Two Sigma Hedge Fund

The Two Sigma Hedge Fund was started by John Overdeck a former managing director from well known quant shop D.E. Shaw. They are a quantitative firm with several billion dollars under management, which was started back in 2001. They are a very mathematical and technologically driven firm. They aim to build and utilize advance technologies to profit by capturing market inefficiencies.

Unlike many firms that choose to situate themselves in Greenwich, they are located in SoHo, which is a little less laid back.

What is Sigma?

Sigma is standard deviation. Two sigma is two standard deviations, which encompasses 95% of the results in a normal distribution. So what does the name of the firm mean? I haven’t the foggiest idea. Does it mean that their goal is to beat 95% of the other funds out there? If that’s the case, why not go for three sigma and be better than 99% of the other hedge funds.

How Does the Two Sigma Hedge Fund Generate Returns?

I’m not sure. There is very little information about them. My best guess is that they are using a similar process to D.E. Shaw which is where the founder of Two Sigma originally worked at.

D.E. Shaw was founded by hedge fund manager David Shaw who used to be a computer science professor at Columbia. Shaw made money by writing complex computer programs to identify market inefficiencies. Shaw is more of a scientist than a financier and set his firm up to resemble a high end academic institution than a financial firm.

With the help of a lot of smart people Shaw was able to build a trading powerhouse. And Two Sigma probably shares a lot of the DNA of Shaw. How much is hard to say, but there is probably a fair amount that is shared.

What are the three most interesting stocks in Two Sigma’s Portfolio?

  • This tech company has been ravaged by Apple and left for dead. It trades at a PE ratio of 3.4 and has a number of valuable patents that are almost being given away for free at the current stock price.
  • This utility pays an 3.9% dividend and is highly levered to one of the most valuable commodities on the planet. Without it, the U.S. economy would probably shutdown.
  • This foreign company was a former high flyer during the internet bubble and now it is selling for less than one eighth of its former high price. It has struck a deal with a tech behemoth and may be ready to strike back.

Like Sub-Prime on Steroids

While the manner in which Two Sigma generates returns is a black box, one hedge fund manager who is responsible for more than $15 billion, has a trade idea that is simple to understand but obscure enough to be overlooked by the rest of the world.

The idea is like sub-prime on steroids. Yes, it is that big (in reality it is actually much bigger than sub-prime) and just as obvious as the whole sub-prime bubble was in hindsight.

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