Warring billionaires, a rogue trader, a divorce: the story of a hedge fund
Two Sigma, one of the largest hedge funds in the world, has long prided itself on two things: its sophisticated, in-house algorithms that power its trading, and its commitment to secrecy. But recent internal issues have forced Two Sigma to air its dirty laundry.
In March, the New York company, with $60 billion in assets, took the unusual step of telling its investors in a filing that the relationship between David M. Siegel and John A. Overdeck, the billionaire co-founders and owners who run the company , , had become so toxic that it could damage the future of Two Sigma. In October, there was more bad news: an employee had changed some trading models without the company’s knowledge, impacting returns and triggering regulatory scrutiny.
And in late October, Mr. Overdeck’s personal life was exposed after his wife alleged in a lawsuit related to their impending divorce that he and the couple’s lawyers had, unbeknownst to her, taken billions of dollars of their joint assets placed in trusts that protect them from her, their three children and the Internal Revenue Service.
It’s the kind of mess that every investment firm wants to avoid for fear of losing clients and talent, especially one that has avoided the spotlight for much of its 22-year existence. In a 2015 profile of Two Sigma, Forbes magazine said the two founders were “obsessive about avoiding publicity and keeping the company’s secrets hidden.”
The revelations have raised questions among investors and regulators about internal controls at Two Sigma. The company’s compliance and governance functions struggled to keep up with rapid growth in the number of employees and funds under management, some former employees said.
Jeff Sonnenfeld, a professor at the Yale School of Management, said the problems at Two Sigma could make investors wary of putting their money into the company or keeping it there. “There are too many other places to invest,” Mr. Sonnenfeld said. “There’s no good reason to put money into that.”
Two Sigma, founded in 2001 by Mr. Siegel, Mr. Overdeck and Mark Pickard, who have since retired, is one of the few “quantitative” companies that employ a quantitative approach – using mathematical models instead of human decision-making. to find patterns in historical data and other financial information – to trade stocks, bonds and more esoteric assets.
Mr. Siegel, 62, has a Ph.D. in computer science from the Massachusetts Institute of Technology, and Mr. Overdeck, 53, is a math prodigy who graduated from Stanford at 19 and was Jeff Bezos’ top lieutenant in the early days of Amazon. Two Sigma quickly amassed tens of billions of dollars in assets by delivering consistent and outsized returns for clients.
Its success allowed it to recruit top mathematicians and engineers who built its own trading models. Two Sigma is consistently ranked among the ten largest hedge funds in the world and has more than 2,200 employees, up from about 500 in mid-2010. The firm has a dozen offices in the United States, Europe and Asia. In addition to being the main hedge fund, Two Sigma also manages real estate, venture capital funds and other companies.
Located in Manhattan’s stylish SoHo neighborhood, rather than Midtown’s business district, Two Sigma built a culture that sought to emulate some of the hallmarks of Silicon Valley’s tech companies, including chess and ping-pong tournaments.
According to Forbes, Mr. Siegel and Mr. Overdeck each have an estimated net worth of more than $7 billion.
But over the past decade their partnership has deteriorated. Although the origins of the feud are unclear, some observers attributed it to the couple’s competitive nature. Their rivalry has worsened to the point where they barely speak to each other anymore. Because they can rarely be in the same room, even simple process and personnel decisions can become complicated, according to current and former employees.
Former employees described having to go back and forth between the two men to reach a decision. Two Sigma does not hold all-hands meetings because its founders refuse to address employees or investors together at events, said two people with knowledge of the company’s internal workings.
The feud had so paralyzed basic management that Two Sigma made it public for the first time in a Securities and Exchange Commission filing. submit in March as a “material” risk, noting that disagreements between the co-founders had affected how they defined the roles and responsibilities of senior executives, succession planning and the management structure of the company’s various teams.
The gap could impact Two Sigma’s “ability to retain or attract employees,” including very senior employees, the filing said, and make it difficult for employees to perform important aspects of their jobs , including research, engineering and business activities. If disagreements were to continue, Two Sigma added, its “ability to fulfill customer mandates could be impacted over time.”
“It reminds us that you shouldn’t rely on algorithms and artificial intelligence,” Mr. Sonnenfeld said. “They are still subject to human weaknesses.”
In early October, the company sent two letters to investors revealing that one of its employees, who built research models used in certain trading portfolios, had made changes to them without the company’s permission.
In one of the letters, Two Sigma said these changes had resulted in $450 million in “positive impacts” and $170 million in “negative impacts” for various funds – making it difficult for investors to gauge the company’s true returns. It told investors it would keep the unexpected gains but make up for the unexpected losses.
The SEC is investigating these events at Two Sigma, according to a person with knowledge of the situation. The Wall Street Journal earlier reported the supervisory investigation.
At least one client of Two Sigma’s is trying to determine whether the 2023 returns the hedge fund has presented so far are legitimate, according to a person who works for the client.
Mr. Overdeck’s personal problems have added a new dimension to the company’s problems. In March 2022, his wife, Laura Overdeck, filed for divorce in New Jersey.
The divorce case remains sealed. But last week, Ms. Overdeck, who studied astrophysics at Princeton University and whose work as a philanthropist includes running Bedtime Math, a nonprofit focused on teaching math to children, alleged in a lawsuit that their lawyers in estate planning at the law firm Seward & Kissel had moved billions of dollars of their joint assets into trusts in Wyoming, affecting her and their children’s ability to access them.
Mr. Overdeck, who is cited from time to time by Forbes as New Jersey’s richest man, lives in the state and has no homes in Wyoming. Instead, according to Ms. Overdeck’s documents, he moved certain assets into trusts in Wyoming to shield them from taxes. The trusts also contained provisions, which Ms. Overdeck said she was not aware of, that could allow her to be removed as trustee if divorce proceedings occurred.
“Laura’s attacks regarding the trusts are unfounded,” Mr. Overdeck said in a statement released by his lawyers, adding that he “looks forward to seeing them properly brought to justice.”
Mr. Overdeck added that his divorce settlement would not affect Two Sigma’s operations or his ownership of the company.