Three Things (10/30)
Oct 30, 2023
“The world is filled with unmet needs." – David Siegel, Co-Founder of Two Sigma
Market correction
The S&P 500 stock index has fallen more than 10% from the high point it touched earlier this year, meeting the popular definition of a market “correction”. A sharp ascent in bond yields and mixed results from technology giants have triggered volatility and sent markets lower.
The stronger than expected economic data has highlighted the strength of the U.S. economy – a paradoxical warning sign for investors as they sort through a higher for longer interest rate environment. In the short term, however, the bond market has been driving volatility: Bonds and yields are in the driver’s seat right now for markets,” said Adam Turnquist, chief technical strategist at LPL Financial. “Yields simply moved too high, too fast.”
Google joins the party
Google announced plans to invest $2 billion in the artificial intelligence company Anthropic. The deal is structured as a convertible note, a type of debt that will convert to equity at the startup’s next funding round. Prior to the financing, Google also signed a major cloud agreement with Anthropic that should provide the company ample resources to double down on computing power.
The deal follows Amazon’s $1.25 billion investment in Anthropic and surely pits the two tech giants against Microsoft and OpenAI. It’s an interesting deal for all parties: Google and Amazon score large cloud contracts while backing a challenger to Microsoft. Anthropic, on the other hand, receives necessary capital to hit the gas on costly computing capabilities. The AI arms race is officially on.
Broken quants
A researcher at Two Sigma Investments adjusted the hedge fund’s investing models without authorization resulting in a total of $620 million in unexpected gains and losses. Changes led to gains of $450 million in total gains for some Two Sigma funds while also leading to a total of $170 million in losses for other funds compared with how they otherwise would have fared. Two Sigma described the activity as “intentional misconduct” that violated the firm’s internal procedures.
“In well-run firms, all changes—calibrations or model changes—are governed by procedures so that they must be disclosed and approved by the proper people,” said Aaron Brown, a veteran quant trader to the WSJ. The lack of controls represent a huge red flag for the $60 billion investment giant and should certainly bring some curious eyes from the SEC.
Disclosures:
As of writing, MSFT, AMZN, and GOOG are holding's in Titan's Flagship strategy. Anthropic is a 4.77% holding in the ARK Venture Fund.