was Rentech an options market maker

[billyjoerob]

In the latest Senate hearings into Jim Simons and his tax fraud, it was revealed that Rentech avoided leverage limits by putting many of its trades in the name of the broker. The broker would then legally own the trade, and rentech would collect a "fee" for advising the broker on what trades to do. It's more complicated that that obviously, but that's the basic idea.

http://www.hsgac.senate.gov/subcomm...s-in-taxes-and-bypass-federal-leverage-limits

This is my guess. Rentech was some sort of early HFT/options market maker. In order to avoid regulation and scrutiny and leverage limits, it would set up a deal with a broker dealer (Barclays/Deutsche Bank) to use the broker's balance sheet in exchange for a share of the profits. So Rentech would provide the strategies (the HFT algorithms or whatever) and the broker would provide the leverage/executions, and the profits would be split. Rentech was a lot more like Timber Hill than it was an ordinary hedge fund. Rentech says the brokers were liable for the losses, but because there were no losses, that was a technicality.

 

[billyjoerob]

In other words, what at first looks like a tax avoidance scheme is really a business model. And the reason Rentech never had to worry much about employees leaving and starting new funds was because Rentech wasn't really a fund. All of the intellectual property is inseparable from essentially running a broker dealer at 20-1 leverage.

 

[newwurldmn]

RenTech were not option market makers. And their ability to retain employees has to do with high compensation and very strict non-compete clauses.

It had to do with an OTC contract. They effectively created their own index and bought an option on it and then proceeded to change the index constituents as their models told them to buy different stocks. Because the option was over 1 year in duration they claimed long term capital gains, but the composition of that index was changing everyday (effectively short term trading). So the 6Bn is really the difference between short and long term gains.

It might be the reason they gave back all their outside investor's money. So that they could run this scheme without anyone else's accountants questioning it.

 

[billyjoerob]

Rentech had such stringent non-compete agreements that two MIT Phds left to work for a competitor without ever signing any non-compete agreement. As to the compensation argument, Simons has $15.5B. He hired people out of universities who tended to compare their salary with what professors make, not what other financiers make. That's how he kept 98% of the compensation to himself. Going through the list of Rentech alumni, I can't find anyone with substantial wealth. Could be wrong.

 

[newwurldmn]

http://www.reuters.com/article/2007/06/19/renaissance-millennium-idUSN1915944520070619

Almost no turnover in an industry where it's common to jump ship every 2-3 years.

How do you think he manages that? He hires the smartest people in the world and they can't figure out that any firm would pay them millions just to learn what they saw inside RenTech?

It seems you know more about the firm than me.

 

[rieszrep]

Rentech had such stringent non-compete agreements that two MIT Phds left to work for a competitor without ever signing any non-compete agreement. That's how he kept 98% of the compensation to himself.

They are 5 year NCAs in general. Nothing besides litigation stops you from working for a competitor even after signing a non-compete. Citadel is embroiled in several cases of NCA violations. Optiver and Tibra haven't settled their case either. Also, a 5% management fee tends to be dilutive in favor of the employees.

Going through the list of Rentech alumni, I can't find anyone with substantial wealth. Could be wrong.

The early founders are very well-off. Without naming anyone: one lives in a huge mansion in Florida and still dabbles in market data once in a while. Another lives in a beautiful house along the coast in Orange County. Most have gone back to academic research but do not care to flaunt their wealth. If you're active among the APS/AMS/MAA/CERN communities, it's a small world and you would probably know a few Rentech alums and have a good idea where they are in life.

A main reason why Rentech has low turnover rate is that it tends to be a terminal point in your career. Their employees generally achieve their retirement wealth/income goals at Rentech so there is little point to move over to a competitor. This isn't unusual though - the same can be said of the upper hierarchy at Citadel, and also most of Two Sigma and Tower Research.

He hired people out of universities who tended to compare their salary with what professors make, not what other financiers make.

Professors generally make more than the average "financier" that fills a quant developer/researcher role. A tenured professor works practically half of the year at about $1,500 per work day at a selective university, with very liberal IP clauses, nearly biannual sabbaticals and the freedom to explore anything during the remaining 50% of time - I know several Rentec researchers whose names are still on their university directories, but I also know several tenured professors who have started companies that received hundreds of millions in second/third round financings.

My point is that it's generally more expensive to hire a professor than a typical trader.

 

[billyjoerob]

It looks like I got the argument for this post from here. I didn't really understand it the first time around, but the latest allegations seem to indicate that there might be something to it. In other words, Rentech used all of the leverage to run the quasi-market making business.

http://falkenblog.blogspot.com/2010/03/renaissances-medallion-fund.html

No one really knows how they do it, but it is rumored to employ some sort of quasi-market making, 'pairs-like' algorithm. That is, they trade a lot electronically, seeding the book and provididing liquidity (eg, limit orders to buy at the best bid or lower), and looking for abnormal movements with sympathetic stocks (eg, when IBM goes up, but Dell does not, sell IBM). This would explain why they are not really scalable ($10B Medallion has been closed to new investors for a long time).

But who knows. I hear they don't hire many economists, and instead prefer PhDs in Math, computer science, etc. This could be a slam on economists, in that we aren't as bright as these guys, or it could be our framework has been poisened by modern econometrics. However, it could be economist's are savvy enough to see the essence of the alpha, and so would be a bigger threat via leaving and starting a competitor, whereas the math PhDs are too focused on the little issues to grasp the bigger picture.

I did hear once (third hand) that in their legal dispute two ex-employees, the intellectual property at issue was quite trivial, which would suggest their alpha is merely being the fastest electronic market makers in the world. Someone has to be fastest. Considering the new co-CEOs are both computer scientists, that would make sense.

 

[MoreLeverage]

In the latest Senate hearings into Jim Simons and his tax fraud, it was revealed that Rentech avoided leverage limits by putting many of its trades in the name of the broker. The broker would then legally own the trade, and rentech would collect a "fee" for advising the broker on what trades to do. It's more complicated that that obviously, but that's the basic idea.

http://www.hsgac.senate.gov/subcomm...s-in-taxes-and-bypass-federal-leverage-limits

If you read that press release, it's clear they've decided the outcome of the hearing well in advance. Regardless of the laws at the time, you're guilty of being rich and running a hedge fund and we're going to figure out how to make you pay. I like how they claim it could have destabilized the banks - as if RenTec wasn't good for some shortfall when they made over $30B trading this way. They were supporting the banking sector, which needs all the help it can get, to the turn of over $1B in fees and financing!

 

[billyjoerob]

It's amazing how many people will come out of the blue to defend the rich & successful. I'm not saying that about you, MoreLeverage, but people react to criticism of the rich and successful like you criticized their mother.

Simons is a $15.5B billionaire with great press: mathematician conquers the markets! Until somebody can explain how he made that money, there is going to be the suspicion that he did it nefariously.

 

[billyjoerob]

Having read some of the 93 page report, it appears that the broker would create an option, sell it to Rentec, and Rentec would exercise the "option" after one year to avoid short term taxes. Supposedly the "option" is held by the broker, and the broker bears some risk, and Rentec is hired as consultant to manage the assets in the "option." That's Rentec's version.

The allegation is that the "option" is really just Rentec's prime brokerage account. That's it. This whole scheme is no more clever than that. Rentec basically just waved its wand over its brokerage account and called it an "option" and believed that would magically transform it into an option. In fact, Barclays took the "option" off its balance sheet and treated it as it would any prime brokerage account. The only difference being that instead of the usual 7.6x leverage limit, the "option" was afforded a 20-1 leverage limit.