The high-profile exit of the founders of hedge fund Two Sigma Investments raises questions about the future of its venture arm, Two Sigma Ventures, and whether the affiliate’s recent successes will be enough to withstand a beating to its brand.
Two Sigma, a liquid, quantitative multi-strategy hedge fund that manages $60 billion in assets, announced on Wednesday that its co-founders John Overdeck and David Siegel, who had spent 23 years at the firm, were set to step down from joint chief executive roles at the end of September.
Elevated in their place are Carter Lyons, Two Sigma’s chief business officer, and Scott Hoffman, formerly general counsel of Lazard.
Caught in the wake of the founder breakup is Two Sigma Ventures, which makes early-stage investments from seed to Series B and has exited companies including GitLab. It had approximately $1.6 billion through year end 2023.
While Two Sigma Ventures is one of several businesses operating under the New York-based parent, there is an industry perception that the VC’s affiliation could dissuade prospective institutional investors from investing in its private market offerings.
In general, LPs tend to highly value personnel stability when conducting due diligence, in addition to their quantitative vetting of returns.
There’s also the question of whether a prospective portfolio company would want to accept capital from the brand.
A Two Sigma spokesperson declined additional comment and did not make an executive available for an interview.
Two Sigma Ventures, operated by a consortium of partners, has continued to land deals this year. Its investment team participated in the $1 billion capital haul for Xaira Therapeutics, the AI drug discovery startup, and has backed other up-and-coming names.
Dry powder primed
Via a number of LP-funded vehicles, Two Sigma Ventures has dry powder on hand to navigate venture’s fragile recovery, with valuations on the uptick and investor dollars zeroing back in on illiquid lockups.
The trend has been fueled by the prospect that the US Federal Reserve may cut interest rates more aggressively than originally planned due to uneven macroeconomic news and slowing inflation.
Still, current and would-be LPs could be put off by founder strife at the parent company. Especially when those founder issues are so troubling that Two Sigma compliance officers took the rare step of detailing in an SEC filing the conflict—and ensuing lack of communication that paralyzed decision-making at the firm level—as a “material” risk to investors.
Two Sigma Ventures, though, can point to its lengthy track record, especially following recent exits at a time when IPOs have been few and far between . Theorem Technology, an AI-powered asset manager that had been backed by Y Combinator and Two Sigma Ventures, sold to Pagaya Technologies at the end of July. The firm also backed Recursion Pharmaceuticals, which went public in 2021 and in June printed $200 million of fresh stock.
It remains to be seen whether potential portfolio targets will buy back into that pedigree. Not to mention LPs.
Featured image by Rob Dobi/Getty Images
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