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Warring Billionaires, a Rogue Trader, a Divorce: One Hedge Fund’s Tale of Woe

Two Sigma, one of the world’s largest hedge funds, has long prided itself on two things: the sophisticated, in-house algorithms that power its trading, and its commitment to secrecy. But recent internal troubles have forced Two Sigma to air its dirty laundry.

In March, the New York firm, 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 firm, had turned so toxic that it could hurt Two Sigma’s future. In October, it had more bad news: An employee had altered some trading models without the firm’s knowledge, affecting its returns and drawing regulatory scrutiny.

And in late October, Mr. Overdeck’s personal life was dragged into the open after his wife alleged in a lawsuit related to their impending divorce that unbeknown to her, he and the couple’s lawyers had moved billions of dollars of their joint assets into trusts that would shield them from her, their three children and the Internal Revenue Service.

It’s the kind of mess that any investment firm wants to avoid for fear of losing clients and talent, especially one that has avoided the spotlight for much of its 22 years of existence. In a 2015 profile of Two Sigma, Forbes magazine said the two founders were “obsessive about avoiding publicity and keeping the firm’s secrets under wraps.”

The disclosures have raised questions from investors and regulators about internal controls at Two Sigma. The firm’s compliance and governance functions struggled to keep up with the swift growth in the number of employees and its funds under management, some former employees said.

Jeff Sonnenfeld, a professor at the Yale School of Management, said the troubles at Two Sigma could make investors wary of putting their money into the firm or keeping it there. “There are too many other places to invest,” Mr. Sonnenfeld said. “There’s no good reason to put money in there.”

Founded in 2001 by Mr. Siegel, Mr. Overdeck and Mark Pickard, who has since retired, Two Sigma is one of a handful of “quant” firms, which apply a quantitative approach — the use of mathematical models rather than 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 whiz who graduated from Stanford at 19 and was Jeff Bezos’ key lieutenant in the early days of Amazon. Two Sigma swiftly amassed assets of tens of billions of dollars by achieving consistent and outsize returns for clients.

Its success allowed it to recruit top mathematicians and engineers who built its proprietary trading models. Consistently ranked among the world’s 10 largest hedge funds, Two Sigma has more than 2,200 employees, up from roughly 500 in the mid-2010s. The firm has a dozen offices in the United States, Europe and Asia. In addition to its main hedge fund, Two Sigma also runs real estate, venture capital funds and other businesses.

Based in Manhattan’s stylish SoHo neighborhood rather than Midtown’s business district, Two Sigma built a culture that sought to mimic some of the trappings of Silicon Valley’s tech firms, including chess and Ping-Pong tournaments.

Mr. Siegel and Mr. Overdeck each have an estimated net worth of more than $7 billion, according to Forbes.

But over the past decade, their partnership soured. Although the origins of the feud are unclear, some observers attributed it to the pair’s competitive natures. Their rivalry has worsened to the point where they barely speak to each other. Because they can rarely stand to be in the same room, even simple process and personnel decision-making can become complicated, according to current and former employees.

Former employees described having to go back and forth between the two men to arrive at a decision. Two Sigma doesn’t hold all-hands meetings because the founders refuse to address employees or investors together at events, two people with knowledge of the firm’s internal workings said.

The feuding had so crippled basic management that Two Sigma disclosed it for the first time in a Securities and Exchange Commission filing in March as a “material” risk, noting that the co-founders’ disagreements had affected how they defined the roles and responsibilities of senior executives, succession planning and the management structure of the firm’s various teams.

The rift could affect Two Sigma’s “ability to retain or attract employees,” including very senior ones, it said in the filing, and make it difficult for workers to carry out key aspects of their jobs, including research, engineering and corporate business. Were the disagreements to continue, Two Sigma added, its “ability to achieve client mandates could be impacted over time.”

“It’s a reminder that you shouldn’t put your faith in algorithms and artificial intelligence,” Mr. Sonnenfeld said. “They’re still subject to human frailties.”

In early October, the firm sent two letters to investors disclosing that one of its employees, who built research models that were used in certain trading portfolios, made changes to them without the firm’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” across several funds — making it hard for investors to gauge the true returns provided by the firm. It told investors that it would hold on to the unexpected gains but make up for the unexpected losses.

The S.E.C. is investigating these events at Two Sigma, according to a person with knowledge of the situation. The Wall Street Journal earlier reported the regulatory investigation.

At least one client of Two Sigma’s is trying to determine whether the returns for 2023 that the hedge fund has presented so far are legitimate, according to someone who works for the client.

Mr. Overdeck’s personal issues have added a new dimension to the firm’s woes. 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 children math, alleged in a court filing that their estate planning lawyers at the law firm Seward & Kissel had moved billions of dollars of their joint assets to trusts in Wyoming that affected her and their children’s ability to gain access to them.

Mr. Overdeck, whom Forbes has cited as the wealthiest man in New Jersey from time to time, lives in the state and has no homes in Wyoming. Instead, according to Ms. Overdeck’s filing, he moved certain assets into trusts based in Wyoming to shield them from taxes. The trusts also included provisions, which Ms. Overdeck said she wasn’t aware of, that could have her removed as a trustee if there was a divorce proceeding.

Laura’s attacks related to the trusts are baseless,” Mr. Overdeck said in a statement provided by his lawyers, adding that he “looks forward to having them properly adjudicated.”

Mr. Overdeck added that his divorce settlement would not affect Two Sigma’s business or his ownership of the firm.

Sumber: www.nytimes.com