Hedge fund industry insiders say Two Sigma’s unusual risk disclosure was years in the making

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  • Two Sigma, the successful quant hedge fund, is dogged by two cofounders who don’t get along.
  • Tensions had simmered for years before the disagreements were disclosed, Insider has learned.
  • Hedge funds generally don’t have extensive disclosures, making it that much more notable.

Two Sigma, the $60 billion quantitative hedge fund giant, is known in the investment management industry and beyond for what it tends to do best: using the power of complex mathematical models and algorithms to invest and making a lot of money doing it. 

But people with direct knowledge of the matter say it has also long been associated with an open secret to those who know the New York firm well: The two men who founded and run Two Sigma don’t exactly get along. 

The tense dynamic between John Overdeck and David Siegel, Two Sigma’s billionaire co-chairmen who are two of the firm’s three cofounders, has been at play for years, Insider has learned. Disagreements between Overdeck and Siegel only surfaced publicly for the first time last week. 

Two Sigma had disclosed management challenges as risks in a routine securities filing in March, and The Wall Street Journal first reported on the filing on June 20. The disclosure was highly unusual for a hedge fund since they generally have much lighter disclosure requirements than their public counterparts, experts say, making the filing all the more notable. Two Sigma has also tended to avoid making headlines over the years.

The firm said there have been “a variety of management and governance challenges” at the firm, including disagreement on the management committee — which consists only of Overdeck and Siegel — about “a number of topics” like corporate governance, succession plans, defining top executives’ roles, and the way teams are organized.

Those disagreements could impact Two Sigma’s ability to attract or hold onto employees, including senior ones, and could impact employees’ ability to do their jobs, the firm said. If such disagreement continued, it would impact the firm’s ability to “achieve client mandates” over time.

“This has been going on for a decade,” a person with direct knowledge of the feud between the men told Insider. The person added: “Culture starts to matter when the money starts to slow down, or people start to care about things other than money.”  

Another person with direct knowledge of the tensions between Siegel and Overdeck said they were unsurprised by the contents of the disclosure, partly because spats and challenges between the two men were so widely known among people at the firm. The surprising part, this person said, was that the dynamic took so long to spill into the open. 

Succession challenges 

Siegel, 61, and Overdeck, 53, formed Two Sigma with cofounder Mark Pickard in Manhattan’s SoHo neighborhood in 2001. The firm now has some 2,000 employees, according to its website. It has expanded into other businesses like real-estate investments, venture capital, private equity, and selling its own risk analysis tools to other firms. 

Overdeck and Siegel could be collegial, said one of the people who spoke with Insider, but their relationship seemed to deteriorate over time. They have always seemed to be in competition with each other for credit over accomplishments and successes, the person said.

Two people who spoke with Insider said it appeared the planned retirement of Jonathan Hitchon, Two Sigma’s chief operating officer and a longtime executive respected internally, was part of the catalyst for the March disclosure, a dynamic first reported by The Wall Street Journal.

Kevin Mullally, an associate professor of finance at the University of Central Florida who has studied the hedge fund industry for years, said he had never seen such a disclosure after reading the March filing from Two Sigma.

Two Sigma declined to comment on what prompted the risk disclosure. Hedge funds are less regulated, more private, and often more secretive than public companies that manage funds and answer to public shareholders, so the reason for Two Sigma’s disclosure appears to have met a high bar for material risk. 

“They’re pretty off the books with a lot of this stuff,” Mullally said in an interview, referring to hedge funds broadly and the relatively few disclosures they are obligated to make around governance and other matters. Then when it comes to planning for the next generation of leaders to take over from hedge fund founders, the transition can be difficult.

The Wall Street Journal reported that Siegel “has favored a plan to hand control to a chief executive officer, while he and Overdeck would keep their chairmen roles.” Overdeck has disagreed with that approach, a person familiar with the matter told Insider. Founder-led firms’ succession planning is a challenge that money managers across the industry are grappling with. 

“If you’ve given your millions of dollars to this person, and they’re going to retire and they’ve generated these returns, management can say they have people in place,” Mullally said of hedge funds generally. “But I can say: that’s not what I signed up for.” 

One of the people who spoke with Insider said the issues atop Two Sigma could boil down to qualities that rear their heads in most high-profile disputes on Wall Street: “Two massive egos.”

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