Investor meeting today. I hate investor meetings.
Don’t get me wrong. Without investors we would have no assets to manage; without assets we would have no profits; and without profits we would have no bonuses. So investors are a necessary evil.
Nonetheless, most hedge fund mangers, your humble narrator included, view investors with barely-disguised contempt, and it’s not hard to see why. Fear and greed are the besetting sins of every participant in the markets, but hedge fund investors embody these two qualities to a greater degree than almost anyone else. Obviously they’re greedy for the juicy returns we promise, else why would they be investing in us? And equally obviously they’re fearful, because they don’t understand what we’re doing (if they did, they would do it themselves, rather than pay us 2 and 20).
We hedge fund managers, of course, like to think of ourselves as far above these trivial failings – no fear and greed in us, no sir – and so naturally we look down on mere investors as lesser beings: emotional, irrational, avaricious, timid and just plain clueless. How galling, then, that we have to go groveling, cap in hand, for the investment millions that these lesser beings happen to control. A healthy contempt is the least we can muster in return.
But of course it wouldn’t do to reveal our feelings. Instead, we lead investors on a merry dance: teasing them with glimpses of golden apples just out of their reach, assuaging their many worries, mollycoddling them and massaging their fragile egos.
Today’s meeting is a good example. The patsy du jour, Raymond _______, is head of alternative investments for the private wealth management practice of a well-known Swiss bank. How he ever rose to such a position is beyond me; I find in him no discernible trace of investment acumen or indeed, basic competence in finance. But that’s not my problem. All that matters to me is that Raymond holds the keys to the vaults in which are stored the amassed riches of assorted Russian oligarchs, Chindian industrialists, TPLAC dictators, and of course large numbers of Anglo-Saxon CXOs.
This presents an interesting puzzle. Given his position, he is no doubt bombarded with investment proposals all the livelong day. Some of them may even be legit. I have to think carefully about how I’m going to handle him.
Should I go for the hard sell, promising triple-digit returns all but guaranteed by Helicopter Ben himself? Or should I be reticent and mysterious and spy-versus-spy, hinting in hushed tones of proprietary secrets so arcane that I can’t even reveal them to my own junior trader? Should I go technical on his ass, dazzling him with our models, our software, our soon-to-be-multiple-Nobel-prize-winning quant department, or even the honest-to-goodness supercomputer currently gathering dust in one of our west coast offices? Or should I talk about the years of experience (true) and expertise (dodgy at best) of our bloated staff?
It turns out I’m worrying for no reason. Within five minutes of his entry to our premises, Raymond manages to let drop the name of the hotel he is staying at (expensive), the restaurant he dined at last night (exclusive), and the art auction he is going to attend this afternoon (exorbitant). And he complains about all three.
I relax. This is going to be easy. Raymond is a show-off.
I hasten to mollify him. I tell him I never stay at his hotel any more, I find it déclassé and indeed positively blue-collar. Instead I recommend another, even more expensive boutique hotel, in a distinctively unfashionable neighborhood: I tell him it hasn’t yet been overrun by the Wells Fargo crowd. Raymond finds this hilarious; Wells Fargo is about as middle-of-the-road as you can get, solid, respectable and utterly boring. Not in the same league as high-flyers like you and me, is the unspoken implication.
As for his dining experience, I sympathize, but what can you do? That particular restaurant hasn’t been the same since its chef became a celebrity with his own TV show and Vegas chain. These days I only go there with tourists who know no better. But you, my friend, you should try out Restaurant X instead, it’s actually quite good. Oh, Restaurant X has a three-month waiting list and Raymond is flying back to Europe tomorrow? No problem at all. Let me just make a phone call. There you go, a reservation for two for tonight. My pleasure.
I remind myself to tread carefully and not overdo the partners-in-luxury act. After all, I don’t want to undermine his sense of superiority, since that could make him defensive or hostile. So I give him a chance to reclaim the higher ground. To wit: I mention that I’ve been too busy with work to go on a vacation this summer, and ask him if there are any destinations he can recommend. Bingo! His eyes light up, and I’m treated to a 20-minute episode of Lifestyles of the Rich and Raymond. It turns out there is no over-priced and under-valued experience that Raymond has not partaken of, and he’s only too happy to fill me in on every ludicrous detail.
The meeting is going swimmingly well. We haven’t spoken even two sentences about finance, but that doesn’t matter in the least. I know exactly how I’m going to play him.
The trick is to get him thinking of Sopwith as something he can show off, just like his Swiss watch and Italian sports car and Swedish girlfriend. This I proceed to do. I drop a name here, mention a trade there, hint at information received, allude to actions taken. My goal is to provide Raymond with a store of ‘insider’ anecdotes with which he can entertain his clients. (I assume, correctly as it turns out, that Raymond’s clients, like Raymond himself, are more interested in appearing suave and sexy and sophisticated than in actually making money). In every case I include just enough detail for Raymond to repeat the tale (suitably embellished, no doubt), and not a jot more: every statement is vague enough to be easily deniable, yet their cumulative impact is, if I say so myself, substantial.
Without being so vulgar as to say so explicitly, I contrive to suggest that Sopwith is as far above the average investment firm as Raymond is above the average investment professional.
This approach works a treat. Raymond is an instant convert, convinced that our platform and his money are a match made in leveraged heaven. He toddles off to evangelize the rest of his firm, and I congratulate myself on a job well done. Then, exhausted by my righteous efforts, I slope home to drown my sorrows in Scotch.
Tuesday, August 25, 2009
Saturday, August 22, 2009
Prologue: Sopwith Asset Management
In 199_, a well-known trader from a leading Wall Street firm decided to strike out on his own. Using a combination of his own money and seed capital from various business contacts, he set up a hedge fund. He recruited an all-star team of traders, technologists, quants, academics, lawyers and administrators to staff his creation, and within a matter of months the fund was up and running. Let’s call it Sopwith Asset Management.
Sopwith’s impressive pedigree meant that it enjoyed an unparalleled reputation in the financial industry. Newspaper articles gushed about its sophisticated investment strategies and cutting-edge financial technology. Academics wrote papers quoting the wisdom of Sopwith’s portfolio managers. Investment bankers wined and dined the staff of the firm, hoping thereby to win a slice of Sopwith’s lucrative trading business. Sopwith alumni were eagerly snapped up by other Wall Street companies. Headhunters called day and night, hoping to lure more employees away.
Helped by this flood of publicity, Sopwith went from strength to strength. It grew in size from a few million dollars under management to a few billion; from a half-dozen employees working out of a nondescript office block in a less-than-fashionable industrial district locale, to fifty power-suited hotshots scattered around the globe.
Sopwith proved to be quite a money-spinner for the people associated with it. Over the years, Sopwith paid tens of millions of dollars in commissions and transaction fees to various investment banks and brokerages. And it paid similarly gargantuan amounts to compliance lawyers, third-party marketers, hardware and software vendors, academic consultants, purveyors of market research, and the like.
But of course it wasn’t Sopwith who was paying any of these costs. No, it was Sopwith’s investors. And why wouldn’t they? After all, they were paying for the privilege of investing with the crème de la crème of the finance industry. A high-profile hedge fund, with vast resources of talent and experience to call upon: the very archetype of the sophisticated financial corporation of the twenty-first century. Aggressively managed, razor-sharp, lean and efficient and hungry. Adept at capturing the smallest and most fleeting of opportunities; adept also at rolling the dice for unimaginable stakes. To invest in Sopwith was to be in elite company.
Alas, the investors were wrong. Beneath the glamour and the glitz, the Emperor had no clothes. Sopwith’s vaunted financial models and analytical technology proved incapable of generating sustainable profits. Good years were followed, inevitably, by bad ones; a monkey flipping a coin could have made as much money as Sopwith did over its lifetime. The cause was not helped by the fact that Sopwith's day-to-day management was a shambles, riven by incompetence, egotism and an utter lack of vision. Slick marketing papered over the cracks for a long time, but it couldn't last. And it didn't.
Ultimately, Sopwith was done in by the tyranny of efficient markets. Sopwith’s investment philosophy was based on the belief that its traders could spot opportunities that others could not; when this turned out not to be the case, there was no backup option, no plan B. As a result, the fund suffered a slow decline into mediocrity, followed by anonymity and then dissolution.
So was Sopwith a failure? Oh no, quite the contrary. Sopwith Asset Management succeeded quite admirably in the task it was designed to do: making its partners and employees immensely rich.
For in addition to the large fees (represented as the “cost of doing business”) that Sopwith’s investors paid to brokerages and vendors and service providers, there were even larger fees paid to Sopwith’s traders and portfolio managers. The incredibly smart people who worked at Sopwith may not have been able to beat the market consistently, but they were very very good at extracting every last penny of fees from their investors. In this respect, at least, they represented the apogee of a fine Wall Street tradition.
I joined Sopwith in 199_, shortly after it was launched. I stayed with it for more years than I care to remember. I saw, at first hand, the firm’s spectacular rise to glory and its dramatic fall from grace.
And I kept a diary.
Sopwith’s impressive pedigree meant that it enjoyed an unparalleled reputation in the financial industry. Newspaper articles gushed about its sophisticated investment strategies and cutting-edge financial technology. Academics wrote papers quoting the wisdom of Sopwith’s portfolio managers. Investment bankers wined and dined the staff of the firm, hoping thereby to win a slice of Sopwith’s lucrative trading business. Sopwith alumni were eagerly snapped up by other Wall Street companies. Headhunters called day and night, hoping to lure more employees away.
Helped by this flood of publicity, Sopwith went from strength to strength. It grew in size from a few million dollars under management to a few billion; from a half-dozen employees working out of a nondescript office block in a less-than-fashionable industrial district locale, to fifty power-suited hotshots scattered around the globe.
Sopwith proved to be quite a money-spinner for the people associated with it. Over the years, Sopwith paid tens of millions of dollars in commissions and transaction fees to various investment banks and brokerages. And it paid similarly gargantuan amounts to compliance lawyers, third-party marketers, hardware and software vendors, academic consultants, purveyors of market research, and the like.
But of course it wasn’t Sopwith who was paying any of these costs. No, it was Sopwith’s investors. And why wouldn’t they? After all, they were paying for the privilege of investing with the crème de la crème of the finance industry. A high-profile hedge fund, with vast resources of talent and experience to call upon: the very archetype of the sophisticated financial corporation of the twenty-first century. Aggressively managed, razor-sharp, lean and efficient and hungry. Adept at capturing the smallest and most fleeting of opportunities; adept also at rolling the dice for unimaginable stakes. To invest in Sopwith was to be in elite company.
Alas, the investors were wrong. Beneath the glamour and the glitz, the Emperor had no clothes. Sopwith’s vaunted financial models and analytical technology proved incapable of generating sustainable profits. Good years were followed, inevitably, by bad ones; a monkey flipping a coin could have made as much money as Sopwith did over its lifetime. The cause was not helped by the fact that Sopwith's day-to-day management was a shambles, riven by incompetence, egotism and an utter lack of vision. Slick marketing papered over the cracks for a long time, but it couldn't last. And it didn't.
Ultimately, Sopwith was done in by the tyranny of efficient markets. Sopwith’s investment philosophy was based on the belief that its traders could spot opportunities that others could not; when this turned out not to be the case, there was no backup option, no plan B. As a result, the fund suffered a slow decline into mediocrity, followed by anonymity and then dissolution.
So was Sopwith a failure? Oh no, quite the contrary. Sopwith Asset Management succeeded quite admirably in the task it was designed to do: making its partners and employees immensely rich.
For in addition to the large fees (represented as the “cost of doing business”) that Sopwith’s investors paid to brokerages and vendors and service providers, there were even larger fees paid to Sopwith’s traders and portfolio managers. The incredibly smart people who worked at Sopwith may not have been able to beat the market consistently, but they were very very good at extracting every last penny of fees from their investors. In this respect, at least, they represented the apogee of a fine Wall Street tradition.
I joined Sopwith in 199_, shortly after it was launched. I stayed with it for more years than I care to remember. I saw, at first hand, the firm’s spectacular rise to glory and its dramatic fall from grace.
And I kept a diary.
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