• Quant funds are expanding beyond computer-run strategies.
• Firms like Qube and Squarepoint are backing legions of human stockpickers.
• "We want to diversify our alpha sources," said Squarepoint's Nicolas Janson.

As mega hedge funds like Millennium, Citadel, and Point72 battle for the best stock-picking talent, another segment of the multi-trillion-dollar industry has joined the fray.

Quant funds are increasingly turning to their longtime competition — human stock-pickers — to diversify their returns. Firms like Qube Research, Squarepoint Capital, and Engineers Gate are backing human traders through portfolios run by third parties, also known as separately managed accounts, or hiring them to trade internally.

Qube, the $20 billion London manager that started 2024 with a bang, has backed 44 stock-picking managers via its SMA platforms since the start of last year. This platform gives the firm insight into the managers' trading and risk management but allows the stockpickers to remain external and raise capital from other allocators.

The firm hopes to grow that number to 100 in the next few years, a person close to the manager told Business Insider. The firm declined to comment.

Squarepoint Capital declined to say how many portfolio managers it has backed on its SMA platform but noted that it only allocates to non-systematic strategies. The manager does not allocate externally to a strategy that would compete with one they have internally, according to Nicolas Janson, the firm's head of external investment strategies who joined at the start of 2022 to build out the platform.

"We want to diversify our alpha sources," Janson said in an interview with BI.

As these firms' assets swell thanks to strong performance, executives are constantly evaluating possible growth areas.

Engineers Gate, for example, is continuing to grow its footprint. The quant firm, which expanded to Asia earlier this year and runs more than $10 billion, according to regulatory filings, hired Mike Daylamani to build out a fundamental team, several people close to the firm told BI.

Daylamani will start in his new role in 2025 and comes from Schonfeld, where he ran a team that blended fundamental and quantitative strategies. He previously ran a similar team at Balyasny for a year after working as a fundamental portfolio manager for Steve Cohen at Point72 for close to a decade.

Two Sigma, one of the largest managers in the hedge fund industry, started hiring human stockpickers for the first time over the last few years, nabbing people such as Zach Rieger and Daniel Schuster, former partners at Maverick spin-off fund ROAM Global Management, in 2022, and Ernesto Cruz, who is the firm's director of research for fundamental equities after working as a portfolio manager for Singapore's sovereign wealth fund, in 2021.

While the manager cut 10% of its workforce in November, no PMs were included in the culling.

Firms that expand beyond their core strategies can occasionally struggle to integrate a different style, but big-name quant managers like Two Sigma and D.E. Shaw have been able to consistently generate returns as they've added investors focused on areas like private markets, real estate, and more.

In fact, D.E. Shaw might be the poster child for other quants considering expansion. The firm's website lists eight different discretionary strategies compared to three systematic offerings and two hybrid strategies that blend the two.

• Two Sigma laid off 200 employees Thursday, 10% of the $60 billion firm's workforce.
• The hedge fund is run by co-CEOs Carter Lyons and Scott Hoffman, who took over for Two Sigma's billionaire cofounders in September.
• The firm is planning to continue to invest in its core strategies, a person close to the manager said.

Thursday brought the latest twist in a year full of them for $60 billion Two Sigma.

The New York-based quant giant has cut 200 jobs — roughly 10% of its overall workforce. The layoffs come less than three months after co-CEOs Carter Lyons and Scott Hoffman took the helm for billionaire cofounders John Overdeck and David Siegel.

No portfolio managers were eliminated, a person close to the manager told Business Insider. Bloomberg earlier reported the cuts.

Two Sigma, which produced decent returns in its two largest quant funds through the first half of the year, is still planning to grow areas it found to be the most impactful following the firm's strategic review, the person close to the manager said. Those areas include quant and discretionary strategies, machine learning, and the manager's tech platform.

The leadership change offered the firm an opportunity to do a broader review of its different units, the person said. The manager has expanded in recent years, including a real-estate strategy in 2021 and risk management and portfolio analytics platform Venn in 2019. The firm also started hiring investors to focus on discretionary strategies for the first time last year.

The goal is to be more disciplined as the firm grows going forward, the person close to Two Sigma said. They noted that the employee retention rate is 95%, so any meaningful changes at the firm would have to be done through job cuts.

The firm is just starting on the journey that very few hedge funds ever begin: life without its founders.

Two Sigma's investors though were ready for a change. The firm's cofounders had been feuding for years, dividing the manager internally.

Lyons, the former chief business officer, was lauded for his work in expanding Two Sigma's product offerings in the August announcement of his promotion. Meanwhile, Hoffman, Lazard's former general counsel, was picked in part for his experience "navigating complex governance changes," the announcement noted.

The announcement also pointed to Hoffman's key role in shepherding Lazard's IPO to completion in 2005. It said he was a key player in the process, advising the boutique investment bank's leadership and board.

One industry insider noted that his hiring might pave the way for a potential listing from Two Sigma one day; the manager's diversified offerings and tech platform make it more well-rounded than the average hedge fund, and a liquidity event could at least partially detangle the bickering cofounders' fortunes.

In this light, the latest cuts could be seen as a clean-up of balance sheet bloat — but the person close to the firm said that a listing has not been discussed in any form.