John Overdeck and David Siegel are both towering figures in the lucrative hedge fund industry. The two billionaires co-founded New York-based hedge fund, Two Sigma Investments LP, in 2001, and have led the quant fund through an extended period of strong growth. Two Sigma, which leverages big data, powerful computers, and complex algorithms to implement automated trading strategies, had a staggering $70.8 billion in assets under management (AUM) as of March 31, 2023.
This makes it the world’s sixth largest hedge fund, according to a recent ranking by Investopedia that utilises hedge funds’ filings with the US’s Securities and Exchange Commission (SEC) to grade the world’s 10 largest funds by AUM.
|Hedge Fund||Assets Under Management|
|Citadel||$339 billion, as of March 18, 2023|
|Bridgewater Associates||$196.8 billion, as of March 30, 2023|
|AQR Capital Management||$120 billion, as of May 24, 2023|
|D.E. Shaw||$109 billion, as of May 17, 2023|
|Renaissance Technologies||$106 billion, as of May 1, 2023|
|Two Sigma Investments||$70.8 billion, as of March 31, 2023|
|Elliot Investment Management||$55.2 billion, as of Dec 31, 2022|
|Farralon Capital Management||$41 billion, as of May 8, 2023|
|Ruffer Investment Company||$31.6 billion, as of April 12, 2023|
|Man Group Limited||$31 billion, as of June 2, 2023|
As co-chairs of Two Sigma, Overdeck and Siegel have an agreement that gives them roughly equal stakes in the firm. They hold the only two votes needed to pass board resolutions and are the sole members of the firm’s management committee.
This concentration of ownership and control has enabled both founders to amass colossal personal fortunes from the management and performance fees that the quant powerhouse charges its clients. Overdeck is worth $5.81 billion, according to Bloomberg. Siegel’s fortune is also estimated at $5.81 billion by Bloomberg, indicating that the duo’s equal stake in the firm has enabled them to accrue roughly equal fortunes. However, equality can breed unhealthy competition and Overdeck and Siegel are no exception.
A Widening Rift
Overdeck and Siegel have made little effort to conceal the fact they are “frenemies” — they are friendly to each other because of the benefits their relationship brings but intensely dislike each other on a personal level. This rivalry has intensified in recent years and is now interfering with the professional management of the firm. This came to light through a Wall Street Journal report that took note of a peculiar disclosure by Two Sigma in a recent SEC filing.
Two Sigma stated in the filing that disagreements between the two founders have led to management and governance challenges that pose a “material risk” to the business. Specifically, the two — who have a monopoly on strategic decision making as the only members of the firm’s management committee – have been unable to reach an agreement on key topics, including:
- Defining roles, authorities and responsibilities for a range of C-level officers, including the critical role of Chief Investment Officer;
- Organisational design and management structure of various teams;
- Corporate governance and oversight matters;
- Succession plans.
Two Sigma acknowledged that the lack of a resolution on these disagreements would not only affect the firm’s ability to attract and retain senior talent, but also impact its ability to achieve strategic goals, including key research and engineering initiatives as well as its client mandate.
Rivalry and disagreements between founders and senior executives are not uncommon in the ultra-competitive world of high finance. What is rare, however, is for firms to disclose these internal power struggles in writing to regulators and clients. Jamie Nash, a partner at law firm Kleinberg Kaplan who advises hedge funds, said that: “Disagreements among founders aren’t uncommon, but I’ve never heard of a disclosure like this.”
It’s been reported that the founders became increasingly competitive as their company succeeded, and would even go to the extent of monitoring billionaire rankings to make sure they were ranked equally. WSJ’s Zuckerman noted in a LinkedIn article that: “In recent years, Overdeck and Siegel have rarely appeared together at firm events. They frequently snipe at each other in meetings.” He added that decisions get delayed and projects killed because employees assume that they won’t be able to get both founders to agree.
It’s no exaggeration to state that, given the magnitude of the fallout between Overdeck and Siegel, Two Sigma risks imploding if the two do not find a resolution to their numerous disagreements. In a telling sign, Jonathan Hitchon, who served as a mediator between the founders, retired as COO of the company recently.
A Divorce That Could Build Bridges
A new development could prove to be instrumental in helping the duo come to an agreement on the way forward. Overdeck is in the process of getting divorced from Laura, his wife of 20 years. WSJ reports that the two did not have a prenuptial agreement, which means that Laura could end up getting half of Overdeck’s assets, including his shares in Two Sigma. This would unsettle the balance of power in the firm that Overdeck and his co-founder Siegel are battling to control.
Despite the prospect of Overdeck’s stake being diluted in a divorce settlement, his lawyer Jonathan Wolfe has been categorical that the founder intends to maintain his stake in Two Sigma. Wolfe told WSJ that: “This is a personal matter for John, who is focused on his business and his children. He is not looking to divest from Two Sigma, and has no intention of entering into any divorce settlement that would affect the firm’s business or his ownership.”
Bloomberg notes that of the $5.81 billion that Overdeck is worth, $5.31 billion are assets held in Two Sigma. With more than 90% of his net worth tied to Two Sigma, it’s difficult to imagine how a divorce settlement will leave his stake untouched. For Siegel, this divorce poses a threat as the entry of a third owner besides Overdeck could lead to changes in the organisation and structure of the firm – something he has fought hard to retain control over.
One cannot rule out the possibility of Overdeck and Siegel overlooking their past differences and working together to create an ownership and management structure that ensures the two retain control of the firm in the event of a divorce settlement that challenges their control. The potential for intrigue, lawsuits and counter lawsuits is high with this approach. But the alternative – letting control of the firm fall to an outsider – is not tenable (at least not for Overdeck who has stated through his lawyer that he doesn’t intend to divest his stake).
The next couple of months will be decisive for Two Sigma. As if the disclosure with the SEC of the bad blood between the founders didn’t do enough to unnerve investors, the firm is facing the possibility of a change in ownership and control. The appeal of hedge funds mainly lies in the reputation of its founders and managers and Overdeck and Siegel have stellar reputations.
However, with recent challenges and the prospect of ownership changes, the two may need to proactively re-instill confidence in their investor base, which includes high net worth individuals and institutional investors like pension funds, insurance firms and endowments. They may also need to step up their efforts to attract top talent, as some professionals may feel reluctant to work with the firm amid the current uncertainty about its future ownership.
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The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organisations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.