(Bloomberg) - A Two Sigma Investments quantitative researcher is pushing back against claims that his misconduct resulted in US$170 million (RM790.99 million) in client losses.
The firm told investors in October that a researcher made unauthorised changes to its quantitative models that led to the losses. Two Sigma didn’t identify the researcher, but an Oct 30 Wall Street Journal story cited “people close to the matter” in naming him as Jian Wu.
Wu on Thursday filed a petition in New York state court seeking to force the US$70 billion hedge fund group to disclose the names of individuals who communicated with investors and journalists about the matter. He said he intended to bring defamation claims against Two Sigma and those people via private arbitration.
Two Sigma said in a statement, “Mr Wu’s defamation claim is frivolous and without merit and we plan to vigorously defend against it.”
In its October communications to clients, the firm said the model changes resulted in US$450 million in gains for some funds but US$170 million in losses at others. The Journal said Two Sigma also told clients that the researcher acted to increase his own compensation — the funds that gained were those in which employees were invested.
Wu, who was put on leave in October, said that Two Sigma paid him around US$23 million in 2022, up from US$2.8 million in 2021 and US$4.2 million in 2020. He cited the numbers to highlight the potential harm he’s suffered, saying the firm’s statements may have made him “unemployable in the hedge fund industry”.
According to Wu, the firm’s statements were false because, though he developed models, he played no role in deciding whether to deploy them in investment portfolios and how to weight them. He said that was the responsibility of the firm’s portfolio management and trading group.
“Any purported loss was a result of Two Sigma’s abysmally weak controls and reckless investments decisions,” he said.
Wu says researchers monitored the performance of their models, once deployed, and often made changes to fix technical problems, update data or improve efficiency. According to Wu, there was no formal policy or process requiring approval of these changes.
“It was a regular and common practice of Two Sigma researchers and engineers to make changes to their models without seeking approval,” he said.
Two Sigma disclosed in a March Securities and Exchange Commission filing that a rift between founders John Overdeck and David Siegel had led to “a variety of management and governance challenges”, including the inability of the firm’s management committee to “reach agreement on a number of topics.”
Wu blamed the lack of a firm policy on model changes to the conflict between the two billionaires.
“The inadequacy of Two Sigma’s controls in this area is illustrative of the dysfunction at Two Sigma that flows down from the dispute between Overdeck and Siegel,” he said in his filing.
By Greg Farrell
December 22, 2023
