Reddit-led market turmoil hits big quant hedge funds

Two Sigma Investments and DE Shaw, two of the biggest names in the hedge fund industry, are nursing losses after an army of retail investors on Reddit upended markets.

The co-ordinated short squeeze that sent the price of GameStop and other lowly priced stocks rocketing in late January has shaken many hedge funds by hitting some of their carefully placed bets. Melvin Capital, which lost 53 per cent in January, is the highest-profile casualty, but many other funds suffered losses, particularly on bets against stocks they expected to suffer during the pandemic.

New York-based Two Sigma, which manages about $48bn in assets and was set up in 2001 by computer scientist David Siegel and mathematician John Overdeck, lost 5.3 per cent in its Absolute Return fund and 8.6 per cent in its Absolute Return Enhanced fund, say people who have seen the numbers.

Two Sigma declined to comment. Its Compass macro fund and risk premia funds were about flat last month, one of the people said.

David Shaw’s DE Shaw, which manages about $27bn, lost 0.9 per cent in its main Composite fund and 2.3 per cent in its global macro Oculus fund, according to people familiar with its performance. The firm declined to comment.

The losses mark a reversal for DE Shaw after a strong year of returns in 2020. However, like many other quant funds, Two Sigma has struggled in some of its funds during the pandemic.

While many hedge funds, particularly those run by human traders, made large gains last year, many computer-driven funds were caught out by the markets’ sharp swings.

This year, some funds’ models that look to exploit tiny mispricings across hundreds of stocks have been hard hit as retail investor interest has pushed some stocks far above previous valuations. GameStop, the focus of Redditors’ attention, soared 1,625 per cent last month, while BlackBerry rose 112 per cent.

Among other funds to suffer this year is Jim Simons’ Renaissance Technologies, which had already posted double-digit losses last year. It lost 9.5 per cent this year to late January in its Institutional Equities fund, according to numbers sent to investors and seen by the Financial Times.

Overall, hedge funds gained 0.9 per cent last month, according to data group Hedge Fund Research, although those focused on technology, or trying to balance bets on rising prices against bets on falling prices, lost money.