oops! WSJ NEWS EXCLUSIVE INVESTING Hedge Fund Two Sigma Is Hit by Trading Scandal Firm tells clients that researcher made unauthorized adjustments that resulted in total of $620 million in unexpected gains and losses By Gregory Zuckerman and Juliet Chung Oct. 29, 2023 5:30 am ET 2 Two Sigma, co-founded by David Siegel, is attracting fresh regulatory scrutiny. PHOTO: JEENAH MOON/BLOOMBERG NEWS 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, according to people close to the matter and investor letters. Two Sigma has placed Wu on administrative leave. The Securities and Exchange Commission is examining the matter. The commission had already been scrutinizing the firm after Two Sigma disclosed earlier this year that it was unable to make basic management decisions. The Wall Street Journal has reported on deepening strife between the firm’s founders over Two Sigma’s direction and succession planning, among other issues. The employee’s identity, the impact of his actions on Two Sigma’s performance and the latest SEC scrutiny haven’t previously been reported. “We are taking this matter extremely seriously and are taking steps to prevent similar issue Two Sigma told clients in a note viewed by the journal. Two Sigma is a quantitative-trading behemoth with $60 billion in assets and around 2,000 employees. Its trading models—a quant firm’s secret sauce—are composed of thousands of lines of Java code that ingest various data and make investment predictions that dictate trades. Wu’s changes led to gains of $450 million in total for some Two Sigma funds—including those in which the firm’s own executives and employees invest, as well as those available to clients. But they also led to a total of $170 million in losses for other funds compared with how they otherwise would have fared—losses largely borne by clients. Two Sigma has made them whole. People familiar with the situation said Wu was trying to improve the firm’s performance, which would have benefited his career and potential pay. Two Sigma was already beset by friction between John Overdeck and David Siegel, the firm’s founders. The Wu affair adds questions about Two Sigma’s internal controls to concerns clients have about the effect of the internal squabbling on the firm’s management. Two Sigma’s top executives this summer became aware of Wu’s changes because they resulted in higher than expected correlations between some of the firm’s trading models. The trail pointed to Wu, who made the changes in two stages over the past year. In a letter to clients, Two Sigma described the activity as “intentional misconduct” that violated the firm’s internal procedures. One person close to the situation disputed the firm’s characterization, saying Wu adjusted how Two Sigma’s models were calibrated but didn’t alter the models themselves. Calibration changes can be seen as more routine than a major change to the models. It couldn’t be determined if there are policies at Two Sigma prohibiting unauthorized calibrations of its models. SHARE YOUR THOUGHTS What is your outlook on Two Sigma’s future? Join the conversation below. Big firms such as Two Sigma usually closely monitor and are fully aware of all important changes to its trading models. “In well-run firms, all changes—calibrations or model changes—are governed by procedures so that they must be disclosed and approved by the proper people,” said Aaron Brown, a veteran quant who wasn’t aware of Two Sigma’s situation. Wu joined the firm in 2018. Like many other researchers at Two Sigma, he is a Ph.D., having received his degree in operations research from Cornell University in 2017, according to his LinkedIn profile. In 2011, he received a bachelor of engineering degree from Beijing’s Tsinghua University. Meanwhile, Two Sigma earlier in October laid off roughly two-dozen recruiters after building up their ranks over the prior two years. One of the few such moves in the firm’s history, the layoffs are a potential sign of slower growth ahead. The firm told its recruiters it has less need for them because it has experienced less attrition recently.
John Tuld : There are three ways to make a living in this business: be first, be smarter, or cheat. John Tuld : Maybe you could tell me what is going on. And please, speak as you might to a young child. Or a golden retriever. It wasn't brains that brought me here; I assure you that. John Tuld : So, what you're telling me, is that the music is about to stop, and we're going to be left holding the biggest bag of odorous excrement ever assembled in the history of capitalism. Peter Sullivan : Sir, I not sure that I would put it that way, but let me clarify using your analogy. What this model shows is the music, so to speak, just slowing. If the music were to stop, as you put it, then this model wouldn't even be close to that scenario. It would be considerably worse. John Tuld : Let me tell you something, Mr. Sullivan. Do you care to know why I'm in this chair with you all? I mean, why I earn the big bucks. Peter Sullivan : Yes. John Tuld : I'm here for one reason and one reason alone. I'm here to guess what the music might do a week, a month, a year from now. That's it. Nothing more. And standing here tonight, I'm afraid that I don't hear - a - thing. Just... silence.