What the hell was a hedge fund in any case? he wondered. He looked it up: ‘A private investment fund that may invest in a diverse range of assets and may employ a variety of investment strategies to maintain a hedged portfolio intended to protect the fund’s investors from downturns in the market while maximising returns on market upswings.’
None the wiser, he flicked back through his notes. Hoffmann had said in his interview that he had worked in the financial sector for the past eight years; for six years before that he had been employed on developing the Large Hadron Collider. As it happened, Leclerc knew a man, a former inspector in the police, who now worked in security at CERN. He gave him a call and fifteen minutes later he was at the wheel of his little Renault, driving slowly in the morning traffic, north-west past the airport, along the Route de Meyrin, through the drab industrial zone of Zimeysa.
Up ahead, framed by the distant mountains, CERN’s huge rust-coloured wooden globe seemed to rise out of the arable fields like a gigantic anachronism: a 1960s vision of what the future was supposed to look like. Leclerc parked opposite it and went into the main building. He gave his name and clipped his visitor’s badge to his windcheater. While he waited for his contact to collect him he studied the little exhibition in the reception area. Apparently sixteen hundred super-conducting magnets, each weighing nearly thirty tonnes, were housed in a twenty-seven-kilometre circular tunnel beneath his feet, shooting beams of particles around it so quickly that they completed the circuit eleven thousand times per second. The collisions of the beams at an energy of seven trillion electronvolts per proton were supposed to reveal the origins of the universe, discover extra dimensions and explain the nature of dark matter. None of it that Leclerc could discern seemed to have anything whatever to do with the financial markets.
QUARRY’S INVITEES BEGAN to arrive just after ten, the first pair – a fifty-six-year-old Genevese, Etienne Mussard, and his younger sister Clarisse – turning up on a bus. ‘They’ll be early,’ Quarry had warned Hoffmann. ‘They’re always early for everything.’ Dowdily dressed, they were both unmarried and lived together in a small three-bedroomed apartment in the suburb of Lancy that they had inherited from their parents. They did not drive. They took no holidays. They rarely dined in restaurants. Quarry estimated M. Mussard’s personal wealth at approximately seven hundred million euros, and Mme Mussard’s at five hundred and fifty million. Their mother’s grandfather, Robert Fazy, had owned a private bank, which had been sold in the 1980s following a scandal involving Jewish assets seized by the Nazis and deposited with Fazy et Cie during the Second World War. They brought with them their family attorney, Dr Max-Albert Gallant, whose firm conveniently also handled the legal affairs of Hoffmann Investment Technologies. It was through Gallant that Quarry had managed to obtain an introduction to the Mussards. ‘They treat me like a son,’ said Quarry. ‘They’re unbelievably rude and do nothing but complain.’
This drab couple was followed closely by perhaps the most exotic of Hoffmann’s clients, Elmira Gulzhan, the thirty-eight-year-old daughter of the President of Azakhstan. Resident in Paris and a graduate of INSEAD in Fontainebleau, Elmira was responsible for administering the Gulzhan family holdings overseas, estimated by the CIA in 2009 to be worth approximately $19 billion. Quarry had contrived to meet her on a skiing party in Val d’Isere. The Gulzhans presently had $120 million invested in the hedge fund – a stake Quarry hoped to persuade her at least to double. He had also made friends on the slopes with her long-term lover, François de Gombart-Tonnelle, a Parisian lawyer, who was at her side today. She emerged from her bulletproof Mercedes wearing an emerald silk frock coat with matching head scarf draped lightly over her helmet of glossy black hair. Quarry was waiting in the lobby to greet her. ‘Be not fooled,’ he had warned Hoffmann. ‘She may look like she’s off to the races but she could hold down a job at Goldman any day of the week. And she can arrange for her daddy to have your fingernails torn out.’
Next to roll up, sharing a limousine from the Hotel Président Wilson on the other side of the lake, were a couple of Americans who had flown over from New York especially for the presentation. Ezra Klein was chief analyst for the Winter Bay Trust, a $14 billion fund-of-funds which, in the words of its prospectus, ‘aims to flatten out risk while achieving high returns by investing in a diverse array of managed portfolios rather than individual bonds or equities’. Klein had a reputation for being super-bright, enhanced by his habit of talking at a rate of six words per second (he had once been timed surreptitiously by his bewildered subordinates), roughly twice as fast as normal human speech, and by the fact that every third word seemed to be an acronym or piece of financial jargon. ‘Ezra’s on the spectrum,’ said Quarry. ‘No wife, no kids, no sexual organs of any kind, as far as I can tell. Winter Bay could be good for another hundred million. We’ll have to see.’
Beside him, not even pretending to listen to Klein’s unintelligible jabber, was a bulky figure in his fifties in full Wall Street dress uniform of black three-piece suit and red-and-white striped tie. This was Bill Easterbrook of the US banking conglomerate AmCor. ‘You’ve met Bill before,’ Quarry had warned Hoffmann. ‘Remember him? He’s the dinosaur who looks as if he’s just stepped out of an Oliver Stone movie. Since you last saw him, he’s been spun off into a separate entity called AmCor Alternative Investments, which is basically just an accounting trick to keep the regulators happy.’ Quarry had himself worked for AmCor in London for a decade, and he and Easterbrook went way back – ‘way, way back’, as he dreamily put it: too far to recall, he implied, through the haze of the years – all the way back to the coke-and-call-girl glory days of the 1990s. When Quarry had left AmCor to set up with Hoffmann, Easterbrook had passed them their first clients in return for commission. Now AmCor Alternative was Hoffmann’s biggest investor, with close to $1 billion under management. He was another attendee whom Quarry took the trouble to meet personally in the lobby.
And so they all came: twenty-seven-year-old Amschel Herxheimer of the Herxheimer banking and trading dynasty, whose sister had been at Oxford with Quarry, and who was being groomed to take over the family’s two-hundred-year-old private bank; dull Iain Mould of what had once been an even duller Fife building society, until it had taken itself public at the beginning of the century and, in the space of three years, run up debts equivalent to half the gross domestic product of Scotland, necessitating a takeover by the British government; the billionaire Mieczyslaw Łukasiński, a former mathematics professor and leader of the Polish Communist Youth Union, who now owned eastern Europe’s third-largest insurance company; and finally two Chinese entrepreneurs, Liwei Xu and Qi Zhang, representing a Shanghai-based investment bank, who arrived with no fewer than six dark-suited associates, whom they insisted were lawyers but who Quarry was fairly sure were computer experts, come to inspect Hoffmann’s cyber-security – after a furiously polite stand-off the ‘lawyers’ reluctantly agreed to leave.
Not one existing investor whom Quarry had invited declined the invitation. ‘They’re coming for two reasons,’ he had explained to Hoffmann. ‘First, because over three years, even as the financial markets have tanked, we’ve returned them a profit of eighty-three per cent and I defy anyone to find any hedge fund anywhere that has produced such consistent alpha – I mean, they must be wondering just what the hell it is we’ve got going on here, yet we’ve refused to take a single extra cent in investment.’
‘And what’s the second reason they’re coming?’
‘Oh, don’t be so modest.’
‘I don’t follow.’
‘It’s you, you daft bugger. They want to take a look at you. They want to discover what you’ve been up to. You’re becoming a legend and they want to touch the hem of your garment, just to see if their fingers turn to gold.’
HOFFMANN WAS WOKEN by Marie-Claude.
‘Dr Hoffmann?’ She shook his shoulder gently. ‘Dr Hoffmann? Mr Quarry says to tell you they are waiting for you in the boardroom.’
‘That’s quite all right. Thank you.’
There was a washroom across the passage from his office. He ran the cold tap and cupped his hands beneath it. He splashed his face again and again, flailing his flesh with the icy water. He had no time to shave. The skin on his chin and around his mouth, normally bland and smooth, felt as bristly and textured as an animal’s. It was a curious fact – no doubt an irrational swing of mood brought on by his injury – but he was beginning to feel exuberant. He had survived an encounter with death – exhilarating in itself – and now he had a boardroom full of supplicants waiting, in Hugo’s words, to touch his hem, in the hope that his genius for making money would rub off on them. The rich of the earth had bestirred themselves from their yachts and pools and racetracks, from the dealing rooms of Manhattan and the counting houses of Shanghai, and had gathered together in Switzerland to listen to Dr Alexander Hoffmann, the legendary – Hugo’s word again – creator of Hoffmann Investment Technologies, preach his vision of the future. And what a story he had to tell! What a gospel he had to preach!
With such thoughts surging through his damaged head, Hoffmann dried his face, pulled back his shoulders and headed off to the boardroom. As he passed across the trading floor, the lithe figure of Ganapathi Rajamani, the company’s chief risk officer, moved smoothly to intercept him, but Hoffmann waved him out of the way: whatever his problem was, it would have to wait.
6
No doubt wealth when very great tends to convert men into useless drones, but their number is never large; and some degree of elimination here occurs, for we daily see rich men, who happen to be fools or profligate, squandering away their wealth.
CHARLES DARWIN, The Descent of Man (1871)
THE BOARDROOM HAD the same corporate impersonality – the same soundproofed glass walls and floor-to-ceiling venetian blinds – as the managers’ offices. A giant blank screen for teleconferencing took up most of the end wall, looking down on to a big oval table of pale Scandinavian wood. As Hoffmann entered the room, all but one of the table’s eighteen chairs was occupied either by the principals or their advisers; the only spare place was next to Quarry at its head. Quarry’s gaze followed his progress round the edge of the room with evident relief. ‘Here he is at last,’ he said, ‘Dr Alexander Hoffmann, ladies and gentlemen, the president of Hoffmann Investment Technologies. As you can see, his brain’s so big we’ve had to let out his head to give it some breathing space. Sorry, Alex, only joking. I’m afraid he took a bit of a knock, hence the stitches, but he’s fine now, aren’t you?’
They all stared. Those nearest to Hoffmann twisted in their seats to look up at him. But Hoffmann, hot with embarrassment, avoided eye contact. He took his position next to Quarry, folded his hands on the table in front of him, and stared fixedly at his interlaced fingers. He felt Quarry’s hand grasp his shoulder, the weight increasing as the Englishman rose to his feet.
‘Right then, we can at last get started. So – welcome, friends, to Geneva. It’s almost eight years since Alex and I set up shop together, using his intelligence and my looks, to create a very special kind of investment fund, based exclusively on algorithmic trading. We started with just over a hundred million dollars in assets under management, a big chunk of it courtesy of my old friend over there, Bill Easterbrook, of AmCor – welcome, Bill. We made a profit that first year, and we’ve gone on making a profit every year, which is why we are now one hundred times larger than when we started, with AUM of ten billion dollars.
‘I’m not going to boast about our track record. I hope I don’t need to. You all get the quarterly statements and you know what we’ve achieved together. I’ll just give you one statistic. On the ninth of October 2007, the Dow Jones Industrial Average closed at 14,164. Last night – I checked it before I left my office – the Dow closed at 10,866. That represents a loss over more than two and a half years of almost one quarter. Imagine that! All those poor saps with their retirement plans and their tracker bonds have lost about twenty-five per cent of their investment. But you, by placing your trust in us over the same period, have seen your net asset value increase by eighty-three per cent. Ladies and gentlemen, I think you’ll agree that bringing your money to us was a pretty smart thing to have done.’
For the first time Hoffmann risked a brief glance around the table. Quarry’s audience was listening intently. (‘The two most interesting things in the world,’ Quarry once remarked: ‘other people’s sex lives and your own money.’) Even Ezra Klein, rocking back and forth like a student in a madrasa, was temporarily still, while Mieczyslaw Łukasiński simply could not keep the grin off his plump peasant face.
Quarry’s right hand continued to rest on Hoffmann’s shoulder; his left was thrust casually in his pocket. ‘In our business we call the gap between market performance and fund performance “alpha”. Over the past three years, Hoffmann has generated alpha of one hundred and twelve per cent. That’s why we’ve twice been voted Algorithmic Hedge Fund of the Year by the financial trade press.
‘Now,’ he went on, ‘this consistency of performance is not, I can assure you, a matter of luck. Hoffmann spends thirty-two million dollars a year on research. We employ sixty of the most brilliant scientific minds in the world – at least I’m told they’re brilliant: I can’t understand a word they’re on about.’
He acknowledged the rueful laughter. Hoffmann saw that the British banker, Iain Mould, was chuckling particularly hard, and he knew at once that he was a fool. Quarry withdrew his hands from Hoffmann’s shoulder and from his own pocket and placed them on the table. He leaned forward, suddenly serious and urgent.
‘About eighteen months ago, Alex and his team achieved a significant technological breakthrough. As a result we had to take the very difficult decision to hard-close the fund.’ Hard-close meant turning away additional investment even from existing clients. ‘And I know that every single one of you in this room – because that is why we’ve invited you here – was disappointed by that decision, and also bewildered, and that some of you were actually pretty angry about it.’
He glanced at Elmira Gulzhan listening at the opposite end of the table. She had screamed at Quarry down the phone, Hoffmann knew, and had even threatened to withdraw the family’s money from the fund or worse (‘You hard-close the Gulzhans – the Gulzhans hard-close you …).
‘Well,’ continued Quarry, with the merest hint of a kiss blown in Elmira’s direction, ‘we apologise for that. But we took the view that we had to concentrate on implementing this new investment strategy based on our existing asset size. There’s always a risk with any kind of fund, as I’m sure you’re aware, that increasing size translates into decreasing performance. We wanted to be as confident as we could be that that wouldn’t happen.
‘It is now our opinion that this new system, which we call VIXAL-4, is robust enough to cope with portfolio expansion. Indeed, the alpha generated over the last six months has been significantly greater than it was when we were relying on our original algorithms. Therefore, as of today, I can announce that Hoffmann is moving from a hard-closed to a soft-closed position, and is willing to accept additional investment from existing clients only.’
He stopped and took a sip of water to allow the impact of his words to sink in. There was complete silence in the room.
‘Cheer up, everyone,’ he said brightly, ‘this is supposed to be good news.’
The tension was released by laughter and for the first time since Hoffmann entered the room the clients looked openly at one another. They had bec
ome a private club, he realised: a freemasonry bound together by a shared secret knowledge. Complicit smiles spread around the table. They were on the inside track.
‘At which point,’ said Quarry, looking on contentedly, ‘I think the best thing I can do is hand you over to Alex here, who can fill you in a bit more on the technical side.’ He half-sat down then stood again. ‘With a bit of luck I may even be able to understand it myself.’
More laughter, and then the floor was Hoffmann’s.
He was not a man to whom speaking in public came naturally. The few classes he had taught at Princeton before leaving the United States had been torture for lecturer and students alike. But now he felt himself filled with a strange energy and clarity. He touched his fingers lightly to his sewn-up wound, took a couple of deep breaths, then rose to his feet.
‘Ladies and gentlemen, we have to be secretive about the detail of what we do in this company, to avoid having our ideas stolen by our competitors, but the general principle is no great mystery, as you well know. We take a couple of hundred different securities and we trade them over a twenty-four-hour cycle. The algorithms we have programmed into our computers pick the positions we hold based on a detailed analysis of previous trends, mostly liquid futures – the Dow, say, or the S and P 500 – and the familiar commodities: Brent crude, natural gas, gold, silver, copper, wheat, whatever. We also do some high-frequency trading, where we may hold positions for only a few milliseconds. It’s really not that complicated. Even the S and P two-hundred-day moving average can be a pretty reliable predictor of the market: if the current index is higher than the preceding average, the market is likely to be bullish; if lower, bearish. Or we can make a prediction, based on twenty years of data, that if tin is at this price and the yen at that, then it is more likely than not that the DAX will be here. Obviously we have vastly more pairs of averages than that to work with – several millions of them – but the principle can be simply stated: the most reliable guide to the future is the past. And we only have to be right about the markets fifty-five per cent of the time to make a profit.
The Fear Index Page 8