D.E. Shaw – the quant king

More than just a systematic fund

Last week, reports appeared on Bloomberg that the quant king D. E. Shaw “is raising money for a new hedge fund, where for the first time the firm will ditch the algorithms and let human traders call all of the shots.” The new D.E. Shaw Cogence Fund is taking in $3-5 billion for pure discretionary trading without any systematic component to the fund.

https://www.bloomberg.com/news/articles/2025-09-17/de-shaw-raising-5-billion-in-its-first-hedge-fund-run-by-humans

D.E. Shaw is one of the most storied and longstanding names in quantitative and systematic hedge fund investing. Hence, it was unsurprising when social media lit up with commentators saying that this must be the top for the industry when even the masters of the systematic universe are turning from computers to humans. After all, the quant arms race is highly competitive, and margins even for the most technology-savvy firms can get eroded quickly, as we saw with high-frequency trading.

Dig a bit deeper, and you wonder if this is really a bearish sign for systematic investing capacity or more like D.E. Shaw packaging its alpha in a slightly different way?

After all, the firm has been doing discretionary investing for decades, albeit co-mingled with systematic investing in a composite fund.

To understand a little more, we have to look into how D.E. Shaw was built, what skills it has focused on, what kind of people have worked there, what it invests in, and how it does this.

Returns and volatility

D.E. Shaw’s returns have accelerated since the return of volatility and macro movements in recent years. Since the start of 2020, annualized returns net of fees have been around 20% for its composite multi-strategy and macro-focused Oculus funds. Returns had been more mixed in the prior decade.

The long-term track record of 12.7% annualized returns net of fees for the composite fund since its inception in 2001 and 13.7% for the Oculus fund since its inception in 2004 are strong. These two funds (the former is circa 2x the size of the latter) compose the vast majority of D.E. Shaw’s hedge fund assets under management (AUM). The multi-strategy fund has allocations to some other D.E. Shaw funds, such as the much smaller dedicated equity stat arb fund.

But where D.E. Shaw stands out against most competitors is the focus on Sharpe ratios and risk-adjusted metrics rather than absolute returns. The D.E. Shaw composite hedge fund has generated double-digit net returns in 18 of its 23 years with low levels of volatility. It has also only had one down year, which was -9% in 2008, much less than the losses its peers faced that year. The Oculus fund has never had a down year and was up 7% in 2008 - more than other macro hedge funds.

Founder David Shaw always had a focus on capital preservation first, and that risk management ethos has lived on at D.E. Shaw in the decades since he stood down from day-to-day management. Even relative to other quant funds, D.E. Shaw has an above-average focus on liquidity risk of its positions and tail risk in its portfolio.

The firm is not without its hiccups. When LTCM blew up in 1998, D.E. Shaw got hit as it had many similar fixed income relative value trades on albeit in much smaller size. Its fixed income leverage was high at 19:1, but not at the same levels as LTCM. When D.E. Shaw launched Oculus a few years later, it made sure it had learned the lessons here. When the systematic industry was hit by the quant quake of August 2007, D.E. Shaw was hit less than some other firms, but the composite fund still fell by a record 5% in the month. The fund’s equity volatility book was down heavily, and D.E. Shaw took heed of correlation across its portfolio, particularly in its equities positions. In Q4 2008, the sizeable credit book within the composite fund was a major drag on investment returns.

How big are D.E. Shaw and when did they grow?

With over $70 billion of AUM and more than $45 billion of that in very high fee hedge funds (mostly at 3% management fees and 35% performance fees), D.E. Shaw generates a sizeable revenue stream.

The chart below illustrates the AUM growth at D.E. Shaw over the last 30 years. Growth started to accelerate from a low base in the mid-nineties, but when the firm took painful losses in 1998, it saw its AUM fall, and headcount declined with the company exiting non-core ventures. The 2000 to mid-2008 period saw unbridled growth with AUM growing from a trough of $0.5bn to a peak of $36bn just before the GFC. Headcount grew tenfold to 1,700.

Despite relatively respectable returns during the GFC, when it started to allow redemptions in the post-GFC period, D.E. Shaw saw large client outflows. It didn’t help that returns were mixed in 2010 and 2011. AUM troughed at $21bn in 2011. The firm was also forced to reduce headcount by 20% over the period.

After opening to new money briefly, most of the flagship D.E. Shaw hedge funds have been largely closed to new money since 2013. The growth in AUM across the group has come from the compounding of investment returns. Any new money coming into the hedge funds or new long-only funds has been more than offset by capital returned by D.E. Shaw to its clients.

Is D.E. Shaw just a hedge fund?

D.E. Shaw expanded into long-only funds well before most of its peers. Today, D.E. Shaw’s long-only business is managing more than $25bn of AUM.

The firm started to manage long only equity mandates using quant strategies as far back as 2000. DESIM (D. E. Shaw Investment Management) was formed in 2005 to manage its long-only businesses and was managing more than $6bn by 2011. That year, it was appointed as an advisor on Vanguard’s Growth and Income Fund https://institutionalassetmanager.co.uk/de-shaw-group-awarded-advisory-mandate-vanguard/

It moved more into factor investing and risk premia strategies in 2013, competing with the likes of market leader AQR.

The other main area of long only investing for D. E. Shaw has been private markets, including private credit, private equity, venture capital, direct private investing, and real estate. As early as 2009, the firm had $2bn of private equity and venture capital investments in India and another $2bn of direct investing.

D. E. Shaw launched its first private credit fund in 2008 and launched the Alkali series of credit funds focusing on less liquid opportunities in 2012. The six Alkali funds have raised around $4bn, including $1bn in the last one in 2024. Another $2bn has been raised for two Diopter Funds focused on buying pools of credit risk from banks through synthetic securitizations.

Is D.E. Shaw just a systematic equities investor?

D. E. Shaw is famous for their systematic investing. But the firm has a long history of discretionary investing going back to 2002. By 2009, this was around one-third of D. E. Shaw’s AUM, and today it is around half of the firm’s AUM. Discretionary investing can be seen across all the main hedge funds, as well as in the long-only business (primarily in private markets investing).

In the early days, D. E. Shaw’s quantitative equity statistical arbitrage programmes were often several percentage points of all US equity trading volumes, but as margins got eroded by competition, D. E. Shaw started to expand into systematic futures trading across equity indexes, rates, currencies, and commodities.

As well as private markets, D. E. Shaw’s credit teams in distressed and asset-backed securities are (as expected) largely discretionary. But discretionary investing is well diversified across most strategies. The macro trading business started discretionary investing in 2004 as part of the Oculus fund launch. Today, macro discretionary investing is one of the largest areas of discretionary investing for D. E. Shaw with AUM of almost $10bn. It also has a much wider range of time horizons/holding periods (ranging from a few days to a few quarters) than the systematic futures trading business.

The demise of Enron in 2001 was a catalyst for many hedge funds and banks building out profitable energy trading franchises. D. E. Shaw entered this market in the post-Enron years using data-driven discretionary strategies primarily in US natural gas but largely as a spread trader rather than taking large directional bets. Unlike Citadel, it is not a large physical natural gas player (albeit it did help to launch several renewable firms).

D. E. Shaw is not as meaningful a player in discretionary equities trading as the large multi-manager “pod shops” and its approach tends to be more quant-driven here than most of these firms – at least their fundamental equities “pods” (rather than the likes of Point72 Cubist or Millennium with WorldQuant). D. E. Shaw has a smaller fundamental equities team with more centralization, longer holding periods, and (often) focused on specific areas like event-driven or recently activist strategies, rather than having lots of industry-specific pods that trade daily.

Who works there?

The core of its front office trading operation in the US is very much made up of D. E. Shaw lifers, with the company’s website saying, “our staff includes world-class mathematicians, physicists, computer scientists, economists, analysts, business-builders, and system architects.” These tend to be hired straight out of Ivy League-type universities with a level of longevity that is extremely unusual for the hedge fund industry.

Since 2001-2002, founder David Shaw has not been involved in the day-to-day running of D. E. Shaw. In a similar way to Jane Street, the firm is run by an executive committee with members of the committee relatively media-shy. The executive committee has traditionally been dominated by early employees (some of whom retired for short periods and then returned).

The 7 current members of the D. E. Shaw executive committee first joined the firm an average of 27 years ago, with only one having joined the firm for the first time in the last 20 years. D. E. Shaw is a rare example of a hedge fund surviving its founder, but the longevity of the top team and also many other senior staff suggest that much has changed at D. E. Shaw over the last few decades, but not everything.

The most famous of D. E. Shaw’s alumni is, of course, Jeff Bezos, who was a very early employee of the firm and was one of the people to interview D. E. Shaw executive committee member Max Stone (head of fixed income and macro) back in 1991. (The other connection with Silicon Valley is that former Google CEO/Chairman Eric Schmidt acquired a 20% stake in D. E. Shaw in 2015)

But the long tenure and academic nature of the D. E. Shaw team means that there are far fewer D. E. Shaw alumni who have gone on to fame and riches at other hedge funds. The most successful alumni in the industry by a considerable margin are the recently fallen out Two Sigma Investments co-founders, John Overdeck and David Siegel.

A rare blemish in D. E. Shaw’s reputation as geeky academic types rather than hard-charging Wall Street barbarians at the gate was the dismissal of co-head of macro discretionary investing Daniel Michalow in 2018. The firm claimed it was for sexual harassment, but Michalow fought back and, in 2022, was awarded $52 million by an industry arbitration panel, which determined that the firm defamed him.

With around 3,000 employees, D. E. Shaw has one of the largest and most international headcounts in the hedge fund industry. Even in the post-GFC period, the firm had more than a dozen offices globally. By far the largest are the Indian operations. Many of the large pod shops and high-frequency trading firms have been hiring aggressively in India recently – not just operations and back-office teams but coders and quants to develop trading strategies. But D. E. Shaw opened its Hyderabad office in 1996, and today that office has more than 1,000 staff. Together with smaller D. E. Shaw offices opened in Bengaluru and Gurugram in 2023, India is today around half of D. E. Shaw’s global headcount. https://www.deshawindia.com/

The India operation also played a crucial role in the development of Arcesium, a post-trade and analytics platform that started inside D. E. Shaw, and is today an independent firm with a headcount of 2,300. https://www.arcesium.com/who-we-are

Another example of the increased diversification of D. E. Shaw is its breadth across asset classes. A firm that was traditionally known as an equity and then futures quant fund now has large teams across a wide variety of areas. For instance, the team of researchers, quants, and traders focusing on credit investing – both public securities and private markets – at D. E. Shaw is 200-person strong.

More than any other giant firm in the hedge fund (with perhaps the exception of Renaissance Technologies), D. E. Shaw has kept to itself and away from its hedge fund brethren. Ask senior people at large multi-strategy firms about their competitors, and usually they always have granular market intelligence, but when it comes to the very secretive firm D. E. Shaw, the usual response is a shrug of the shoulders!