A hot strategy at one of the fastest growing hedge funds around is struggling

  • David Siegel Two SigmaTwo SigmaDavid Siegel, billionaire cofounder and co-chairman, Two Sigma Investments

    A strategy run by $US30 billion Two Sigma, an increasingly popular hedge fund, has made almost no money this year.

  • Another of Two Sigma’s funds has lost nearly 4%.
  • Investors, like public pensions, have poured money into Two Sigma and similar quant firms over the past several years.

A strategy run by $US30 billion Two Sigma Investments, one of the hedge fund industry’s fastest growing firms, has made almost no money this year, according to a private client letter reviewed by Business Insider.

Two Sigma’s Risk Premia strategy returned an estimated 0.06% this year through the end of June, losing almost all the gains it had made in the first quarter over the course of the second, the letter said.

Figures for July were not available and exactly how much money the fund manages is not clear. A Two Sigma spokesman declined to say.

The strategy is predominantly made up of Two Sigma’s Equity Market Neutral Risk Premia strategy (ERPTV) — at 70% — which had its worst quarter in history in the second quarter, according to the letter. Two Sigma’s Macro Risk Premia strategy makes up the other 30% of the strategy.

Geoff Duncombe, chief investment officer, and Renaud Verlaque, managing director, said in the letter:

“As in the first quarter, U.S. trading remained challenged by an environment more focused on individual stocks and sectors and less on styles. Unlike in the first quarter, Asia trading was challenged during the period as well.

Continued good performance in Europe was not sufficient to offset losses from the U.S. and Asia.”

Two Sigma’s risk premia strategy isn’t the only one struggling. The firm’s Compass Cayman fund, which manages about $US850 million, is down 3.8% this year through July 28, according to data from HSBC.

Investors have poured money into Two Sigma and other quantitative firms like it over the past several years as traditional managers struggle to make money. Two Sigma’s firmwide assets rose 22% last year, bringing assets to $US30.4 billion at the start of this year, according to the HFI Billion Dollar Club ranking.

Risk premia meanwhile is a hot investment strategy. It’s a way to invest that is generally market neutral, multi-asset, and multi-factor, and in all, encompasses about $US200 billion, consultant Cliffwater estimated in a recent research paper.

Public pensions are among the investors buying in. The Pennsylvania Public School Employees’ Retirement Board invested $US200 million in Two Sigma’s Risk Premia Enhanced Fund last year, according to public filings. That fund is managed by Duncombe, Two Sigma’s CIO, according to the pension’s documents.

And over the past year, Two Sigma raised at least $US65.8 million its Risk Premia fund and $US666 million in a Cayman Islands-based version of the fund, according to regulatory filings (here and here).

Two Sigma was founded by billionaires John Overdeck and David Siegel, who previously worked at DE Shaw.

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