Mysterious researcher "stirs up trouble", quantitative hedge fund giant attracts attention again in the "whirlpool"

Hedge fund giant Two Sigma is in trouble again!

According to overseas sources, a researcher from this top quantitative firm on Wall Street has been suspended for intentionally "obstructing" or "tampering with" the execution of its trading models, potentially causing harm to the interests of fund holders.

Although the large hedge fund company based in New York promptly sent a letter to the affected clients disclosing the situation and stated that it would consider compensation if there were any losses, doubts have already arisen.

How could an experienced and well-controlled mega quantitative institution allow a researcher to "disrupt" the normal operation of its products?

Behind this seemingly absurd incident, what clues can be followed?

Admitting "improper conduct" by individual staff

According to market sources, Two Sigma recently disclosed to some product holders that a researcher at the company engaged in improper conduct by deliberately bypassing the company's modeling conventions, which may have caused some of the company's products to be damaged and some to benefit.

The company also stated that they are actively evaluating the performance of the affected portfolios. If it is concluded that a fund has suffered losses due to this improper conduct, the company will provide appropriate compensation.

The company also stated that the above-mentioned incident will not affect its normal operation and is attempting to take measures to prevent a recurrence of similar improper conduct.

Specific details kept under wraps

However, the specific details of the incident are still being kept under wraps.

For example, what kind of "improper conduct" led to deviations in the execution of the models?

Why would such "improper" conduct benefit some portfolios while causing damage to others?

How could a researcher influence the performance of specific funds (considering that researchers at quantitative institutions usually do not involve specific trades)?

Furthermore, can the aforementioned improper conduct itself be controlled through processes?

How can the processes and systems of quantitative institutions be further improved?

How can the execution of the same quantitative model ensure fair returns for similar strategy products, and so on?

These questions have attracted attention, but so far there have been no further answers. Even the specific information about the researcher has not been disclosed.

Background of Two Sigma

Public information shows that Two Sigma, founded in 2001, currently manages assets worth $60 billion, equivalent to 432 billion yuan.

Sigma is the English translation of "∑," which represents the summation symbol in mathematics, indicating its mathematical DNA.

This fund giant has over 2,000 employees worldwide and is renowned for managing investment strategies using various technological methods such as artificial intelligence, machine learning, and distributed computing.

Currently, Two Sigma has diversified its scope, including investment businesses in the financing/lending platform, venture capital, real estate private equity, and cloud service data platform in the insurance field. In addition, Two Sigma China's onshore investment entity is called Tengsheng Investment and has the qualification of a private fund manager, with an asset management scale ranging from 5 billion to 10 billion yuan.

Two Sigma's "core competency" in the international capital market remains its fund investment business.

Previous "issues"

In fact, Two Sigma has recently attracted considerable attention from its peers.

A few months ago, the two bosses of this Wall Street giant had some "disagreements," and the above information was disclosed in a public announcement, which also attracted some attention.

At that time (March 2023), in the investment advisory business operation report submitted to the U.S. Securities and Exchange Commission (SEC), Two Sigma wrote about the "specific risks" that exist within its management team, including:

The company has experienced a series of challenges in terms of management and governance. The management committee partners have been unable to reach a consensus on the following matters: 1) the role and responsibilities of the management committee members and the chief investment officer; 2) the design of the company's team organization and management structure; 3) corporate governance and supervision matters; 4) team succession planning.

The so-called differences within Two Sigma occurred between the two founders, John Overdeck and David Siegel. Overdeck is mainly responsible for investment research, while Siegel serves as the company's "public face" and plays a role more akin to a company advisor.

It is reported that Overdeck and Siegel each hold a 50% stake in the company. The differences between them have increased due to disagreements over their respective contributions to the company's work and other core issues such as control rights.

However, there have been subsequent reports indicating that the situation is still under control.