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Curriculum·Graduate·G502

Quantitative Methods and Model Risk

Two Sigma, disclosed 2023. Two Sigma is one of the most sophisticated quantitative hedge funds in the world, running strategies built and governed by teams of scientists, and it disclosed that one of its own researchers had made unauthorized changes to the firm's trading models, adjusting them in ways that left some funds overperforming by more than 400 million dollars and others underperforming by about 165 million, which Two Sigma repaid; the SEC fined it 90 million dollars.

Taught in G502-01 ›Source ↗

Start with lesson 14 lessons · about 2.2 hours · free account to read in full

Lesson 1 opens on

Two Sigma, disclosed 2023

Two Sigma is one of the most sophisticated quantitative hedge funds in the world, running strategies built and governed by teams of scientists, and in October 2023 it disclosed to investors that one of its own modelers had made unauthorized changes to the firm's trading models. The SEC's January 2025 order found that between November 2021 and August 2023 the modeler made dozens of unapproved changes to the parameters of fourteen models used in live trading, which made some funds and accounts overperform by more than 400 million dollars and others underperform by about 165 million dollars; Two Sigma repaid the 165 million dollars to the harmed funds and paid a 90 million dollar penalty, without admitting or denying the findings. The models were not wrong in a mathematical sense; nothing in the equations failed, and no market moved unexpectedly.

Read it in G502-01 ›The source ↗

The lessons

  1. G502-01A model is a lever on real moneyExplain that a trading model is a lever on real money, so the risk is who can change it, not just the mathabout 33 min · opens on Two Sigma, disclosed 2023
  2. G502-02Model governance: who can change whatExplain that when a value comes from a mark rather than a market, who sets it is the whole controlabout 34 min · opens on Platinum Partners, 2016
  3. G502-03Marking to model, and marking to hopeExplain that marking an illiquid position to a model can slide into marking it to what you wish it were worthabout 33 min · opens on Visium Asset Management, 2016
  4. G502-04When the numbers are a story you tell yourselfExplain that reported numbers can become a story disconnected from reality when the checks are capturedabout 34 min · opens on The Bayou Group, 2005