Hedge funds have figured prominently in the news, with the latest announcement in the Wall St Journal on Wednesday that Vega Asset Management, one of the world's largest, had had significant losses in the last few months while a number of other funds have quietly closed up shop and returned investor's money. For every hedge fund taking a hit, there are others with legendary success. The allure of alternative investments (some would say asset class) has not waned; rather the numbers of new hedge funds and new investors continue to grow as the economic barriers for entry continue to fall.

And here is why. Earlier in the week Gregory Zuckerman of same paper reported that the Medallion Hedge fund run by James Simons, PhD, a world class mathematician with a performance to match his CEO reputation, is cashing out shares to all outside investor by year's end.

Enormously and consistently successful since inception in 1988, Medallion has returned an average of 34% annually, even after management fees of 5% of the assets and 44% of all investment gains. In a pure maths calculation using an initial investment of 1 million US dollars as a guide, without any redemptions or additional infusions, an original investment at the start of 1988 would doubled the money every 2.11 years or so, ending in a real fortune of more than 100 million, more or less, today. Average calculations are just that average, and misleading, but even so you get the picture. The hedge fund business has been extraordinarily good for Mr. Simons, earning him second place last year in the top twenty five hedge fund compensation scale at 670,000 million USD. The highest, Edward Lampert made almost twice that at 1.02 Billion.

The reason given for downsizing Medallion was that Dr. Simons felt that the Medallion fund could not longer generate outsize returns, because, well, the fund was outsize and becoming unwieldy.

Yet, in what was an even more intriguing statement, although perhaps not to existing investors who have participated in an amazing 25 year track record, is that Professor Simons along with his 60 or so other PhD's on staff, is aiming even higher.

Now 67 years young, his goal - to create the first mega-hedge fund.

With an entry fee of 20 Million, and scheduled to launch August 1 (Alternative Investment News June 24, 2005), The Renaissance Institutional Equities Fund (REIF) is expected to top out at 100 Billion dollars. Now that's large! In comparison, the country of China holds only 500 billion dollars more in US Treasuries. In wandering thoughts, I couldn't help but wonder in the never ending scheme of things, would it not be truly amazing if China became a major institutional investor in this mega-hedge trend?

RElF offers four fee schedules, a fixed 2% management fee; a 50 basis point management fee (one-half of one percent) and a 10% performance fee; a 80 basis point management fee and 25% of the net excess over the S&P 500 benchmark; or a 50 basis point fee plus 35% of the net excess over the S&P 500 benchmark. RElF is designed to have low volatility, investing solely in US equities with risk mitigation further by using stock index futures. It will use a similar technology as the Medallion Fund.

Who is he? Scanning the Internet merely by typing in the name James Simons, I found that he was most frequently mentioned, with awe by his peers, relative to his contributions to advanced mathematical concepts, his presentations at scientific symposiums and related advanced maths articles. He received an undergraduate degree from MIT, and his PhD in mathematics from University of California at Berkeley.

His career started at MIT and Harvard where he developed critical tools for theoretical physics, then

becoming chairman of the math department of the State University of New York at Stony Brook. He worked during the Vietnam war as a code breaker, then turned his genius to the world of investing.

Even now his staff reflect his intellect, composed of doctorates in quantum physics, applied mathematics, and foreign language technical abilities. Interestingly, most of these professionals have had no exposure to Wall Street.

Still not well known in the broad investment market because he apparently prefers it that way, it was difficult even today to gather enough verifiable information on his methodologies and strategic models. But then that has been the traditional veneer of the hedge fund world, operating in methodical anonymity, letting positive results speak for themselves.

How did he accomplish this legendary record of topping every other hedge fund in that time frame? Dr. Simons created a technology for trading based upon a technique called high frequency finance or time-sensitive analysis. Built for rapid computer trading using complex quantitative models, simplistically, they work by analysing tick by tick market data to optimise the timing of their trades.

Not much more than those few facts have ever been revealed by Medallion, even to its own investors.

So, anyone ready to invest your first 20 million? Interest has been high among institutions, pension funds, and the ultra rich. It's also predicted there will be other like-size funds.

Next week, do hedge funds help or hinder markets, and what kinds of hedge funds might be a good diversification for small investors.

Martha Harris Myron CPA/PFS CFP? is a VP and Senior Private Banker, Private Client Services, Bank of Bermuda Member HSBC Group. She specialises in providing investing and comprehensive financial solutions for individuals and their families.

She can be reached at 299-5578. Confidential email can be directed to marthamyron@northrock.bm

The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy/sell any investment product.

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