Lyons, a CFA with a finance degree, is a 13-year veteran of Two Sigma who most recently served as its chief business officer. Hoffman left as general counsel of Lazard last year after almost three decades at the firm. Overdeck, by contrast, was a high-school mathlete who went on to study mathematics and statistics at Stanford University. Siegel was coding and building logic boards by age 12 and earned a PhD in computer science from the Massachusetts Institute of Technology.

The implication: Two Sigma, quant shop of quant shops, will no longer be by run by quants.

The firm declined to comment, beyond the news release announcing the changes on Wednesday. The Wall Street Journal was first to report Two Sigma’s regulatory disclosure and details of the founders’ disagreements.

The fissure, so far, hasn’t appeared to bother clients or dent performance. Two Sigma’s quant algorithms essentially run on their own, unperturbed by office drama. Even amid the rift between the engineering and investing arm, Two Sigma’s main funds has mostly made money over the past five years — so some investors are happy to stay put.

Fight for credit

Power struggles among shared leaders are littered throughout Wall Street history. Lehman Brothers co-CEOs Lewis Glucksman and Peter G. Peterson battled in the 1980s, leading to the sale of the firm. Henry Paulson and Jon Corzine jostled over control as Goldman Sachs prepared to go public in the late 1990s. Even last year’s sale of Sculptor Capital Management stemmed in part from a years-long fight between the hedge fund’s founder Dan Och and his onetime protégé Jimmy Levin.

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Two Sigma employees have long whispered that the bad blood between Siegel and Overdeck probably came down to one thing: ego. The men seemed to constantly be at odds over which one deserved more credit for their collective success, and whose business defined the firm. Overdeck — the mathematician — handled modelling and research and viewed Two Sigma as an investing firm. Meanwhile, his computer scientist counterpart oversaw engineering and saw it as a tech company.

Employees had to shuttle between the partners who preferred not to speak to each other, even about important business matters. On the rare cases they were together, they’d talk over each other.

Tensions built. The CEOs’ power struggle created a politicised environment where employees were consumed by the possibility of upsetting the feuding founders. Siegel, in particular, is known for yelling at employees.

Trouble became more public over the past year or so. News that Overdeck was getting divorced raised questions about the future of his stake in the firm. A rogue employee was accused of tampering with trading algorithms. Part of the private equity business went off on its own.

Siegel also has a slightly smaller equity stake than his rival because, years ago, he gave some up in order to lure a senior hire. Siegel and Overdeck still had to agree on major firm decisions — leading to stalemates when they didn’t see eye-to-eye.

But Two Sigma, like most hedge-fund operators, is a private company. There are no outside shareholders to exert pressure, no outside governance board to broker internal disputes.

“How do you tell your bosses who don’t like each other to kiss and make up?” Jo-Ellen Pozner, associate professor of management at Santa Clara University, said in an interview. Without outside mediators, private companies can only hope their owners can resolve personal disagreements before imperiling the business.

Fresh start?

The CEOs’ decision this week — seen by some as a potential green shoots of new beginning — also raises questions over how much power the new leaders will actually wield — and whether the founders will really let go. Siegel and Overdeck remain Two Sigma’s co-chairmen, its funds’ biggest investors and owners of almost all of the firm’s equity. Some fear the same problems will persist, or that the new leaders could take sides.

Hoffman recently worked at Siegel’s family office. Overdeck, meanwhile, will step down as chief investment officer of Two Sigma Investments — he’ll be replaced by Ali-Milan Nekmouche, who has reported into him for years.

The firm said Overdeck and Siegel will stay as advisers.

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Whether they’ll be able to stand each other any better is anyone’s guess. Billionaires, after all, tend to think they’re right about a lot of things.

“The social psychological literature shows that status, power and wealth create obstinacy,” Pozner, the professor, said. “People become less attuned to other’s emotional needs and resistant to the idea that they might be wrong.”

Bloomberg

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