US equities are in a recovery mode after giving up most of the gains in October as concerns over the economic outlook, persistent inflation, and soaring geopolitical tensions weighed on investors’ sentiment. Concerns that the high-interest rate environment will stay put for much longer took a significant toll on high-growth stocks. Two Sigma Advisors is one of the hedge funds that have felt the full brunt of the market correction, given its considerable exposure to technology stocks that are always susceptible to a high-interest rate environment.
Founded in 2001 by John Overdeck and David Siegel, the hedge fund has become one of the largest, with about $39.26 billion in assets under management. It is one of the most followed and tracked in part because it leverages sophisticated in-house algorithms to analyze and discover unique investment opportunities, especially in times of uncertainty and turmoil, as the one experienced in October. Meta and Nvidia are some of the stocks that have proved to be solid picks for hedge funds, going by the triple percentage gains over the past year.
The quantitative hedge fund uses data science and machine learning to identify undervalued stocks. The firm relies on a contrarian investment style that focuses on stocks that are out of favor with the market. Mr. Siegel, who has a Ph.D. in computer science from the Massachusetts Institute of Technology, has been the driving force behind the quant hedge fund investment strategies.
Over the years, Two Sigma has recruited top mathematicians and engineers to help build and fine-tune proprietary trading models. This might explain why hedge funds have ranked among the top ten hedge funds over the years. Overall, the hedge fund gained 21.7% as of the end of the first quarter, dwarfing the 6% gain of the S&P 500 ETF (SPY).
The hedge fund has consistently outperformed the S&P 500. For starters, its flagship fund, Two Sigma Compass Enhanced, has returned on average 16.9% annually since 2007, dwarfing the 9.2% gain of the S&P 500.
While deteriorating macroeconomics have had a significant hand in Two Sigma coming under pressure in the third quarter, souring relationships between Siegel and Overdeck threaten the hedge fund’s future and performance. Reports that the relationship between the two co-founders has turned toxic are a significant concern to investors and regulators.
Exacerbating the situation, Overdeck’s personal life is being dragged into the open as part of a bitter divorce standoff. Mr. Overdeck’s wife earlier this year filed a lawsuit alleging she was not informed about certain asset transfers to trusts.
Two Sigma’s performance in October could also have been dragged down by reports that an employee altered some hedge fund trading models without the firm’s knowledge. The change reportedly affected returns and drew regulatory scrutiny, given the size of the hedge fund’s portfolio. In one of the letters to investors, the hedge fund acknowledged that the changes resulted in $450 million in positive impacts and $170 million in negative impacts across various funds.
David Siegel of Two Sigma Advisors
While the hedge fund has, for the longest time, carried out its operations behind the public limelight, recent revelations continue to raise serious questions from investors and regulators over internal controls. The hedge fund’s flagship fund, Compass Enhanced Fund, deploys a global macro strategy that underperformed the S&P 500 ETF (SPY) and was up 9.9%, going by the 8.16% gain in the quarter.
Our Methodology
After analyzing the quant hedge fund 13F fillings we have analyzed the top holdings and there performance in the first, second and third quarter of the year. We have compared the stock’s performance with that of the S&P 500 ETF (SPY).
Two Sigma Advisors Top Stock Picks and their Performance against S&P 500 ETF (SPY)
10. Honeywell International Inc. (NASDAQ:HON)
Two Sigma Advisors Equity Stake: $406.38 Million
Year-to Date Performance: -13%
SPDR S&P 500 ETF Trust (NYSEARCA:SPY) YTD Performance: +15.59%
Number of Hedge Fund Holders: 61
Honeywell International Inc. (NASDAQ:HON) is one of Two Sigma Advisors’ investments in the industrial sector, specializing in the provision of auxiliary power units, propulsion engines, integrated avionics, environmental control, and electric power systems for the aerospace industry. The company’s Honeywell Building Technologies segment provides software applications for building control and optimization, sensors, switches, control systems, and instruments for energy management, access control, video surveillance, and fire products.
Two Sigma Advisors has held stakes in Honeywell International Inc. since 2010, buying and selling as one of the ways of taking advantage of price swings. The quant hedge fund held stakes worth $406.39 million as of the second quarter, accounting for 1.03% of the portfolio. Nevertheless, the stock has underperformed, dropping 11.6% in Q1 compared to a 6% gain for the S&P 500 ETF (SPY). Honeywell International Inc. bounced back, rallying 9.5% in Q2 against a 9.9% gain for the ETF, but dropped 11.1% in Q3 against a 3.6% slide for the ETF.
9. NIKE, Inc. (NYSE:NKE)
Two Sigma Advisors Equity Stake: $417.88 Million
Year-to-Date Performance: -8.2%
SPDR S&P 500 ETF Trust YTD Performance: +15.59%
Number of Hedge Fund Holders: 70
NIKE, Inc. (NYSE:NKE) designs, develops, and sells athletic footwear, apparel, equipment, and accessories. It also provides athletic and casual footwear apparel and accessories under the Jumpman trademark for sports and fitness activities.
NIKE, Inc. is one of the top holdings in Two Sigma Advisors, accounting for 1.06% of the hedge fund portfolio. Two Sigma has been buying and selling shares in the company since 2010 and held stakes worth $417.88 million as of the second quarter. Nevertheless, NIKE, Inc. was up 1.7% in Q1 against a 6% gain for the S&P 500 ETF (SPY) and down 8.3% in Q2 compared to a 9.9% gain for the ETF. The stock was down 13.6% in Q3 compared to a 3.6% drop for the SPY ETF.
8. Meta Platforms, Inc. (NASDAQ:META)
Two Sigma Advisors Equity Stake: $418 million
Year-to-Date Performance: +165%
SPDR S&P 500 ETF Trust YTD Performance: +15.59%
Number of Hedge Fund Holders: 225
Meta Platforms, Inc. (NASDAQ:META) is a communication services company that develops products that enable people to connect and share with friends and family through mobile devices and personal computers. Facebook and Instagram are Meta Platforms, Inc.’s flagship apps, through which the company generates billions of dollars through advertisements. It also runs Messenger and WhatsApp apps that attract millions of users daily.
Meta Platforms, Inc. has emerged as one of the top stocks in the Two Sigma Advisors portfolio, going by the 165% gain year to date. It was up 72% in Q1, outperforming the S&P 500 ETF (SPY), which was up 6% and 38% in Q2 against a 9.9% gain for the ETF. Meta Platforms, Inc. was up 4.9% in Q3 as the SPY ETF fell 3.6% in Q3. Two Sigma has been buying and selling shares in the company since 2012 and held stakes worth $418 million in Q2, accounting for 1.06% of the portfolio.
Here is what Davis Funds, an investment management firm, said about Meta Platforms, Inc. in its Q3 2023 investor letter:
“In big technology, the huge price volatility of leaders like Meta Platforms can come with opportunity—trimming when prices are high and adding when they are low. For example, we added significantly to Meta last year at less than half of today’s price and have recently trimmed our position in Alphabet as its shares swung back into favor. For many years, we have referred to the leading online platforms such as Alphabet as the blue chips of tomorrow. Their economies of scale, network effects, strong competitive positions and profitable business models combine to make them some of the best businesses we have ever seen. Because of this success, these juggernauts have attracted waves of regulatory scrutiny and relentless negative press coverage. As a result of the ebb and flow of these controversies, investor sentiment can swing precipitously from euphoria to disgust, which can provide opportunities for price-conscious investors. While we are not short-term traders, the enormous price volatility of these online tech leaders has led us to be opportunistic, trimming when prices are high and adding when they are low. Recently, as these companies have swung back into favor, we have trimmed our holdings in Meta Platforms.”
7. The Charles Schwab Corporation (NYSE:SCHW)
Two Sigma Advisors Equity Stake: $431.66 Million
Year-to-Date Performance: -33%
SPDR S&P 500 ETF Trust YTD Performance: +15.59%
Number of Hedge Fund Holders: 88
Headquartered in Westlake, Texas, The Charles Schwab Corporation (NYSE:SCHW) is another financial services play in the Two Sigma portfolio, operating as a savings and loan holding company. The company offers brokerage accounts with equity and fixed-income trading banking and asset management.
While The Charles Schwab Corporation is one of the oldest holdings in Two Sigma Advisors, it has proved to be a big disappointment going by the 33% year-to-date slide. The Charles Schwab Corporation was down 35% in Q1 against a 6% gain for the S&P 500 ETF (SPY) and up by 7.6% in Q2 against a 9.9% gains for the ETF. In Q3, it was down 3.6%, in line with the ETF. Two Sigma has been buying and selling Charles Schwab shares since 2010 and held stakes worth $431 million in Q2 2023, accounting for 1.09% of the portfolio.
Here is what ClearBridge Large Cap Value Strategy said about The Charles Schwab Corporation in its Q2 2023 investor letter:
“We have done so recently with The Charles Schwab Corporation, which got caught up in investor concerns over regional banks, due to the perception of an asset/liability mismatch on Schwab’s balance sheet. While there are similarities with regional banks, Schwab has minimal credit risk and far higher organic growth than traditional banks. In addition, Schwab’s mostly retail customers are not pulling money out of its ecosystem. On the contrary, the company continues to grow client assets at a mid-single-digit percentage rate despite the banking selloff. Concerned over interest rate risk, we trimmed our position last year and earlier this year. As the stock pulled back this spring, we added back aggressively. It remains an exceptionally strong franchise in terms of asset gathering and customer loyalty and runs a unique business model that continues to attract client assets; we are pleased to have the opportunity to express our differentiated view.”
6. Ford Motor Company (NYSE:F)
Two Sigma Advisors Equity Stake: $437.38 million
Year-to-Date Performance: -12.9%
SPDR S&P 500 ETF Trust YTD Performance: +15.59%
Number of Hedge Fund Holders: 40
Ford Motor Company (NYSE:F) is one of the plays that affirm Two Sigma’s diversified portfolio, as it is a consumer cyclical play that designs, develops, and delivers a range of Ford trucks, commercial cars, and vans, as well as sport utility vehicles and Lincoln luxury vehicles.
Ford Motor Company has experienced wild swings in the market in line with the turmoil at Two Sigma Advisors. It was up by 5.2% in Q1, underperforming the S&P 500 ETF (SPY), which was up 6%. Nevertheless, it rallied in Q2 by 23%, dwarfing the 9.9% gain for the ETF, but fell 17.9% in Q3 against 3.6% for the ETF. Ford Motor Company is one of the oldest holdings in the Two Sigma portfolio, going by the first investment in 2010. The hedge fund has been buying and selling stakes in the company and held stakes worth $437.38 million in the second quarter.
5. McDonald’s Corporation (NYSE:MCD)
Two Sigma Advisors Equity Stake: $441.61 Million
Year-to-Date Performance: +1.5%
SPDR S&P 500 ETF Trust YTD Performance: +15.59%
Number of Hedge Fund Holders: 68
McDonald’s Corporation (NYSE:MCD) operates and franchises restaurants that offer hamburgers and cheeseburgers, chicken sandwiches and nuggets, fries, salads, shakes, frozen desserts, and sundaes. As one of the biggest restaurant chains, it also offers beverages and other beverages, as well as a breakfast menu.
McDonald’s Corporation is one of the consumer cyclical plays that Two Sigma has always turned to navigate the varying economic conditions. While the stock has come under pressure in recent months, it was up by 5.7% in Q1 against a 6% gain for the S&P 500 ETF (SPY) and 6.8% in Q2 against a 9.9% gain. However, McDonald’s Corporation dropped 11.7% in Q3 against a slide of 3.6% for the ETF. The stock accounts for 1.12% of the Two Sigma Advisors portfolio, with stakes worth $441.61 million.
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4. Microsoft Corporation (NASDAQ:MSFT)
Two Sigma Advisors Equity Stake: $491.1 million
Year-to-date Performance: +50.6%
SPDR S&P 500 ETF Trust YTD Performance: +15.59%
Number of Hedge Fund Holders: 300
Based in Redmond, Washington, Microsoft Corporation (NASDAQ:MSFT) is a technology company that develops and supports software services, devices, and solutions worldwide. The company offers various software solutions for enterprises, including Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Microsoft 365 Copilot. It also provides cloud computing solutions through Azure and gaming solutions through the Xbox Console.
Even as Two Sigma Advisors has been embroiled in leadership wrangles, Microsoft Corporation has remained a top pick for gaining exposure to the artificial intelligence boom. Having invested over $13 billion in OpenAI, the company has seen its sentiments improve significantly. Consequently, the stock is up by 50.6%.
Two Sigma Advisors increased its stakes in the company in the second quarter after it gained 18.8% against a 6% gain for the S&P 500 ETF (SPY). Microsoft Corporation was also up by 19.7% in Q2 against a 9.9% gain for the SPY ETF. However, it dropped 7% in Q3 against a 3.6% drop for the ETF. The hedge fund has been buying and selling the stock since 2010 and accounted for 1.25% of the portfolio as of Q2 2023.
Baron Technology Fund made the following comment about Microsoft Corporation in its Q3 2023 investor letter:
“Microsoft Corporation is the world’s largest software company. Microsoft was traditionally known for its Windows and Office products, but over the last five years, it has built an over $60 billion cloud business, including its Azure cloud infrastructure service and its Office 365 and Dynamics 365 cloud-delivered applications. The stock detracted from performance because Microsoft is the Fund’s largest holding and shares retreated 7.0% after strong first half performance. For the June quarter, Microsoft reported better-than-expected Azure results for the third straight period, highlighted by Azure revenue growing 27% in constant currency. Its computing division also beat expectations, with Windows revenue benefiting from an early back-to-school inventory build. Microsoft’s September quarter revenue guidance came in below Street expectations; however, with Azure effectively in line and demonstrating stabilization, but computing seeing the negative sequential impact of the pull-forward in back-to-school purchases. Looking at the big picture, Microsoft continues to execute at a high level, navigating a challenging macro backdrop while aggressively investing in long-term growth, and we remain confident that Microsoft is well positioned to leverage AI over the medium to long term as it infuses Open AI and other generative AI technologies across its entire product portfolio.”
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3. Visa Inc. (NYSE:V)
Two Sigma Advisors Equity Stake: $534.73 Million
Year-to-Date Performance: +17%
SPDR S&P 500 ETF Trust YTD Performance: +15.59%
Number of Hedge Fund Holders: 171
Visa Inc. (NYSE:V) is a company that Two Sigma uses to gain exposure in the financial services sector, as it operates as a technology company providing a wide array of payment solutions. The company offers credit, debit, and prepaid card products.
Visa Inc. has benefited from solid consumer spending power amid a robust economy. Likewise, it remains one of Two Sigma’s top holdings, having gained 8.6% in Q1 against a 6% gain for the S&P 500 ETF (SPY) and 5.3% in Q2 against a 9.9% gain for the ETF. While Visa Inc. was down by 2.9% in Q3, it outperformed the SPY ETF, which was down by 3.6%. The quant hedge fund has bought and sold stakes in the company since 2010 and accounted for 1.36% of the portfolio in Q2 2023.
Ensemble Capital Management’s investor letter for the third quarter of 2023 mentioned Visa Inc.. Here is what is said:
“Mastercard is a company that pretty much everyone has heard of. In fact, when we meet with Ensemble’s clients, we occasionally tell them that we’re nearly certain that they are carrying a Mastercard in their wallet or purse as we speak, and if not, they are carrying a Visa Inc.. Most people carry both.
People carry Mastercard and Visa because they are accepted nearly everywhere in developed markets. And they are accepted in most emerging economies, at least at locations where higher income people spend money. As a shopper you can show up at a bodega in Peru, a high end hotel in Tokyo, a truck stop in Alabama, or an ice cream cart in Milan, show them a piece of plastic and they’ll let you walk away with goods and services without any worry that they aren’t going to get paid…” (Click here to read the full text)
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2. NVIDIA Corporation (NASDAQ:NVDA)
Two Sigma Advisors Equity Stake: $723.49 Million
Year-to-date Performance: +220%
SPDR S&P 500 ETF Trust YTD Performance: +15.59%
Number of Hedge Fund Holders: 175
Nvidia Corporation (NASDAQ:NVDA) is a technology company that provides graphics, computing, and networking solutions. The company designs and manufactures graphics processing units for gaming and PCs. The company’s compute and networking segment offers data center platforms and systems for artificial intelligence.
Nvidia Corporation is one of the stocks that have helped shrug off Two Sigma founder’s squabbles going by its impressive run year to date. The stock gained 93% in Q1 compared to a 6% gain in the S&P 500 ETF (SPY). The stock was also up by 52% in Q2 compared to a 9.9% gain for the ETF and a 2.6% gain in Q3 compared to a loss of 3.6% for the ETF. While Two Sigma Advisors has been buying and selling shares in Nvidia Corporation since 2010, it started bolstering its position in the second quarter of 2023 as it benefits from the AI boom. It is the second largest holding, accounting for 1.84% of the portfolio.
Here is what Baron Opportunity Fund said about NVIDIA Corporation in its Q3 2023 investor letter:
“NVIDIA Corporation is a leading semiconductor company that sells chips and software for accelerated computing and gaming. Shares have nearly tripled year-to-date, as the company continues reporting unprecedented growth because of the acceleration in demand for its data center chips. After reporting revenue of $7 billion in the first quarter and providing guidance of $11 billion for the second quarter, NVIDIA reported second quarter revenue of $13.5 billion and guided for another step up in the third quarter to $16 billion, with its CFO declaring “[d]emand for our Data Center platform for AI is tremendous and broad-based across industries and customers.” We are at the tipping point of a new era of computing with NVIDIA at its epicenter. This is how CEO and founder Jensen Huang put it (during the company’s August 23 earnings call):
“[T]he easiest way to think about the demand is the world is transitioning from general purpose computing to accelerated computing…[W]hat you’re seeing companies do now is recognizing this…tipping point…recognizing the beginning of this transition, and diverting their capital investment to accelerated computing and generative AI…This isn’t a singular application that is driving the demand, but this is a new computing platform…a new computing transitioning that’s happening…A new computing era has begun. The simultaneously going through two platform transitions, accelerated computing and generative AI.””
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1. Apple Inc. (NASDAQ:AAPL)
Two Sigma Advisors Equity Stake: $1.19 Billion
Year to Date Performance: +44%
SPDR S&P 500 ETF Trust YTD Performance: +15.59%
Number of Hedge Fund Holders: 135
Headquartered in Cupertino, California, Apple Inc. (NASDAQ:AAPL) designs, manufactures, and sells smartphones, personal computers, tablets, wearable’s, and accessories. The company is best known for the iPhone product line and the Mac line of personal computers and wearable’s, among other hardware devices. The company also generates billions of dollars from its service segment, driven by the sale of apps on the Apple Store, Apple Music, and the Apple Arcade game subscription service.
Amid the squabbles between Siegel and Overdeck, Apple Inc. has continued to outperform in the Two Sigma Advisors portfolio, going by the 31% gain in Q1 compared to the 6% gain of the S&P 500 ETF (SPY).
Apple Inc. was up by 17% in Q2 against 9.9% for the ETF and down 11% in Q3, compared to a 3.6% slide for the ETF. The quant hedge fund has been buying and selling shares in the company since 2010, currently accounting for 3.02% of the portfolio.
In its Q3 2023 investor letter, Baron Technology Fund shared its insights on Apple Inc. as follows:
“After a strong start to the year, shares of Apple Inc. partially retraced their gains this quarter. Mixed second calendar quarter financial results, with iPhone, iPad, and Wearables revenue coming in just shy of consensus expectations, coupled with elevated investor concerns about the macro economy and potential weakness in consumer spending later this year, pressured shares. Despite these quarterly fluctuations in product sales, we are encouraged by several long-term trends, including: (1) revenue from higher-margin services like the App Store, iCloud, and Apple Pay, which are growing faster than the overall business, driving better revenue visibility and higher free-cash-flow (FCF) margins; (2) continued gains in global market share in smartphones, wearables, and other hardware categories; and (3) consistent returns of capital to shareholders via share repurchases and dividends. On top of these trends in the core business, Apple is thoughtfully investing in new categories like augmented reality, search, financial services, and streaming media content. We took advantage of weakness in the quarter to add to our position in Apple.”
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This article is originally published at Insider Monkey.
