Two Sigma Sells Proprietary Software Access to Investors
Top quantitative hedge funds rarely give outside investors a peek behind the curtain. But one firm known for its secretive process and strong returns is starting to open up — and expects to cash in.
Two Sigma, a New York-based investment manager that oversees more than $60 billion, recently began selling its software programme Venn, which analyses client positions and helps guide them toward better risk-management strategies, to the public.
Among its early clients are Brown University, Prudential Financial and the State of Wisconsin Investment Board. It is a sign that investment methods once considered cutting edge are increasingly filtering into the mainstream.
Other companies known for managing money have also expanded their software businesses in recent years. For example, Blackrock’s Aladdin system is one of the dominant tools that institutions now use for risk management.
Two Sigma’s programme can quickly pull in data about a client’s investment positions, and run analyses based on factors such as momentum and credit. As investors increasingly use factor methods to guide their decisions, the software can clue them in to areas where they may have too little or too much concentration, and help them adjust their risk.
Users can see how their positions would have performed in prior periods, including recessions and financial shocks. Two Sigma is working on an update that will let investors test investment returns and correlations based on market shocks, such as escalations in the trade war.
“There are a small number of investors who can access our funds today, but there are thousands of other investors out there who have no relationship with us” that could benefit from Two Sigma’s technology, Jake Dwyer, general manager of Venn, said in an interview with FN’s sister-publication Barron’s.
“How can we offer something that allows them to engage with us in a scalable way to address needs across their portfolio without having to deal with the capacity constraints of managing a product? Software scales infinitely in that respect.”
There is a free version of the software and a professional one. The pro version costs $50,000 a year or $5,000 a month. Two Sigma now has more than 400 clients on the platform, including previous clients who had been using it before it was opened to wider distribution.
About 30 Two Sigma employees are working on the product. It is segregated from Two Sigma’s funds so that Two Sigma investment managers can’t use client data from Venn to aid trading decisions.
Dwyer sees Venn as much more than a pet project alongside the firm’s better-known hedge fund and private-equity businesses. There are 30,000 investment managers managing $70tn in assets that could use a product like this, Dwyer estimates.
“It’s a significant market opportunity and one that we wouldn’t enter into if we didn’t feel like it had the opportunity to really move the needle in terms of our overall business revenue,” he said.
By Avi Salzman for Financial News: https://www.fnlondon.com/articles/two-sigma-hedge-fund-gives-investors-access-to-its-software-for-a-price-20191120