Two Sigma

Robert Mercer, co-CEO of quantitative hedge fund Renaissance Technologies, has been in the public eye this year because of his backing of Donald Trump. His political activities sparked a feud with an ex-employee who claims he was fired for criticizing the views of his boss. But none of this appears to have distracted or impacted Mercer’s business. Renaissance Technologies, which was founded by its billionaire chairman James Simons in 1982, has seen its assets under management swell amid strong performance and investor inflows. Renaissance’s funds that still include outside investor capital keep posting solid returns. Renaissance Institutional Equities fund, the firm’s biggest hedge fund, is up 6% net of fees in 2017 after surging by 21.5% in 2016. Renaissance Institutional Diversified Alpha, another large fund, has returned 7.5% in 2017 after posting gains of 10.7% last year. The smaller Renaissance Institutional Diversified Global Equities fund is up 8% in 2017. Renaissance’s recent success comes at a time when much of the hedge fund industry is struggling, posting disappointing returns for years and desperately trying to convince investors to stick with their funds, sometimes without success. But investors appear more enthusiastic than ever about hedge funds like Renaissance that use computers, math and big data to generate returns. They seem moved by the explosion of information applicable to stock and securities prices and increasingly believe technology and database approaches are required to successfully trade financial markets. In recent months, its asset growth has mostly not come from its flagship hedge funds. Instead, assets have flowed into a new UCITS fund Two Sigma opened with Schroders in Europe and from hopping on the factor-based investing train. Institutional investors are increasingly interested in allocating to factor strategies, rules-based portfolios tilted to securities with certain attributes, like momentum or quality, believed to produce superior returns over time. Two Sigma got into the factor-investing business in 2015 and has found demand to be strong. The fees it charges on these products are significantly lower than its traditional hedge funds. It competes in this area with firms like billionaire Cliff Asness’ AQR Capital Management and BlackRock, the nation’s biggest asset manager. Two Sigma’s big Compass hedge fund is down 1.8% so far in 2017 after gaining 10.3% in 2016. It’s flagship Spectrum fund returned about 3% last year. In addition to the expanding hedge fund business, Overdeck and Siegel are growing Two Sigma’s market-making arm. Two Sigma Securities announced this week that it had purchased the global options market-making business of Interactive Brokers. The firm already handles some 5% of the shares traded in U.S. markets daily. Overdeck and Siegel have clearly built a new Wall Street powerhouse.