” businesses. The CME’s bitcoin futures contract launch in 2017 was a major moment, by allowing more mainstream investors — such as Renaissance — to bet on or against bitcoin for the first time.
But it is a controversial development. The Securities and Exchange Commission has refused to approve exchange traded funds for the cryptocurrency, and many in the finance industry consider it a scam and prone to manipulation.
Chicago-based Cboe Global Markets, CME’s crosstown rival and the first US derivative exchange to offer bitcoin futures, unexpectedly pulled the plug on the fledgling market last year as demand for the product wavered.
It is also phenomenally volatile. The price of bitcoin soared from under $1,000 at the start of 2017 to a peak of nearly $20,000 in December that year, before suddenly collapsing. Since 2018 it has seesawed between $3,000 and $12,000.
Renaissance listed a range of risks involved in trading the cryptocurrency, such as its limited history, volatility, the lack of any official recognition as a currency, limited regulation, the possibility of increased government scrutiny and its “susceptibility to manipulation by malicious actors”.
“Any of these factors could materially and adversely affect the value of the fund’s investments,” the filing stated.
The Medallion fund is on track for its best year, the Wall Street Journal reported on Friday, despite a volatile market that has affected Renaissance’s other funds, which have posted some of their worst quarters ever.
The Renaissance Institutional Equities Fund has managed to claw back some of its earlier losses, gaining 4.8 per cent in the first two weeks of April to reduce its loss this year to 10.3 per cent, while Renaissance Institutional Diversified Alpha is close to flat for the month and down 10.4 per cent for the year, according to people familiar with the matter. Renaissance Institutional Diversified Global Equities Fund was up 1 per cent in the first two weeks of April, paring its 2020 loss to 9 per cent.
Renaissance also revealed in the filing that it was last year fined €150,000 by the Spanish securities regulator for breaching a short-selling ban on Liberbank in 2017, a decision that the hedge fund group is now appealing in the Spanish high court.
“Although Renaissance had not engaged in a short sale, the (regulator) determined that Renaissance’s reduction of long positions violated the short sale ban because it resulted in an increase in the net short position in Liberbank held by the funds Renaissance manages,” the filing said.
However the investment group believes that the regulator and the Spanish Ministry of Economy and Enterprise have “improperly broadened the scope of the Spanish regulation beyond its intent and plain language”, given that Renaissance did not enter any short-selling transactions after the ban was put in place, the filing stated.