Avoiding “Tales of Woe”

The hedge fund Two Sigma has had a tough year, suffering a breakdown in the relationship between its founders that threatens the future of the firm, a breach of internal controls that allowed an employee to adjust its trading algorithms without authorization, and the exposure in a divorce proceeding of alleged questionable financial dealings by one of its founders. The spectacle raises the primary fear of any investor - that a firm trusted to safeguard assets is, in fact, riddled with risks. And that fear of the unknown parallels the concerns of any organization considering a significant investment or senior hire - that the safe bet they’re contemplating is a mirage.

The spectacle raises the question - how do you learn about such risks before they break onto the front pages? Maureen Farrell’s reporting for the New York Times provides a roadmap — interviews with former employees and industry experts, careful review of company filings and inquiries with relevant regulators, thorough and thoughtful background investigations on the professional and personal histories of the key parties. As scandals repeatedly teach, following the wisdom of the herd courts unseen danger. And no matter how lofty a person or entity’s reputation, you never know what you will find when you take a deeper look.