A Scandal And A Rash Of Leaks Reveal D.E. Shaw To Be An Almost Normal Hedge Fund

D.E. Shaw is still spending its days aggressively worrying that it's just another hedge fund full of hedge fund types.
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When Daniel Michalow was fired from D.E. Shaw earlier this summer, the fund stepped out from behind its famed veil of secrecy to offer an uncharacteristically strong statement that was clearly meant to eviscerate one of its own rising stars and convey in no uncertain terms that D.E. Shaw was not playing around in this #MeToo moment. In an open response letter to fund founder David Shaw, Michalow admitted to personality defects, professed his innocence of physical or verbal sexual harassment and then unleashed an epistolary tirade claiming that he could prove D.E. Shaw's projected vision of itself as a breed apart from other hedge funds was known inside the fund itself to be a comical hypocrisy.

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Since Michalow's letter was published, Dealbreaker has spoken to a number of current and former D.E. Shaw employees, and the picture they paint is consistently much closer to the one shared by Michalow than the one presented by D.E. Shaw.

According to our sources, D.E. Shaw is a massive hedge fund staffed by people who work long, hard hours and play rather hard as well. It's a closed environment that organically fosters intramural sexual relationships, hard-partying social situations, and sometimes brusque, rude or inappropriate styles of communication between colleagues. In essence, the people who work at D.E. Shaw behave like the people who work at almost every other major hedge fund, the only difference being that D.E. Shaw is a doggedly secretive organization liturgically opposed to admitting what's going on inside of it.

D.E. Shaw declined to comment in response to this piece.

To fully understand what D.E Shaw comports itself to be, it's perhaps most useful to take a look at the "Who We Are" section of the D.E. Shaw website:

Our culture rewards analytical rigor and adherence to the highest possible ethical and legal standards, and we've cultivated a collegial work environment that promotes collaboration across disciplines, geographies, and investment strategies. Our firm has been built in part by attempting to do what other companies might consider impossible, or never imagine at all. A single transformative idea that ultimately works—for a new business, a new trading model, or an improved back office process—is worth a dozen ideas that lead nowhere. We've learned that when an extraordinary team sets extraordinarily ambitious goals, astonishing breakthroughs can be expected.

David Shaw was an ur-quant trader, founding his fund in the 1980s above a communist bookstore and becoming a billionaire pioneer in the algorithmic trading game. He was also famous for eschewing Wall Street types in favor of academics and computer scientists, letting them dress how they wanted and trade how they wanted. D.E. Shaw started off quirky and different, but 30-plus years is a long time.

To maintain its outsider image, D.E. Shaw [or DESCO as it is referred to almost exclusively by those on the inside] has, according to our sources, cultivated an environment of deeply-ingrained clannishness that seems to go a step beyond the average tribal mentalities of hedge fund life. D.E. Shaw famously bills itself as a place for the poet-quant to find Alpha amongst fellow moralists and seekers of truth, yet the fund has also demonstrated an almost baroque fear of the press. If there was a Dealbreaker League Table for most inscrutable hedge funds, D.E. Shaw would come in first every time.

And there's a reason for that. Shaw's staffing vision lives on today. You're not going to find a room full of Wharton frat douches and MIT quant shut-ins. It's a potent sales routine, a promise of a well-rounded trading floor, a true investment differential. A 'liberal arts value prop' if you will. But according to one former D.E. Shaw employee, "They hire really smart kids who don't know their own market value and teach them how to work at D.E. Shaw... It's a great deal for DESCO." It also creates an environment of true believers who don't really question the company line.

By almost every measure, it works. Success at D.E. Shaw relies very heavily on buying into the DESCO way of life. That opinion was dominant across the sources we spoke to, with one current employee adding, "The way things are at DESCO, the things you have to believe, make it really hard to hire from an outside fund." For those who succeed at D.E. Shaw, insiders say, the unique culture they grew up in makes it very difficult to leave.

Every single D.E. Shaw insider we spoke to used some version of the word "cult" to describe the ethos inside the fund, but almost all of them did it with a blithe nonchalance that belied the more negative connotations of the notion. If anything, D.E. Shaw appears to operate with a motto of "radical opaqueness," with an executive committee of four communicating with the rarely-seen and technically not-in-charge David Shaw. That committee runs the firm via a very top-down management structure. "Have you read about Scientology?" one former employee asked us, "It's not unlike Scientology."

But while many workers can come to see management as controlling culty or even evil, the majority of D.E. Shaw insiders we spoke to see the fund in much grayer tones. "There are a few bad people at DESCO, sure, but that's true anywhere. I think it's a mostly good place with a very intense culture and some serious blinders," said a current employee. "The Michalow thing has made [stuff] harder to ignore."

And the "Michalow thing" does appear to have been a true inflection point for D.E. Shaw. As we wrote at the time, Michalow was generally charged by his former employer with "gross violations of [D.E. Shaw's] standards and values." More specifically, Michalow had said out loud that he wanted an assistant he could refer to as "sugar tits" and was known to offer and solicit hugs from colleagues, some of whom were female. Michalow's firing seemed part and parcel of the #MeToo exegesis on Wall Street and beyond. But then there was the letter.

Understandably, we found our puerile interest piqued by Michalow's letter. Aside from the obvious, it broke down its allegations of life inside D.E. Shaw into a list of bullet points that varied in detail but contained phrases like "drunk," "inappropriate sexual imagery," "drug use," "strip club," and "received oral sex from another employee." All in all, it was a laundry list of misbehaviors that we at Dealbreaker have always referred to internally as "normal crazy hedge fund stuff."

Once we published the post about Michalow and his letter, a strange thing happened. A D.E. Shaw insider reached out to us to share information. The feelers were cautious, almost paranoid, and then there were more, and then more. Every single source we spoke to made a point to tell us that they were taught to never speak to the press. They all also uniformly told us that Michalow's description of D.E. Shaw culture was much closer to reality than the one that D.E. Shaw presents to the outside world.

"Dan's letter was amazing," said one former employee. "It looked crazy to a lot of people, but not to anyone who worked at DESCO." Another current employee told us that Michalow's firing has left a real schism within the fund, with some feeling that D.E. Shaw burned Michalow after he made it clear that he was not actually retiring. "It's insane that they thought Dan would stop working, he's like 35," said one current employee. "But how did Dan think it was going to go?" Many of our sources were very clear that D.E. Shaw is known to turn adversarial when former employees attempt to leave and start their own funds. Again, not the kind of behavior that shocks anyone with a working knowledge of financial cultural norms. But from what we've learned about Michalow, his case might be a little different.

Four people with knowledge of the macro group at D.E. Shaw portrayed Michalow as the de facto manager of the group. His boss, executive committee member Max Stone, relocated to Boston years ago and - unlike his company bio suggests - had surrendered much of the day-to-day management to Michalow. When asked if Michalow was maybe an ideal mid-level sacrifice to the #MeToo movement, one current D.E. Shaw employee responded, "Dan was not mid-level. He was the heir apparent to Max's EC [executive committee] spot. He knows everything."

The handling of Michalow's departure also rankled some inside the fund. Aside from the tangled nest of subjective emotions and cultural politics that pervade almost every case like this, numerous sources told us that Michalow's firing was minimized before the story hit the press. And the confusion was not just internal: Two sources told us that at least one investor was told that "Dan is going kite surfing" before Bloomberg published news of his firing in May. Other sources told us that the fund might have believed that to be true at the time.

In that context, it makes sense that Michalow, who declined comment for this story, would be the person to light the match on a cultural shift within the fund. After walking through Michalow's letter with a handful of D.E. Shaw insiders, it's hard to find an accusation the letter that isn't corroborated by at least three or four of the people we spoke to, and we have now heard a few more stories that are some pretty fun yarns. Michalow's firing and the resulting fallout have pulled back the curtain on a big hedge fund that employs some people who apparently evince the kind of human frailties seen at most financial institutions where people work excruciatingly long hours and make millions of dollars.

Nothing we learned about D.E. Shaw in our conversations with D.E. Shaw insiders was illegal, morally outrageous or even worthy of a lazy FINRA investigation. But the way these things were communicated to us, the paranoia about talking to the press, the cloak and dagger machinations to meet [the idea that DESCO might hack emails was brought up by thee separate sources], and the overall fear of D.E. Shaw's retribution made us wonder time and again why the stakes seemed so high for such barely scandalous information.

In the end, it seems like D.E. Shaw is spending twice the time and effort to contain the truth about its jejune cultural shortcomings than it needs to acknowledge and address them. We trust any quant to see the possible error in that.

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