The Securities and Exchange Commission is probing an incident at Two Sigma Investments LP, where a researcher tampered with the quant-investor’s models, according to a Wall Street Journal report on Sunday.
The hedge fund, which manages around $60 billion according to its website, is also under scrutiny from the regulator over how a rift in the firm’s hierarchy has left it unable to make basic management decisions, the Journal report said.
Read more: Two Sigma Billionaire Founders in Rift That Poses Material Risk
The researcher manipulated the firm’s models in an attempt to boost his compensation, and the changes led to unexpected gains and losses of $620 million across its funds, the report, which cited people familiar with the matter and letters sent to investors, said.
The changes the researcher made led to $450 million of gains in funds where employees invest alongside external investors, and losses of $170 million largely borne by clients, the Journal said.
Two Sigma told investors about the misconduct in a letter earlier this month and said at the time that it would consider compensating investors for any losses. The newspaper reported that investors have now been made whole.
“We take this matter extremely seriously and are reviewing this incident to determine what changes should be made to prevent similar misconduct,” the firm said in a letter earlier this month.
The incident adds to troubles for the quant-investing giant. Earlier this year, the firm said a falling-out between its billionaire co-founders had become so strained that it qualified as a material risk.
John Overdeck and David Siegel, who founded the firm in 2001, disagreed over Two Sigma’s organization and succession plans, according to a March 31 regulatory filing. The tensions were already affecting the ability of employees to fully implement key research, engineering or business initiatives, according to the filing.
