In this article, we discuss Two Sigma Advisors top stock picks and their performance against S&P 500 ETF (SPY). You can skip our detailed analysis of the performance of Two Sigma Advisors go directly to read Two Sigma Advisors 5 Top Stock Picks and their Performance against S&P 500 ETF (SPY).

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.

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. (NASDAQ:HON) 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. (NASDAQ:HON) 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 (NYSEARCA:SPY) 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. (NYSE:NKE) 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. (NYSE:NKE) 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 (NYSEARCA:SPY) 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. (NASDAQ:META)’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. (NASDAQ:META) 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. (NASDAQ:META) 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. (NASDAQ:META) 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 (NYSEARCA:SPY) 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 (NYSE:SCHW) 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 (NYSE:SCHW) 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 (NYSE:SCHW) in its Q2 2023 investor letter:

“We have done so recently with The Charles Schwab Corporation (NYSE:SCHW), 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 (NYSEARCA:SPY) 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 (NYSE:F) 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 (NYSE:F) 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.

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Disclosure: None. Two Sigma Advisors Top Stock Picks and their Performance against S&P 500 ETF (SPY) is originally published on Insider Monkey.