Two Sigma has vaulted over the $50bn assets under management mark to put it on a par with Renaissance Technologies as the biggest global quantitative hedge fund, as investors continue to pile into computer-powered investment strategies.
The New York-based hedge fund set up in 2001 by computer scientist David Siegel and mathematician John Overdeck has been growing rapidly in recent years. Two Sigma managed about $6bn in 2011, but jumped past the $50bn mark earlier this month, said people familiar with the matter.
That puts it roughly level with Renaissance Technologies, which manages just over $50bn, and more than DE Shaw’s $45bn. Both are older than Two Sigma.
Investor demand for algorithmic investing has exploded in recent years, even as the rest of the hedge fund industry has struggled with poor performance and outflows.
Morgan Stanley recently estimated that various quant strategies, ranging from cheap next-generation exchange traded funds to pricey sophisticated hedge fund vehicles, have grown at 15 per cent annually over the past six years, and now control about $1.5tn.
A flurry of new start-ups have emerged in the quant investing field in recent years, as programmers and data scientists take advantage of ever-cheaper computing power and ravenous investor appetite.
But the biggest growth is happening at the largest, most-respected players, according to Emma Bewley, head of fund investment at Connection Capital.
“The big firms are getting bigger,” she said. “There’s a real sense that while a lot of hedge funds are building out their quantitative side, they don’t have the know-how of the established quant firms.”
All of Two Sigma’s “absolute return” hedge fund products are closed to outside investors, with most of the growth now coming in its two other main businesses, next-generation passive “risk premia” funds and more hybrid vehicles.
Quants tend to have a different background to typical hedge funds. More than half of Two Sigma’s 1,200 staff come from outside the finance industry, with most educated in mathematics and computer science. They include the winner of a Japanese backgammon tournament and the “world’s first open-source software artist”, according to a graphic novel handed to new recruits.
However, the rapid growth of quantitative investing has sparked a ferocious war for talent, with banks, traditional asset managers and hedge funds desperate to attract more coders.
But the greater worry for investors and the industry is that the inflows of money into the space is ramping up risks to markets.
While strategies can vary greatly, there is concern that with more money gushing in some trades can become “crowded”, and unravel quickly if the market environment shifts.
Quants say they are now less aggressive, use less leverage and deploy more varied strategies.
Many hedge funds are careful to monitor for signs of crowding, and limit how much money a strategy or fund manages at any time.
For example, Two Sigma’s equity and macro hedge funds, which manage about $35bn, have long been closed to outside investors.
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