It should have been rock solid. But a rogue trader at Two Sigma, a $60 billion hedge fund, has caused $170 million in investor losses.
Two Sigma is now under SEC investigation. From The Wall Street Journal:
A researcher at Two Sigma Investments adjusted the hedge fund's investing models without authorization, the firm has told clients, leading to losses in some funds, big gains in others and fresh regulatory scrutiny.
The researcher, Jian Wu, a senior vice president at New York-based Two Sigma, was trying to boost his compensation, Two Sigma has told clients, without identifying Wu. He made changes over the past year that resulted in a total of $620 million in unexpected gains and losses…
In addition to $170 million in unexpected losses, Wu's tampering also caused $450 million in gains. While Wu might use that to justify his behavior, his rogue trades could've cost the firm billions.
Fortunately, the fund has since made investors who lost money whole. But I wonder how much more they could lose if this happens again.
Two Sigma appears to be in chaos. For months, the firm's founders, John Overdeck and David Siegel, have been at odds.
This makes it difficult for the fund to make decisions. Wu appears to have taken advantage of this power vacuum.
Many of the investors in hedge funds are pensions and university endowments. How can those managers go to their boards and justify keeping money in a fund under SEC investigation?
With dysfunction at the top and the government nosing around, I expect investors and key employees to jump ship.
Hedge funds are prone to these death spirals.
After big losses in meme stocks, Melvin Capital lost investors and shut down. The same could happen to Two Sigma.
Companies need one strong leader. Infighting at the top will kill a firm faster than anything else.
Do you think Two Sigma will survive? Leave a comment and let us know!
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Photo: Two Sigma Co-Founders David Siegel and John Overdeck.
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