Today the Boy King is worried about oil.
This is somewhat puzzling, as we have no position in oil, either long or short.
Unfortunately, what we do have is a position in government bonds. And the bond market is a fickle beast. Some days the bond market seems to care only about abstract macroeconomic news: growth and output data, employment and wage data, housing market data, cost-of-living indices, the prices of raw materials, and so on. On other days, bonds dance in lockstep with their friends across the aisle, stocks. There are periods of weeks on end when bond prices seem to be determined entirely by (say) the dollar-yen exchange rate; every other indicator is ignored. Then, in the blink of an eye, the correlation with exchange rates vanishes, and a new day-to-day correlation develops, with (say) emerging markets. This lasts a few days, before the next fashion takes hold. Lather, rinse, repeat.
The current determinant of choice is oil. Bond yields have tracked oil prices almost tick for tick these last few weeks. Unfortunately for us, oil has been in freefall, driving yields lower, and we’d been betting that yields will go higher. So, every morning for the last few weeks, I’ve been greeted by the sight of Jimmy’s worried face as he informs me what happened in the oil market overnight. “Oil dropped 30 cents yesterday!” “Oil is up 5 cents today!” He’s becoming an oil junkie. Every penny of fluctuation in the oil price is met with theatrical moans and sighs. It’s beginning to get me down.
Personally I think the latest move is overdone. Both my medium-term “fundamental analysis” of growth and inflation, and my short-term “trader’s intuition” tell me that bond yields have fallen too far; they’re ripe for a rebound.
I go to Jimmy and tell him I think yields are too low and they’re heading back up. A somewhat surreal conversation ensues.
Me: I think yields are going up.
Jimmy: So you think oil is going to rebound?
Me: No, I didn’t say that. I have no real opinion about oil. I’m not even trading oil. I’m trading bonds. And as a bond trader I think that yields have dropped too far, too fast.
Jimmy: But bond yields are completely correlated with oil.
Me: Umm, not quite.
At this point I go into lecture mode. Usually if I spout enough jargon I can confuse him into agreeing with me; let’s see if the trick will work today.
Me: I agree with you that bond yields have been highly correlated with oil prices over the last few weeks. But correlation does not imply causation: maybe both markets are being driven by some external factor that we’re not aware of. In any case the signals are simultaneous; there’s no predictive power in oil price information. And who knows, the correlation could change – after all, it didn’t exist two months ago, and I’m willing to bet it won’t exist two months hence. Oh, and your sample size is too small to be robust – three weeks of data don’t prove anything.
Unfortunately, the strategy backfires. My explanation confuses him all right, but instead of backing off and agreeing to let me do what I want, he wants a simpler explanation. He wants a graph.
I’m not sure what the graph will prove, and I tell him so. He thinks I’m contradicting him and says in what he imagines are firm, decisive tones, “I insist on seeing a graph”.
I ignore the request. Creating a graph of oil against bonds, while trivial to do, would be of absolutely no use. Graphs are horribly non-quantitative – about the only thing they’re good for is reinforcing your existing prejudices. In this particular case, a graph would merely confirm what we already know: that bond yields have tracked oil prices over the last few weeks. Big deal.
But I underestimate Jimmy’s doggedness. He digs into our research archive and pulls out a piece of analysis from a large investment bank showing exactly the graph he wanted me to generate.
He waves this graph triumphantly at me: See! There’s a correlation!
Me: (sighing) I never said there wasn’t a correlation. But it may not be robust, it doesn’t imply causation, and it certainly says nothing about future behavior.
Jimmy: But there’s a correlation!
Me: I don’t care. I’m not buying oil, I’m betting that bond yields will go up.
Jimmy: But betting on yields is just like buying oil, because of the correlation!
Me: I just explained why the correlation is meaningless.
Jimmy: So does that mean you don’t think oil will rise?
Me: It may rise. It may fall. I don’t have an opinion either way.
Jimmy: But then why are you betting that bond yields will go up?
I realize that this is a battle I can’t win. Beating my head against a wall is more fun than trying to change Jimmy’s mind once it’s made up. There’s only one thing for it: make a graceful retreat.
I tell him I think bond yields will go up because oil is poised for a major move higher.
Update, a week later: Bond yields have risen, while the price of oil hasn’t changed. The Boy King comes up to me and says, “It’s very interesting, isn’t it? The correlation has broken down, just as we thought it would”.
Thursday, May 6, 2010
Monday, April 26, 2010
The Boy King
I have a new name for the esteemed head of our trading desk. From now on, Jimmy the Kid will be referred to as the Boy King.
You know the fable, surely? The one about a juvenile monarch who wields absolute power, and forces older and wiser people to jump through meaningless hoops? I always knew that Jimmy’s rise to power read like something out of a fairy tale, but I never realized how apt the analogy was until now.
For he is a petty tyrant, the sovereign of all he surveys, and he rejoices in the capricious exercise of power. The more arbitrary the exercise, the happier he is. Jimmy is destroying the morale of this once-proud organization at a rate of knots.
Fortunately there are ways to work around him. Because just like a toddler, he’s easily distracted by shiny new toys. So every week he has a new project that he decides to take in hand. Last week it was risk management; this week I believe it’s settlements. He chugs around with great enthusiasm making life miserable for the poor slobs who have to actually handle settlements. He comes up with suggestions that are not just impractical, they are existentially impossible. Fortunately he never follows up on anything because by next week he will be distracted by his next shiny toy.
I only hope the settlements team doesn’t mess things up and resist Jimmy’s onslaught. The greatest danger is that they’ll tell him he’s out of his depth, or nix his suggestions out of hand. If they do that he will dig in his heels, and insist on seeing his changes put into practice, with disastrous consequences for all concerned. Much smarter is for the settlements team to nod and agree with everything he says, promise to implement his plans “as soon as possible”, and then do absolutely nothing.
Indeed, faced with Jimmy’s rapidly oscillating enthusiasms, the whole firm has embarked on a policy of aggressively doing nothing. Fortunately, the markets have been doing nothing as well, so it doesn’t look like we’re underperforming. Our investors are thrilled, especially since our transaction costs are falling lower by the day (if you don’t trade, of course you won’t have transaction costs). Essentially, we’re being paid to just sit around.
Easy money.
You know the fable, surely? The one about a juvenile monarch who wields absolute power, and forces older and wiser people to jump through meaningless hoops? I always knew that Jimmy’s rise to power read like something out of a fairy tale, but I never realized how apt the analogy was until now.
For he is a petty tyrant, the sovereign of all he surveys, and he rejoices in the capricious exercise of power. The more arbitrary the exercise, the happier he is. Jimmy is destroying the morale of this once-proud organization at a rate of knots.
Fortunately there are ways to work around him. Because just like a toddler, he’s easily distracted by shiny new toys. So every week he has a new project that he decides to take in hand. Last week it was risk management; this week I believe it’s settlements. He chugs around with great enthusiasm making life miserable for the poor slobs who have to actually handle settlements. He comes up with suggestions that are not just impractical, they are existentially impossible. Fortunately he never follows up on anything because by next week he will be distracted by his next shiny toy.
I only hope the settlements team doesn’t mess things up and resist Jimmy’s onslaught. The greatest danger is that they’ll tell him he’s out of his depth, or nix his suggestions out of hand. If they do that he will dig in his heels, and insist on seeing his changes put into practice, with disastrous consequences for all concerned. Much smarter is for the settlements team to nod and agree with everything he says, promise to implement his plans “as soon as possible”, and then do absolutely nothing.
Indeed, faced with Jimmy’s rapidly oscillating enthusiasms, the whole firm has embarked on a policy of aggressively doing nothing. Fortunately, the markets have been doing nothing as well, so it doesn’t look like we’re underperforming. Our investors are thrilled, especially since our transaction costs are falling lower by the day (if you don’t trade, of course you won’t have transaction costs). Essentially, we’re being paid to just sit around.
Easy money.
Thursday, April 15, 2010
Temples of Excess
God I feel awful today. Bloated, constipated, hung over and bleary.
It’s a good thing I’m merely a hedge fund trader and not say a heart surgeon or air traffic controller. No matter what I do, the worst that can happen is that one group of rich people becomes marginally richer, while another group becomes marginally poorer. Ah, the pleasures of a life without responsibility!
At some places, being hung over is actually a positive. If I worked for, say, Stairs Burn, I would probably embrace drunkenness, the better to fit in with their stable of meatheads and muppets. I’m told that getting smashed with your MD is the quickest route to promotion at more than one venerable Wall St firm.
Sadly, I work for Sopwith, where passing out at your table is frowned upon and throwing up on your bosses’ shoes is a definite no-no. We’re kind of pedantic that way.
I suppose it’s my own fault. All life is a learning experience, and I have learned my lesson. In one pithy sentence: “Never eat steak with a man named Truck”.
Truck is a derivatives salesman from Organist Manly. He is also a connoisseur of, well, if not necessarily fine food, then at least of lots of food. There is a reason for his nickname.
Truck called me yesterday and proposed that we celebrate our annual bonuses with some serious meat-eating. He suggested Embers. I knew he would suggest Embers.
A brief digression. America, as we all know, is the land of excess. Within America, New York is the city that best embodies this excess (though LA comes close). And New York’s extremism finds its purest expression in its steakhouses, which are temples of excess. Want a piece of meat the size of a football? Want a tomato the size of a cantaloupe melon? Want enough French fries to blanket a small town? Want enough whipped cream to host a Winter Olympics? Just go to a New York steakhouse.
But not all steakhouses are the same. Different steakhouses aim to capture different, and highly specific, clienteles. And which clientele, gentle reader, carries the flag for the most blatant, shameless, unthinking excess imaginable? Yes, you guessed right, it’s the finance industry. World headquarters: Embers Steakhouse.
When you enter Embers, you are overwhelmed by three distinct smells. Floating on the top is the smell of cigar smoke; every table is filled with investment bankers celebrating their deals du jour. Occupying the midsection is the smell of grease and meat, the canonical steakhouse odors carried to an extreme. But right at the bottom, pervading everything else, infiltrating every conversation, flavoring the wine and seasoning the meat, is the smell of testosterone. You don’t go to Embers to eat the food; you go to Embers because that’s what rich, successful and above all manly bankers do.
Frankly, I can’t stand Embers. Of course, I couldn’t tell Truck that in so many words; his feelings would be hurt. So I spun it as best as I could. I told him I was bored of Embers because I had eaten there so often; could Truck suggest someplace new?
Truck rose to the challenge, and booked us into Ludwig’s. On our way there he told me its story: Ludwig’s was a new steakhouse founded by the chef and two senior waiters from Peter Mauser’s (a venerable Brooklyn institution). And sure enough, when we walked, it looked like Mauser’s reincarnated.
But there was a problem. Unlike Peter Mauser’s, Ludwig’s did not serve German Potatoes.
Truck was apoplectic. “How can you not serve German Potatoes? What kind of steakhouse is this?”
The waiter explained, “We couldn’t reproduce the quality of Mauser’s German Potatoes, and rather than give our diners a substandard experience, we decided to take it off the menu.”
Now, Truck’s gigantic exterior hides a sharp and active mind (especially when it comes to matters of food), and he immediately spotted the hidden premise in this statement.
“You mean to tell me that every other dish on the menu has been vetted as being equal to or better than Mauser’s finest?”
“Yes sir, we think so.”
“Okay, then. Prove it. Bring me one of everything.”
“One of everything, sir?”
“You heard me. Bring me one plate of everything on your menu. I reckon I know my food; let’s see if your quality control is really that good.”
Now, keep this in mind. At the table there were only Truck, Truck’s assistant Trailer (the nickname was irresistible), myself, and a junior trader we all called Pippin (I don’t think anyone knew his real name; he, like Trailer, was there to be seen and not heard). Four people. Meanwhile, the menu had six different cuts of steak alone, ribs, veal, three different chicken dishes, lamb chops, pork loins, sole and salmon filets, burgers, corned beef, and at least twenty different sides. Not to mention ten different desserts.
And Truck wanted it all.
I suppose I should have stopped him, but I had had a few drinks too many by this point, so I’m ashamed to say I cheered him on. Trailer and Pip got into the spirit of things as well. As did the entire wait staff at Ludwig’s. The kitchen moved into high gear, while Truck himself shifted seamlessly into overdrive.
We tried, we really tried. Food kept appearing, and we kept shoveling it down. At one point I vaguely remember trying to add up all the numbers on the right hand side of the menu card; I reached 2000 before it struck me that I wouldn’t be paying for any of this. I promptly threw aside the card and sent the waiter back for more wine.
The next thing I knew, it was morning, and I was staggering back into Sopwith’s offices for another day of wrestling with the markets.
Good thing my investors can’t see me now.
Update, 12 noon: I dialed Truck’s number at lunchtime. Trailer picked up the phone. I said, “God, Trailer, I feel awful today”. Trailer replied, “Yeah, me too. But you know old Truck? He’s sitting next to me eating a steak sandwich for lunch.”
I think I’m going to throw up.
Update, 5pm: It’s the close of business, and we’re up 3% on the day. That’s a pretty phenomenal return, especially considering I was wasted out of my mind for most of the trading session. Hmm, maybe I should go out with Truck more often?
It’s a good thing I’m merely a hedge fund trader and not say a heart surgeon or air traffic controller. No matter what I do, the worst that can happen is that one group of rich people becomes marginally richer, while another group becomes marginally poorer. Ah, the pleasures of a life without responsibility!
At some places, being hung over is actually a positive. If I worked for, say, Stairs Burn, I would probably embrace drunkenness, the better to fit in with their stable of meatheads and muppets. I’m told that getting smashed with your MD is the quickest route to promotion at more than one venerable Wall St firm.
Sadly, I work for Sopwith, where passing out at your table is frowned upon and throwing up on your bosses’ shoes is a definite no-no. We’re kind of pedantic that way.
I suppose it’s my own fault. All life is a learning experience, and I have learned my lesson. In one pithy sentence: “Never eat steak with a man named Truck”.
Truck is a derivatives salesman from Organist Manly. He is also a connoisseur of, well, if not necessarily fine food, then at least of lots of food. There is a reason for his nickname.
Truck called me yesterday and proposed that we celebrate our annual bonuses with some serious meat-eating. He suggested Embers. I knew he would suggest Embers.
A brief digression. America, as we all know, is the land of excess. Within America, New York is the city that best embodies this excess (though LA comes close). And New York’s extremism finds its purest expression in its steakhouses, which are temples of excess. Want a piece of meat the size of a football? Want a tomato the size of a cantaloupe melon? Want enough French fries to blanket a small town? Want enough whipped cream to host a Winter Olympics? Just go to a New York steakhouse.
But not all steakhouses are the same. Different steakhouses aim to capture different, and highly specific, clienteles. And which clientele, gentle reader, carries the flag for the most blatant, shameless, unthinking excess imaginable? Yes, you guessed right, it’s the finance industry. World headquarters: Embers Steakhouse.
When you enter Embers, you are overwhelmed by three distinct smells. Floating on the top is the smell of cigar smoke; every table is filled with investment bankers celebrating their deals du jour. Occupying the midsection is the smell of grease and meat, the canonical steakhouse odors carried to an extreme. But right at the bottom, pervading everything else, infiltrating every conversation, flavoring the wine and seasoning the meat, is the smell of testosterone. You don’t go to Embers to eat the food; you go to Embers because that’s what rich, successful and above all manly bankers do.
Frankly, I can’t stand Embers. Of course, I couldn’t tell Truck that in so many words; his feelings would be hurt. So I spun it as best as I could. I told him I was bored of Embers because I had eaten there so often; could Truck suggest someplace new?
Truck rose to the challenge, and booked us into Ludwig’s. On our way there he told me its story: Ludwig’s was a new steakhouse founded by the chef and two senior waiters from Peter Mauser’s (a venerable Brooklyn institution). And sure enough, when we walked, it looked like Mauser’s reincarnated.
But there was a problem. Unlike Peter Mauser’s, Ludwig’s did not serve German Potatoes.
Truck was apoplectic. “How can you not serve German Potatoes? What kind of steakhouse is this?”
The waiter explained, “We couldn’t reproduce the quality of Mauser’s German Potatoes, and rather than give our diners a substandard experience, we decided to take it off the menu.”
Now, Truck’s gigantic exterior hides a sharp and active mind (especially when it comes to matters of food), and he immediately spotted the hidden premise in this statement.
“You mean to tell me that every other dish on the menu has been vetted as being equal to or better than Mauser’s finest?”
“Yes sir, we think so.”
“Okay, then. Prove it. Bring me one of everything.”
“One of everything, sir?”
“You heard me. Bring me one plate of everything on your menu. I reckon I know my food; let’s see if your quality control is really that good.”
Now, keep this in mind. At the table there were only Truck, Truck’s assistant Trailer (the nickname was irresistible), myself, and a junior trader we all called Pippin (I don’t think anyone knew his real name; he, like Trailer, was there to be seen and not heard). Four people. Meanwhile, the menu had six different cuts of steak alone, ribs, veal, three different chicken dishes, lamb chops, pork loins, sole and salmon filets, burgers, corned beef, and at least twenty different sides. Not to mention ten different desserts.
And Truck wanted it all.
I suppose I should have stopped him, but I had had a few drinks too many by this point, so I’m ashamed to say I cheered him on. Trailer and Pip got into the spirit of things as well. As did the entire wait staff at Ludwig’s. The kitchen moved into high gear, while Truck himself shifted seamlessly into overdrive.
We tried, we really tried. Food kept appearing, and we kept shoveling it down. At one point I vaguely remember trying to add up all the numbers on the right hand side of the menu card; I reached 2000 before it struck me that I wouldn’t be paying for any of this. I promptly threw aside the card and sent the waiter back for more wine.
The next thing I knew, it was morning, and I was staggering back into Sopwith’s offices for another day of wrestling with the markets.
Good thing my investors can’t see me now.
Update, 12 noon: I dialed Truck’s number at lunchtime. Trailer picked up the phone. I said, “God, Trailer, I feel awful today”. Trailer replied, “Yeah, me too. But you know old Truck? He’s sitting next to me eating a steak sandwich for lunch.”
I think I’m going to throw up.
Update, 5pm: It’s the close of business, and we’re up 3% on the day. That’s a pretty phenomenal return, especially considering I was wasted out of my mind for most of the trading session. Hmm, maybe I should go out with Truck more often?
Friday, April 9, 2010
How To Build Spreadsheets
One of my many New Year Resolutions was to be a kinder, gentler hedge fund shark.
As such, I have realized that my last post was unnecessarily grumpy. Instead of merely complaining about the problem of jobseekers’ lack of ninja finance skills, I have decided to contribute to the solution. With this humble aim in mind, I present the second part of my guide to living the hedge fund life: How To Build Spreadsheets.
Building spreadsheets in Excel is an essential skill for any hedge fund manager. Indeed, it is one of the ways we distinguish ourselves from lesser mortals. I often think that you can determine how high up on the totem pole any particular individual or industry is, by looking at how much they use Excel.
Hedge fund managers live and die by Excel; and of course they are at the top. Investment bankers and private-equity types occasionally work in Excel, but they don’t harness its full power; I can’t really condone such sloppiness. Management consultants spend their entire lives building Powerpoint presentations, which tells you all you need to know about how futile the consulting industry is. Programmers use Access, which is I suppose acceptable. One step below them come secretaries and personal assistants, who use Outlook. Finally, lawyers are clearly at the bottom of any social ordering you may care to construct, and it shows: they use Microsoft Word.
But just firing up Excel is not sufficient to make you a hedge fund hotshot. Heck, a mere accountant can open a spreadsheet and add up numbers. No; there are specific principles that you must follow in order to establish your credibility. I call these the Four C’s of Excel Mastery:
1. Control. Ask yourself this basic question: what is the purpose of your spreadsheet? Answer: the purpose of any spreadsheet you build is to confirm and buttress the trading position you already hold (or intend to hold), for the benefit of investors and senior management. Therefore, it is vital that you exercise total control of the output of your program. Anyone can build spreadsheets which give unpredictable (and hence unreliable) answers. But true mastery comes from knowing what your spreadsheet will do, before it does it. This is the first principle: Control.
Control can have different aspects. Elementary control involves delinking inputs and outputs: no matter what the inputs are, the outputs are the same (namely, what you want them to be). More advanced techniques of control involve complex logical pathways which somehow, magically, cancel each other out, so that the spreadsheet as a whole does nothing. Finally, Zen level control involves manipulating irrelevant cells in non-obvious ways to produce seemingly random (but – surprise! – highly desirable) results.
But mere control is not enough; it is useless without its counterpart, which is the next principle:
2. Cripple. If your control is not perfect – if your spreadsheet can be used to generate conclusions contrary to your own, then it is useless and in fact actively dangerous. The best way to ensure that a spreadsheet cannot be used to generate such conclusions is to prevent it from generating any conclusions at all, at least when used by other people. This is the second principle: Cripple.
There are different ways you can cripple your spreadsheet. The most effective way is to not disseminate it at all; instead, distribute hard copies (paper printouts) of all graphs, tables and other data. Printed graphs are unassailable and incontrovertible, and thus a boon for traders.
But occasionally you will run into a paperless-office-enthusiast, who insists on soft copies of all documentation. PDF snapshots of the output screens should do the trick here.
Rarer, but much more irritating, is the keen junior trader or diligent risk manager who wants your actual Excel source. Such people are easy to handle; before mailing them anything, simply delete all macros and paste-special-values everywhere. (If you’re feeling vindictive, paste-special-values in some places but not in others; this is guaranteed to keep the recipient busy for days if not months.)
Finally, rarest of all but also very dangerous, is the competent adversary: someone with Excel skills of his own who insists on a working version. There’s not much you can do here except move on to the next principle:
3. Conceal. If you find yourself compelled to share ‘working’ versions of your spreadsheets, make sure you conceal all the calculations. Bury crucial variables. Hide cells, rows, columns, heck, entire worksheets. Use white-on-white text judiciously. Stick critical calculations into cell HZ65000.
In short, make it as hard as possible for any user other than yourself to figure what’s going on. Remember, if your spreadsheet can be reproduced by a third party, then you have failed.
Now, you may say that I’m carrying things too far. Control, Cripple and Conceal – these principles are all very well, but surely nobody can get away with such blatant tricks forever? Surely even the most blinkered investors or incompetent managers will see through such obvious manipulation? This brings us to the last and most important principle:
4. Convert. Your ultimate aim is to get your target audience to have faith, blind unthinking faith, in the outputs of your spreadsheet. And the key to getting people to believe in something, is getting them to want to believe. In other words, you have to get them on your side before a single regression is run or graph is plotted.
How to do this? Through the trader’s classic weapon: psychology.
If your target is junior to you, overwhelm him with information. Include every possible data point as an input, from the phase of the moon to the GNP of Upper Volta in 1962 (deflated and adjusted for purchasing power parity, naturally). Have 8 different models running simultaneously, with 78 individual parameters to be fine-tuned. Print the results across 5 worksheets, using a random combination of cell values, scatter plots and time series graphs to represent the output data.
Overkill? Quite the contrary. Your target will be so awed by the sheer quantity of work that must (obviously) have gone into the spreadsheet, and so keen to make a good impression on you, that he will fall for your conclusions hook line and sinker. Even if he doesn’t know what those conclusions are, or how you arrived at them.
On the other hand, if your target is senior management, your strategy should be the exact opposite: simplify, simplify, simplify! The less nuanced, the better; senior management do not handle complexity well. I sometimes think the ideal spreadsheet for a CEO is one with a single cell, saying BUY or SELL as the case may be. No other distractions, if you please. CEOs like clarity of thought and directness of action; your job is to provide them with these qualities.
Aesthetics matter as well. If your target is a devotee of the classics, use antique Quotron colors – green numbers on a black background. If your target is a bleeding-edge techie, go for the brushed metal, glass and chrome look. If your target prides himself on being self-educated (not uncommon in a Wall Street where old-school seat-of-the-pants traders are increasingly being rendered obsolete by PhD-wielding droids) then make sure your spreadsheet has a home-baked appearance, with misaligned columns and clumsily-annotated graphs. And so on.
The possibilities for customization are endless. Everything you know about your target should be reflected in the design of your spreadsheet, such that you press all the right buttons. Pander to his prejudices, cheerlead his favorites, blackball his enemies. Your target will be so thrilled to see his own biases confirmed, that he will not dig deeply into your biases, which after all are what your spreadsheet is designed to verify. And then you’re home free.
Truly, Excel is a wonderful tool.
As such, I have realized that my last post was unnecessarily grumpy. Instead of merely complaining about the problem of jobseekers’ lack of ninja finance skills, I have decided to contribute to the solution. With this humble aim in mind, I present the second part of my guide to living the hedge fund life: How To Build Spreadsheets.
Building spreadsheets in Excel is an essential skill for any hedge fund manager. Indeed, it is one of the ways we distinguish ourselves from lesser mortals. I often think that you can determine how high up on the totem pole any particular individual or industry is, by looking at how much they use Excel.
Hedge fund managers live and die by Excel; and of course they are at the top. Investment bankers and private-equity types occasionally work in Excel, but they don’t harness its full power; I can’t really condone such sloppiness. Management consultants spend their entire lives building Powerpoint presentations, which tells you all you need to know about how futile the consulting industry is. Programmers use Access, which is I suppose acceptable. One step below them come secretaries and personal assistants, who use Outlook. Finally, lawyers are clearly at the bottom of any social ordering you may care to construct, and it shows: they use Microsoft Word.
But just firing up Excel is not sufficient to make you a hedge fund hotshot. Heck, a mere accountant can open a spreadsheet and add up numbers. No; there are specific principles that you must follow in order to establish your credibility. I call these the Four C’s of Excel Mastery:
1. Control. Ask yourself this basic question: what is the purpose of your spreadsheet? Answer: the purpose of any spreadsheet you build is to confirm and buttress the trading position you already hold (or intend to hold), for the benefit of investors and senior management. Therefore, it is vital that you exercise total control of the output of your program. Anyone can build spreadsheets which give unpredictable (and hence unreliable) answers. But true mastery comes from knowing what your spreadsheet will do, before it does it. This is the first principle: Control.
Control can have different aspects. Elementary control involves delinking inputs and outputs: no matter what the inputs are, the outputs are the same (namely, what you want them to be). More advanced techniques of control involve complex logical pathways which somehow, magically, cancel each other out, so that the spreadsheet as a whole does nothing. Finally, Zen level control involves manipulating irrelevant cells in non-obvious ways to produce seemingly random (but – surprise! – highly desirable) results.
But mere control is not enough; it is useless without its counterpart, which is the next principle:
2. Cripple. If your control is not perfect – if your spreadsheet can be used to generate conclusions contrary to your own, then it is useless and in fact actively dangerous. The best way to ensure that a spreadsheet cannot be used to generate such conclusions is to prevent it from generating any conclusions at all, at least when used by other people. This is the second principle: Cripple.
There are different ways you can cripple your spreadsheet. The most effective way is to not disseminate it at all; instead, distribute hard copies (paper printouts) of all graphs, tables and other data. Printed graphs are unassailable and incontrovertible, and thus a boon for traders.
But occasionally you will run into a paperless-office-enthusiast, who insists on soft copies of all documentation. PDF snapshots of the output screens should do the trick here.
Rarer, but much more irritating, is the keen junior trader or diligent risk manager who wants your actual Excel source. Such people are easy to handle; before mailing them anything, simply delete all macros and paste-special-values everywhere. (If you’re feeling vindictive, paste-special-values in some places but not in others; this is guaranteed to keep the recipient busy for days if not months.)
Finally, rarest of all but also very dangerous, is the competent adversary: someone with Excel skills of his own who insists on a working version. There’s not much you can do here except move on to the next principle:
3. Conceal. If you find yourself compelled to share ‘working’ versions of your spreadsheets, make sure you conceal all the calculations. Bury crucial variables. Hide cells, rows, columns, heck, entire worksheets. Use white-on-white text judiciously. Stick critical calculations into cell HZ65000.
In short, make it as hard as possible for any user other than yourself to figure what’s going on. Remember, if your spreadsheet can be reproduced by a third party, then you have failed.
Now, you may say that I’m carrying things too far. Control, Cripple and Conceal – these principles are all very well, but surely nobody can get away with such blatant tricks forever? Surely even the most blinkered investors or incompetent managers will see through such obvious manipulation? This brings us to the last and most important principle:
4. Convert. Your ultimate aim is to get your target audience to have faith, blind unthinking faith, in the outputs of your spreadsheet. And the key to getting people to believe in something, is getting them to want to believe. In other words, you have to get them on your side before a single regression is run or graph is plotted.
How to do this? Through the trader’s classic weapon: psychology.
If your target is junior to you, overwhelm him with information. Include every possible data point as an input, from the phase of the moon to the GNP of Upper Volta in 1962 (deflated and adjusted for purchasing power parity, naturally). Have 8 different models running simultaneously, with 78 individual parameters to be fine-tuned. Print the results across 5 worksheets, using a random combination of cell values, scatter plots and time series graphs to represent the output data.
Overkill? Quite the contrary. Your target will be so awed by the sheer quantity of work that must (obviously) have gone into the spreadsheet, and so keen to make a good impression on you, that he will fall for your conclusions hook line and sinker. Even if he doesn’t know what those conclusions are, or how you arrived at them.
On the other hand, if your target is senior management, your strategy should be the exact opposite: simplify, simplify, simplify! The less nuanced, the better; senior management do not handle complexity well. I sometimes think the ideal spreadsheet for a CEO is one with a single cell, saying BUY or SELL as the case may be. No other distractions, if you please. CEOs like clarity of thought and directness of action; your job is to provide them with these qualities.
Aesthetics matter as well. If your target is a devotee of the classics, use antique Quotron colors – green numbers on a black background. If your target is a bleeding-edge techie, go for the brushed metal, glass and chrome look. If your target prides himself on being self-educated (not uncommon in a Wall Street where old-school seat-of-the-pants traders are increasingly being rendered obsolete by PhD-wielding droids) then make sure your spreadsheet has a home-baked appearance, with misaligned columns and clumsily-annotated graphs. And so on.
The possibilities for customization are endless. Everything you know about your target should be reflected in the design of your spreadsheet, such that you press all the right buttons. Pander to his prejudices, cheerlead his favorites, blackball his enemies. Your target will be so thrilled to see his own biases confirmed, that he will not dig deeply into your biases, which after all are what your spreadsheet is designed to verify. And then you’re home free.
Truly, Excel is a wonderful tool.
Tuesday, March 23, 2010
Schooled
Really, what do they teach them in business schools these days?
I have just wasted one whole evening going through various MBA-droid resumes that Jimmy the Kid has seen fit to inflict upon me, as part of his ridiculous scheme to ‘professionalize’ the company. That’s four hours of my life that I will never get back.
The general-management resumes are bad enough. These are dudes with no clue about assets, markets or asset markets; but they have plenty to say about proactively incenting stakeholders to architect transformative strategies which will then harness holistic synergies across our business regime. Or regimen, as the case may be.
At least the general-management resumes are easy to identify and toss into the trashcan. Ah, for the good old days when all MBA resumes were of that ilk! But no. Thanks to the recent bubble in everybody’s favorite industry, an increasing number of B-school weenies have decided to specialize in finance. Heaven help us all.
This new breed of jobseeker doesn’t talk about integrated tactical paradigms. Instead, they’re all about hidden Markov models and affine curves and Gaussian copulas and other strange beasts. But the basic idea is the same: hide your lack of expertise or experience in a flood of jargon.
It never works. Here’s why.
Either your prospective employer understands the jargon himself, or he doesn’t.
If he does understand the jargon, then he also understands the fact that most models are junk. Affine curves are not so fine in practice. Markov isn’t hiding; he’s dead. Gauss too.
If on the other hand he doesn’t understand the jargon, then do you think he’s going to hire you? Why would any manager risk putting himself out of a job by hiring a better-qualified subordinate?
You would think business schools would do a better job of teaching their graduates this elementary political calculation.
Oh, and the saddest part of the whole business? I have gone through over fifty resumes this evening and not one of them – not one! – has mentioned the one technical skill which is truly essential in our industry. I am talking, of course, about Microsoft Excel.
Really, what do they teach them in business schools these days?
I have just wasted one whole evening going through various MBA-droid resumes that Jimmy the Kid has seen fit to inflict upon me, as part of his ridiculous scheme to ‘professionalize’ the company. That’s four hours of my life that I will never get back.
The general-management resumes are bad enough. These are dudes with no clue about assets, markets or asset markets; but they have plenty to say about proactively incenting stakeholders to architect transformative strategies which will then harness holistic synergies across our business regime. Or regimen, as the case may be.
At least the general-management resumes are easy to identify and toss into the trashcan. Ah, for the good old days when all MBA resumes were of that ilk! But no. Thanks to the recent bubble in everybody’s favorite industry, an increasing number of B-school weenies have decided to specialize in finance. Heaven help us all.
This new breed of jobseeker doesn’t talk about integrated tactical paradigms. Instead, they’re all about hidden Markov models and affine curves and Gaussian copulas and other strange beasts. But the basic idea is the same: hide your lack of expertise or experience in a flood of jargon.
It never works. Here’s why.
Either your prospective employer understands the jargon himself, or he doesn’t.
If he does understand the jargon, then he also understands the fact that most models are junk. Affine curves are not so fine in practice. Markov isn’t hiding; he’s dead. Gauss too.
If on the other hand he doesn’t understand the jargon, then do you think he’s going to hire you? Why would any manager risk putting himself out of a job by hiring a better-qualified subordinate?
You would think business schools would do a better job of teaching their graduates this elementary political calculation.
Oh, and the saddest part of the whole business? I have gone through over fifty resumes this evening and not one of them – not one! – has mentioned the one technical skill which is truly essential in our industry. I am talking, of course, about Microsoft Excel.
Really, what do they teach them in business schools these days?
Wednesday, March 17, 2010
A True Maestro
Markets rarely make sense. Last week we had some good economic numbers and stocks went down; this week the economic news is bad and stocks are going up. It’s enough to drive a man to drink.
Funnily enough, the best trader I ever knew was a habitual drunkard. He claimed that he functioned best when his blood alcohol level was above a certain (high-ish) threshold. Having watched his profits mount up over the years, I was hardly in a position to disagree with his methods, and neither was management.
Alan was based in our Tokyo office. He would stagger bleary-eyed into the office at 10am, punt Japanese stocks and bonds till 3pm in a desultory kind of way and then head out to the bar. By 6pm he would be pleasantly sloshed and ready for action, just in time for the London market to open. He would wander back into Sopwith at this time, and start placing trades, drinking all the while. By midnight New York would have come online as well, and Alan would be on a roll. He’d continue trading till 2 or 3am, then close out his positions (usually at a hefty profit) and totter home.
Alan was a superb trader. Apart from one infamous occasion where he actually passed out and hence forgot to unwind one of his trades, he almost never lost money. (He told me later that the passing out was because a hated cross-firm rival had convinced him to mix his drinks, which he normally never did. “Stick to scotch and you’ll be fine”, were his words of wisdom to me on the occasion). Short term, long term, stocks, bonds, currencies, commodities – they were all grist to Alan’s mill. I think his drunkenness allowed him to understand the market’s irrational mood swings much better than could sober rationalists like me.
And mood swings there were in plenty. Like all the best traders, Alan was notorious for changing his mind on a dime. I remember a junior trader sidling up to him one day and timidly asking him for his opinion on the oil market. Alan said, (and I paraphrase only slightly), “Up. It’s going up. Up up up. Oil’s going super high. No question about it. Yup. Up. That’s the word. Up. Buy all you can.” At this point, Alan got up from his chair and broke into an impromptu jig, with both arms pointing skyward.
Convinced, the junior trader went out and bought oil. Over the next few days, oil crashed by 15%. Aghast, he went back to Alan, and said accusingly, “I thought you said oil was going up!” Alan blinked, and replied, “Did I? Hmm. I changed my mind. Actually, I went and sold oil. Made about 15% too. That was a nice trade. You should have sold some oil too.”
The hapless junior trader, of course, was shunted to our Moldovan pension desk or some such backwater, while Alan banked a hefty bonus for his troubles.
I still remember Alan’s “interview” for a position at Sopwith. Now, you have to realize that when a star trader like Alan considers joining a particular firm, the interview is a mutual process: we have to like him, but equally important, he has to like us. After all there are plenty of other firms that would leap at the chance to hire an established money-maker. So senior management pulled out all the stops in convincing Alan that Sopwith was where he was meant to be. Their ace in the hole was yours truly: I was trotted out as an example of Sopwith’s forward-thinking, technologically-advanced, analytically-sophisticated, quantitatively-superior investment style.
We went out to dinner at a nice (read: expensive) French restaurant, and talked high finance with Jimmy the Kid, Professor Fortescue and our head of IT, the Redneck Geek. Alan asked me what I thought about long-dated European bonds; I told him that it all depended on events in the Danish mortgage market. He nodded sagely and said, yes, that’s a very perceptive analysis. I asked him what he thought about the New Zealand dollar; he said it all depended on the Japanese domestic savings rate. I nodded sagely and said, yes, I agree with you completely.
Later I found myself standing next to him in the men’s room. I turned to him and said, do you really believe what you said about the Kiwi and Mrs Watanabe? He grinned and said, no, not really; it just seemed like something to say, to pass the time. He then asked me, do you really believe the Danes matter, outside of Legoland? I grinned and said, nope, it’s just that Danish mortgage bonds are the flavor of the month with various investment bank analysts. He grinned even wider, and asked me, so, what’s it like, working at Sopwith? I said, to be honest, it’s not bad. Just play your cards right and you can do whatever the hell you want. I certainly do. All that tech mumbo-jumbo is just cover; I’m having a whale of a time.
It was, if I say so myself, a beautiful sell. Alan joined us a few days later and wasted no time in hitting the cover off the ball. For a few glorious months, Sopwith’s investors were treated to the sight of a trader who actually made money for them.
Of course, it couldn’t last.
Contrary to what you might think, Alan did not go down with all guns firing, losing hundreds of millions of dollars in a vodka-fueled blaze of glory. Instead, he was done in by that old bugbear, office politics. Alan had the temerity to suggest to Jimmy the Kid that he, Alan, was a better trader than the Big Boss himself. Jimmy, who didn’t like Alan, promptly reported this conversation to the Big Boss. And from then on Alan’s days at the firm were numbered. I was sad to see him go.
After leaving Sopwith, Alan spent a few years shuttling between various investment banks. Then the financial crisis hit, and Alan was in his element. He made a truckload of money shorting the housing market before the crash. Then, typically, he turned on a dime and made a boatload of money going the other way, riding the post-crash rally. It was a performance worthy of a maestro; I often wonder what would have happened if Alan had been in charge of the Federal Reserve instead of his namesake.
Ah well, a man can dream, can’t he?
Funnily enough, the best trader I ever knew was a habitual drunkard. He claimed that he functioned best when his blood alcohol level was above a certain (high-ish) threshold. Having watched his profits mount up over the years, I was hardly in a position to disagree with his methods, and neither was management.
Alan was based in our Tokyo office. He would stagger bleary-eyed into the office at 10am, punt Japanese stocks and bonds till 3pm in a desultory kind of way and then head out to the bar. By 6pm he would be pleasantly sloshed and ready for action, just in time for the London market to open. He would wander back into Sopwith at this time, and start placing trades, drinking all the while. By midnight New York would have come online as well, and Alan would be on a roll. He’d continue trading till 2 or 3am, then close out his positions (usually at a hefty profit) and totter home.
Alan was a superb trader. Apart from one infamous occasion where he actually passed out and hence forgot to unwind one of his trades, he almost never lost money. (He told me later that the passing out was because a hated cross-firm rival had convinced him to mix his drinks, which he normally never did. “Stick to scotch and you’ll be fine”, were his words of wisdom to me on the occasion). Short term, long term, stocks, bonds, currencies, commodities – they were all grist to Alan’s mill. I think his drunkenness allowed him to understand the market’s irrational mood swings much better than could sober rationalists like me.
And mood swings there were in plenty. Like all the best traders, Alan was notorious for changing his mind on a dime. I remember a junior trader sidling up to him one day and timidly asking him for his opinion on the oil market. Alan said, (and I paraphrase only slightly), “Up. It’s going up. Up up up. Oil’s going super high. No question about it. Yup. Up. That’s the word. Up. Buy all you can.” At this point, Alan got up from his chair and broke into an impromptu jig, with both arms pointing skyward.
Convinced, the junior trader went out and bought oil. Over the next few days, oil crashed by 15%. Aghast, he went back to Alan, and said accusingly, “I thought you said oil was going up!” Alan blinked, and replied, “Did I? Hmm. I changed my mind. Actually, I went and sold oil. Made about 15% too. That was a nice trade. You should have sold some oil too.”
The hapless junior trader, of course, was shunted to our Moldovan pension desk or some such backwater, while Alan banked a hefty bonus for his troubles.
I still remember Alan’s “interview” for a position at Sopwith. Now, you have to realize that when a star trader like Alan considers joining a particular firm, the interview is a mutual process: we have to like him, but equally important, he has to like us. After all there are plenty of other firms that would leap at the chance to hire an established money-maker. So senior management pulled out all the stops in convincing Alan that Sopwith was where he was meant to be. Their ace in the hole was yours truly: I was trotted out as an example of Sopwith’s forward-thinking, technologically-advanced, analytically-sophisticated, quantitatively-superior investment style.
We went out to dinner at a nice (read: expensive) French restaurant, and talked high finance with Jimmy the Kid, Professor Fortescue and our head of IT, the Redneck Geek. Alan asked me what I thought about long-dated European bonds; I told him that it all depended on events in the Danish mortgage market. He nodded sagely and said, yes, that’s a very perceptive analysis. I asked him what he thought about the New Zealand dollar; he said it all depended on the Japanese domestic savings rate. I nodded sagely and said, yes, I agree with you completely.
Later I found myself standing next to him in the men’s room. I turned to him and said, do you really believe what you said about the Kiwi and Mrs Watanabe? He grinned and said, no, not really; it just seemed like something to say, to pass the time. He then asked me, do you really believe the Danes matter, outside of Legoland? I grinned and said, nope, it’s just that Danish mortgage bonds are the flavor of the month with various investment bank analysts. He grinned even wider, and asked me, so, what’s it like, working at Sopwith? I said, to be honest, it’s not bad. Just play your cards right and you can do whatever the hell you want. I certainly do. All that tech mumbo-jumbo is just cover; I’m having a whale of a time.
It was, if I say so myself, a beautiful sell. Alan joined us a few days later and wasted no time in hitting the cover off the ball. For a few glorious months, Sopwith’s investors were treated to the sight of a trader who actually made money for them.
Of course, it couldn’t last.
Contrary to what you might think, Alan did not go down with all guns firing, losing hundreds of millions of dollars in a vodka-fueled blaze of glory. Instead, he was done in by that old bugbear, office politics. Alan had the temerity to suggest to Jimmy the Kid that he, Alan, was a better trader than the Big Boss himself. Jimmy, who didn’t like Alan, promptly reported this conversation to the Big Boss. And from then on Alan’s days at the firm were numbered. I was sad to see him go.
After leaving Sopwith, Alan spent a few years shuttling between various investment banks. Then the financial crisis hit, and Alan was in his element. He made a truckload of money shorting the housing market before the crash. Then, typically, he turned on a dime and made a boatload of money going the other way, riding the post-crash rally. It was a performance worthy of a maestro; I often wonder what would have happened if Alan had been in charge of the Federal Reserve instead of his namesake.
Ah well, a man can dream, can’t he?
Friday, March 12, 2010
B-School Blues
Jimmy wants to hire an MBA.
He read in the Economist that thanks to the recession, business school enrolments are up and recruitment is down. He thinks that this means he can hire an MBA on the cheap.
This is a typical piece of Jimmy logic. He starts with an established fact, puts a unique spin on it, and reaches a conclusion that dovetails with his own wishful thinking. Of course, his conclusion is nonsense. A glut of supply in the MBA market simply means that the pool of available recruits is likely to be of a much lower quality, on average, than in previous years. And if we offer a slave wage, we are guaranteeing that we will get only low-quality job applicants.
Besides which, we are a trading firm. Our very existence depends on our ability to find value and acquire it at a low price; or to find excess and sell it at the top. There is no way we should be hiring people who think it makes economic sense to invest two years and two hundred thousand dollars on a content-free degree in the middle of a recession.
But this argument won’t cut any ice. Jimmy has had enough of the motley mix of math, science, econ and finance geeks that make up our workforce (with degrees ranging from community college to Ivy League Ph.D.s). He thinks this variety of experience is messy.
And he can’t understand what these rocket scientists are doing anyway; therefore it must not be very useful. No; it’s time for a ‘professional’ workforce, and that means hiring MBAs.
Actually I can’t say I’m surprised. MBAs are shallow, self-congratulatory, pompous and conformist. Just like Jimmy in fact.
Still, there’s one saving grace. Jimmy has put me in charge of the hiring committee. This will be fun.
Postscript: Later -- much later! -- I found out the truth: this was all done in order to impress the alumni relations committee at Jimmy’s alma mater. Jimmy wanted nothing more than to be able to swagger back into his old school, disbursing largesse in the form of a plum hedge fund job. Small man, small victories.
He read in the Economist that thanks to the recession, business school enrolments are up and recruitment is down. He thinks that this means he can hire an MBA on the cheap.
This is a typical piece of Jimmy logic. He starts with an established fact, puts a unique spin on it, and reaches a conclusion that dovetails with his own wishful thinking. Of course, his conclusion is nonsense. A glut of supply in the MBA market simply means that the pool of available recruits is likely to be of a much lower quality, on average, than in previous years. And if we offer a slave wage, we are guaranteeing that we will get only low-quality job applicants.
Besides which, we are a trading firm. Our very existence depends on our ability to find value and acquire it at a low price; or to find excess and sell it at the top. There is no way we should be hiring people who think it makes economic sense to invest two years and two hundred thousand dollars on a content-free degree in the middle of a recession.
But this argument won’t cut any ice. Jimmy has had enough of the motley mix of math, science, econ and finance geeks that make up our workforce (with degrees ranging from community college to Ivy League Ph.D.s). He thinks this variety of experience is messy.
And he can’t understand what these rocket scientists are doing anyway; therefore it must not be very useful. No; it’s time for a ‘professional’ workforce, and that means hiring MBAs.
Actually I can’t say I’m surprised. MBAs are shallow, self-congratulatory, pompous and conformist. Just like Jimmy in fact.
Still, there’s one saving grace. Jimmy has put me in charge of the hiring committee. This will be fun.
Postscript: Later -- much later! -- I found out the truth: this was all done in order to impress the alumni relations committee at Jimmy’s alma mater. Jimmy wanted nothing more than to be able to swagger back into his old school, disbursing largesse in the form of a plum hedge fund job. Small man, small victories.
Tuesday, March 9, 2010
Broke and Broker
There is a pecking order on Wall Street.
We hedge fund dudes are, of course, at the top of the totem pole. Slightly below us (because they have to work much longer hours, the poor slobs) sit the private equity gang. Below them come the bulge bracket investment banks, in rigidly defined order: Goldman leading the way, Merrill bringing up the rear. Lower yet are the money center banks (snigger). And then, right at the bottom, is that vast and unexplored swathe of Middle America known to us only as ‘retail’.
Somewhere in the middle of this hierarchy one can find a curious tribe: the specialist brokers. These guys service, and simultaneously compete with, the market-making desks of various investment banks. It’s a thankless job, with razor-thin margins, intense production pressure and negligible job security.
Brokers typically have none of the advantages (capital base, risk appetite, cross-platform networks) of their investment-banking competition. So they have to rely on ever-more desperate measures to drum up business. And what, I hear you ask, might those measures be?
The answer is obvious: freebies that are even more lavish than those disbursed by their dealer counterparts. I have lost count of the number of gewgaws I have received from my broker friends: everything from gym bags and squeeze balls to golf trips toting free Blackberries.
(Aside: one particular broker even paid my monthly phone bill for the aforementioned free Blackberry. I think the rationale was that I could use the device to execute trades – not just phone them in, actually execute on the broker’s main electronic platform – and hence it was a legitimate business expense. Hey, if a broker can set up a special execution keyboard with a dedicated line connecting me to their servers at their expense, why not do the same thing wirelessly?
As it happens I don’t think I ever made a call, let alone executed a trade, on the Blackberry – I never could get used to its bulky form factor. I lost the phone when moving countries a few years ago, but I never informed the broker, and they never asked. For all I know they’re still paying the monthly bill. )
But the freebies were only part of the deal. The other part, inevitably, involved dinners on a scale that would put Roman emperors to shame. It’s no coincidence that every single broker salesman I know is morbidly obese. I don’t mean common-or-garden-variety overweight, I mean seriously, debilitatingly, grossly fat. Eating New York sized steaks four nights a week will do that to you.
Consider my broker friend Bill. Bill was the Platonic ideal of a frat boy: easygoing, friendly, not overly burdened with intellect, happy to have a good time, all the time. He liked nothing better than to head out, sink a few beers, try (and fail) to pick up any cute female bartenders, then drown his sorrows in chicken wings (or, if he was feeling ritzy, barbecue ribs). Bill was also fairly athletic in his youth: he played football for a well-known southern school.
Last I saw him, Bill was nearing 350 lbs, and he’s not more than 5’7”. He told me he was having difficulty sleeping at night because of stress- and weight-related breathing problems. He then suggested we go out to dinner at Babbo.
The amazing thing is that Bill was convinced he was living the American Dream. He was young, unattached, and making six figures in Manhattan: what more could a good ole boy want? That’s the essential perversity of Wall Street: it doesn’t just chew up your life (and other people’s money); it chews up your life (and other people’s money) and convinces you (and the aforementioned other people) that you wouldn’t have it any other way. Amazing, and sad.
(Postscript, September 2005: a miracle! Bill escaped the living death of being a broker salesman, and got a job on the buy side. Unfortunately, said job was as a mortgage trader. I heard the news and immediately doubled my short in TOL. What can I say, I’m a hedge fund dude. )
We hedge fund dudes are, of course, at the top of the totem pole. Slightly below us (because they have to work much longer hours, the poor slobs) sit the private equity gang. Below them come the bulge bracket investment banks, in rigidly defined order: Goldman leading the way, Merrill bringing up the rear. Lower yet are the money center banks (snigger). And then, right at the bottom, is that vast and unexplored swathe of Middle America known to us only as ‘retail’.
Somewhere in the middle of this hierarchy one can find a curious tribe: the specialist brokers. These guys service, and simultaneously compete with, the market-making desks of various investment banks. It’s a thankless job, with razor-thin margins, intense production pressure and negligible job security.
Brokers typically have none of the advantages (capital base, risk appetite, cross-platform networks) of their investment-banking competition. So they have to rely on ever-more desperate measures to drum up business. And what, I hear you ask, might those measures be?
The answer is obvious: freebies that are even more lavish than those disbursed by their dealer counterparts. I have lost count of the number of gewgaws I have received from my broker friends: everything from gym bags and squeeze balls to golf trips toting free Blackberries.
(Aside: one particular broker even paid my monthly phone bill for the aforementioned free Blackberry. I think the rationale was that I could use the device to execute trades – not just phone them in, actually execute on the broker’s main electronic platform – and hence it was a legitimate business expense. Hey, if a broker can set up a special execution keyboard with a dedicated line connecting me to their servers at their expense, why not do the same thing wirelessly?
As it happens I don’t think I ever made a call, let alone executed a trade, on the Blackberry – I never could get used to its bulky form factor. I lost the phone when moving countries a few years ago, but I never informed the broker, and they never asked. For all I know they’re still paying the monthly bill. )
But the freebies were only part of the deal. The other part, inevitably, involved dinners on a scale that would put Roman emperors to shame. It’s no coincidence that every single broker salesman I know is morbidly obese. I don’t mean common-or-garden-variety overweight, I mean seriously, debilitatingly, grossly fat. Eating New York sized steaks four nights a week will do that to you.
Consider my broker friend Bill. Bill was the Platonic ideal of a frat boy: easygoing, friendly, not overly burdened with intellect, happy to have a good time, all the time. He liked nothing better than to head out, sink a few beers, try (and fail) to pick up any cute female bartenders, then drown his sorrows in chicken wings (or, if he was feeling ritzy, barbecue ribs). Bill was also fairly athletic in his youth: he played football for a well-known southern school.
Last I saw him, Bill was nearing 350 lbs, and he’s not more than 5’7”. He told me he was having difficulty sleeping at night because of stress- and weight-related breathing problems. He then suggested we go out to dinner at Babbo.
The amazing thing is that Bill was convinced he was living the American Dream. He was young, unattached, and making six figures in Manhattan: what more could a good ole boy want? That’s the essential perversity of Wall Street: it doesn’t just chew up your life (and other people’s money); it chews up your life (and other people’s money) and convinces you (and the aforementioned other people) that you wouldn’t have it any other way. Amazing, and sad.
(Postscript, September 2005: a miracle! Bill escaped the living death of being a broker salesman, and got a job on the buy side. Unfortunately, said job was as a mortgage trader. I heard the news and immediately doubled my short in TOL. What can I say, I’m a hedge fund dude. )
Tuesday, March 2, 2010
Flying Blind
The core of Sopwith’s financial analytics is a system called RADAR. Once upon a time, RADAR was an elegant, efficient, robust and powerful system with a single well-defined task: to produce live risk-management reports (the very name RADAR stands for “Real-time Aggregation, Decomposition and Analysis of Risk”). But over the years, users have requested myriads of extensions to the original functionality, and programmers have responded with a multitude of quick fixes, each one uglier than the last. Today’s version of RADAR is a baroque monstrosity, a bloated mess of code that churns out dozens of wildly disparate reports every day: profit and loss accounting, risk management analysis, cash-flow and settlements information, trade valuation and hedge calculation, financing and liquidity projections, everything but the weather forecast. It’s a miracle that RADAR runs at all, but run it does.
Unfortunately, all the many hacks cobbled onto RADAR over the years have failed to address a fundamental weakness in its structure: its human interface. RADAR was originally designed to be used by programmers, and for good reason: its hideous complexity requires a huge amount of effort and technical skill to understand and manage. But any programmer with that amount of skill would simply hate working on RADAR: it’s a tedious, repetitive and utterly mind-numbing job. In point of fact, every single programmer we’ve assigned to RADAR has either quit or asked for a transfer within six months of the assignment. Even the person who created the system, the semi-mythical Original Programmer, chose to gracefully retire from the finance industry when faced with the alternative prospect of having to maintain RADAR indefinitely.
A rational company would have tried to find a long-term solution to this problem: either by redesigning RADAR so that it was less tedious for programmers to work with, or by simplifying RADAR so that it could be used directly by accountants and back-office staff, or by looking for (and paying) a programmer who could tolerate working with the existing system, or, as a last resort, by junking RADAR wholesale and outsourcing all our analytic needs. But Sopwith is not, and has never been, a rational company. Management decided that if six months was the upper limit for a programmer to work with RADAR, then that was that: we would simply higher a new programmer every six months (give or take a few) to fill the gap.
Enter the Sprouts. Encouraged by the success of an early hire from a famous engineering school, Sopwith instituted a policy of hiring a newly-minted engineer every year. Typically, this engineer would spend his first six months at the firm learning his way around RADAR, his second six months running and maintaining it, and his third six months passing his knowledge down to the next hire. After that he would be at a loose end, but since Sopwith was culturally incapable of firing anyone (other than the occasional trader), a job would be found for him: quantitative research, analytics, risk management, trading, somewhere. At one stage last year we had three junior traders, a junior risk manager and two junior quants, all spinning their wheels in the service of the firm, with no functional senior traders, risk managers or quants to guide them.
The current set of Sprouts, the fifth generation since fund inception, is in a bad way. By unhappy coincidence, the three previous Sprouts quit Sopwith en masse a few months ago, leaving the latest recruits with no immediate supervisors to learn from. And our IT department is currently without a head, or indeed, any senior personnel at all. (This is not unusual for the IT department. Although management is admittedly a rare commodity throughout the firm, the IT department takes the scarcity to extreme levels even by Sopwith standards).
This leaves the junior Sprouts in a vacuum. There’s no one to teach them the basics of analytical finance, no one to allocate their time and effort, and (most importantly) no one to run interference between them and the rest of the company. As a result of the former circumstance they have to figure RADAR out for themselves, almost from first principles; this is an incredibly painful and time-consuming process. And the latter circumstance means that they’re always being interrupted by users who need minor fixes to their workstations, or their email, or their printers, or other trivial matters, leaving the Sprouts no time to embark on any sort of serious education or project work.
To their credit, the Sprouts make the best of a bad job diligently and uncomplainingly – they’re still too young to have become apathetic. Sprout One is the older and more experienced of the pair; he has almost a full year behind him, which means he knows (barely) what a derivative is. Sprout Two has just finished his seventh month at Sopwith, and hence has no such pretensions to knowledge. Between the two of them, and aided by a hefty amount of sheer doggedness, they manage to satisfy all the trivial user requests while somehow coaxing RADAR to run every day.
But it’s a balance poised on the edge of a knife. Every day brings a new crisis, and eventually the situation gets so bad that the Original Programmer is called out of retirement two continents away, and asked to teach the Sprouts how RADAR actually works. He gives it a shot, but learns quickly that getting two clueless newbies to understand a complex system long-distance is a losing proposition; instead of teaching the Sprouts anything, he simply fixes each day’s problems by himself.
Consider, if you will, the implications of this state of affairs. We have the very latest in risk management technology, capable of analyzing complex portfolio movements to immense (albeit spurious) precision. We have hundreds of thousands of dollars’ worth of hardware, and have invested millions more in our software. We have upwards of a hundred employees, all utterly dependent on their spreadsheets, their email, their web apps, their databases. And this entire edifice is being manned by two college graduates with a grand total of eighteen months of experience between them. Yet nobody seems to think this is a problem!
Our risk manager floats merrily along in his cloud of Olympian detachment: as long as the clauses in the official risk management policy are being followed to the letter he couldn’t care less if our IT department were run by a poodle. Our traders recognize that a new Dark Age is setting in, and have replaced their quantitative arbitrage strategies with simpler, more primitive trades: these days they merely make wild bets on the market going up or down, based on nothing more sophisticated than gut feeling. Our back office staff muddle along as they’ve always done; IT has never really done anything for them, so the lack of an IT department doesn’t faze them in the least. The Big Boss knows that the state of affairs is farcical, but he just got married to a model twenty years his junior, and he can’t be bothered to get involved. His emissary Jimmy the Kid is dimly aware that there’s a problem, but since he lacks the competence to solve it he’s ignoring it, in the hope that it’ll go away.
The only people capable of appreciating the magnitude of the danger and caring enough to do something about it are our investors. But in a truly delicious piece of irony, they remain blissfully unaware of the entire mess. These are people who stay up late at night obsessing about various real and imagined risks to our portfolio, who call us thrice a day to chat about every unfounded rumor that’s making the rounds, who think every dollar lost is a catastrophe beyond compare. Yet the biggest risk of all, and the one closest to home, is ignored.
I feel almost sorry for them.
Unfortunately, all the many hacks cobbled onto RADAR over the years have failed to address a fundamental weakness in its structure: its human interface. RADAR was originally designed to be used by programmers, and for good reason: its hideous complexity requires a huge amount of effort and technical skill to understand and manage. But any programmer with that amount of skill would simply hate working on RADAR: it’s a tedious, repetitive and utterly mind-numbing job. In point of fact, every single programmer we’ve assigned to RADAR has either quit or asked for a transfer within six months of the assignment. Even the person who created the system, the semi-mythical Original Programmer, chose to gracefully retire from the finance industry when faced with the alternative prospect of having to maintain RADAR indefinitely.
A rational company would have tried to find a long-term solution to this problem: either by redesigning RADAR so that it was less tedious for programmers to work with, or by simplifying RADAR so that it could be used directly by accountants and back-office staff, or by looking for (and paying) a programmer who could tolerate working with the existing system, or, as a last resort, by junking RADAR wholesale and outsourcing all our analytic needs. But Sopwith is not, and has never been, a rational company. Management decided that if six months was the upper limit for a programmer to work with RADAR, then that was that: we would simply higher a new programmer every six months (give or take a few) to fill the gap.
Enter the Sprouts. Encouraged by the success of an early hire from a famous engineering school, Sopwith instituted a policy of hiring a newly-minted engineer every year. Typically, this engineer would spend his first six months at the firm learning his way around RADAR, his second six months running and maintaining it, and his third six months passing his knowledge down to the next hire. After that he would be at a loose end, but since Sopwith was culturally incapable of firing anyone (other than the occasional trader), a job would be found for him: quantitative research, analytics, risk management, trading, somewhere. At one stage last year we had three junior traders, a junior risk manager and two junior quants, all spinning their wheels in the service of the firm, with no functional senior traders, risk managers or quants to guide them.
The current set of Sprouts, the fifth generation since fund inception, is in a bad way. By unhappy coincidence, the three previous Sprouts quit Sopwith en masse a few months ago, leaving the latest recruits with no immediate supervisors to learn from. And our IT department is currently without a head, or indeed, any senior personnel at all. (This is not unusual for the IT department. Although management is admittedly a rare commodity throughout the firm, the IT department takes the scarcity to extreme levels even by Sopwith standards).
This leaves the junior Sprouts in a vacuum. There’s no one to teach them the basics of analytical finance, no one to allocate their time and effort, and (most importantly) no one to run interference between them and the rest of the company. As a result of the former circumstance they have to figure RADAR out for themselves, almost from first principles; this is an incredibly painful and time-consuming process. And the latter circumstance means that they’re always being interrupted by users who need minor fixes to their workstations, or their email, or their printers, or other trivial matters, leaving the Sprouts no time to embark on any sort of serious education or project work.
To their credit, the Sprouts make the best of a bad job diligently and uncomplainingly – they’re still too young to have become apathetic. Sprout One is the older and more experienced of the pair; he has almost a full year behind him, which means he knows (barely) what a derivative is. Sprout Two has just finished his seventh month at Sopwith, and hence has no such pretensions to knowledge. Between the two of them, and aided by a hefty amount of sheer doggedness, they manage to satisfy all the trivial user requests while somehow coaxing RADAR to run every day.
But it’s a balance poised on the edge of a knife. Every day brings a new crisis, and eventually the situation gets so bad that the Original Programmer is called out of retirement two continents away, and asked to teach the Sprouts how RADAR actually works. He gives it a shot, but learns quickly that getting two clueless newbies to understand a complex system long-distance is a losing proposition; instead of teaching the Sprouts anything, he simply fixes each day’s problems by himself.
Consider, if you will, the implications of this state of affairs. We have the very latest in risk management technology, capable of analyzing complex portfolio movements to immense (albeit spurious) precision. We have hundreds of thousands of dollars’ worth of hardware, and have invested millions more in our software. We have upwards of a hundred employees, all utterly dependent on their spreadsheets, their email, their web apps, their databases. And this entire edifice is being manned by two college graduates with a grand total of eighteen months of experience between them. Yet nobody seems to think this is a problem!
Our risk manager floats merrily along in his cloud of Olympian detachment: as long as the clauses in the official risk management policy are being followed to the letter he couldn’t care less if our IT department were run by a poodle. Our traders recognize that a new Dark Age is setting in, and have replaced their quantitative arbitrage strategies with simpler, more primitive trades: these days they merely make wild bets on the market going up or down, based on nothing more sophisticated than gut feeling. Our back office staff muddle along as they’ve always done; IT has never really done anything for them, so the lack of an IT department doesn’t faze them in the least. The Big Boss knows that the state of affairs is farcical, but he just got married to a model twenty years his junior, and he can’t be bothered to get involved. His emissary Jimmy the Kid is dimly aware that there’s a problem, but since he lacks the competence to solve it he’s ignoring it, in the hope that it’ll go away.
The only people capable of appreciating the magnitude of the danger and caring enough to do something about it are our investors. But in a truly delicious piece of irony, they remain blissfully unaware of the entire mess. These are people who stay up late at night obsessing about various real and imagined risks to our portfolio, who call us thrice a day to chat about every unfounded rumor that’s making the rounds, who think every dollar lost is a catastrophe beyond compare. Yet the biggest risk of all, and the one closest to home, is ignored.
I feel almost sorry for them.
Thursday, February 25, 2010
Trading Up
I pride myself on my cynicism. There is never a situation so messed up that I can’t shrug my world-weary shoulders and say “Well, what did you expect?” Every year Wall Street engineers some scandal of monstrous proportions; every year I refuse to be outraged. I expect the worst, and, I have to say, usually the worst is precisely what transpires.
But now I have met my match. Nothing, nothing I have seen on Wall Street begins to compare with the toxic mix of incompetence, arrogance and self-generated bad luck that follows Jimmy the Kid everywhere he goes. In the past I occasionally wondered if Sopwith was truly the basket case it appeared to be; Jimmy’s promotion has removed all my doubts.
Jimmy is now the titular head of the trading desk. He is also, without exception, the most abject trader I have ever met. He is the worst kind of sucker: he falls for everything. When the market is booming he gets greedy and buys right at the top. When the market crashes he panics and sells right at the bottom. He falls for every rumor making the rounds, he is a sucker for every con job, he is a walking mark. He prefers gossip to facts, handwaving to analysis, ‘gut feeling’ to intellectual rigor. And he intends to remake the trading desk in his image.
What’s more, Jimmy has reserved a special place in his grandiose plans for me. You see, I was one of the few people to give him the time of day back when he was a grub. (Most traders think that analysts are only good for fetching coffee and sandwiches; at the risk of sounding elitist, I have to confess that most traders are correct in this view). As a result he has decided that he will look out for me. Jimmy has appointed himself my mentor.
Am I depressed? Oh no, quite the contrary. Jimmy’s promotion is wonderful news for me.
Say what you will about our previous head honchos – Olympian, detached, aloof, unmotivated – they at least had the virtue of being good at their jobs. So I too had to be good at my job. Jimmy on the other hand doesn’t have a clue, so I can get away with anything.
It’s just a question of knowing how to play him. I know how to inflame his greed, how to amplify his fear, how to massage his ego, how to feed his lust for power. In addition, I flatter him shamelessly – I ask for his advice, I hang on to his words of wisdom, I praise his every move. I am Jimmy’s number one fan.
As a result, I can get Jimmy to do whatever I want.
Some of the other traders couldn’t hack this young whippersnapper telling them what to do; they’d rather quit than report to Jimmy. Fortunately I have no ego; all I care about is taking risk and making money. Jimmy is my man.
Let the good times roll!
But now I have met my match. Nothing, nothing I have seen on Wall Street begins to compare with the toxic mix of incompetence, arrogance and self-generated bad luck that follows Jimmy the Kid everywhere he goes. In the past I occasionally wondered if Sopwith was truly the basket case it appeared to be; Jimmy’s promotion has removed all my doubts.
Jimmy is now the titular head of the trading desk. He is also, without exception, the most abject trader I have ever met. He is the worst kind of sucker: he falls for everything. When the market is booming he gets greedy and buys right at the top. When the market crashes he panics and sells right at the bottom. He falls for every rumor making the rounds, he is a sucker for every con job, he is a walking mark. He prefers gossip to facts, handwaving to analysis, ‘gut feeling’ to intellectual rigor. And he intends to remake the trading desk in his image.
What’s more, Jimmy has reserved a special place in his grandiose plans for me. You see, I was one of the few people to give him the time of day back when he was a grub. (Most traders think that analysts are only good for fetching coffee and sandwiches; at the risk of sounding elitist, I have to confess that most traders are correct in this view). As a result he has decided that he will look out for me. Jimmy has appointed himself my mentor.
Am I depressed? Oh no, quite the contrary. Jimmy’s promotion is wonderful news for me.
Say what you will about our previous head honchos – Olympian, detached, aloof, unmotivated – they at least had the virtue of being good at their jobs. So I too had to be good at my job. Jimmy on the other hand doesn’t have a clue, so I can get away with anything.
It’s just a question of knowing how to play him. I know how to inflame his greed, how to amplify his fear, how to massage his ego, how to feed his lust for power. In addition, I flatter him shamelessly – I ask for his advice, I hang on to his words of wisdom, I praise his every move. I am Jimmy’s number one fan.
As a result, I can get Jimmy to do whatever I want.
Some of the other traders couldn’t hack this young whippersnapper telling them what to do; they’d rather quit than report to Jimmy. Fortunately I have no ego; all I care about is taking risk and making money. Jimmy is my man.
Let the good times roll!
Monday, February 22, 2010
How To Drop Names
I realize that not every visitor to this blog comes here for entertainment. Yes, bashing investors, colleagues and rivals is fun, but I like to think that this blog serves a serious purpose as well. Many of my most devoted readers are, in fact, young hedge fund types who aspire to my current lofty heights.
For these readers, and as a public service, I have decided to introduce a new feature: an occasional “how-to” column. This column will reveal everything you need to know about slithering up the greasy pole that is the financial industry.
Today’s topic: how to drop names.
(What, you thought I was going to teach you some actual finance? Ha ha, don’t make me laugh. Knowledge of actual finance is highly overrated in this game. Don’t waste your time and mine trying to learn what a bond is; it’s just not worth it.)
The ability to drop names strategically is a key element of Wall Street success. A good name-dropper will be perceived as a person of prestige and influence; and from perception to reality is but a short step. But as with all other skills, it needs to be practiced and perfected. Dropping names badly can often be worse than not dropping them at all.
There are various techniques that one can use to drop names; here is a brief taxonomy:
1. The Pathetic. I once had lunch with a banker who tried to convince me that Sopwith should open a prime brokerage account with his (second-tier) firm. He went out of his way to mention that he had once worked with Jon Corzine: “Yes, Jon and I traded the bond basis back in the 80s”. My unspoken reaction? “Dude, that’s pathetic. By your own admission you and Corzine were in the exact same position 30 years ago. And now look at you! He became head of Goldman Sachs and then governor of New Jersey. You on the other hand are trying to sell a second-rate product to a third-rate firm, for peanuts in commissions. You should be ashamed of yourself.”
Needless to say, I do not recommend the Pathetic name-drop technique.
2. The Aggressive. Some second-raters recognize, dimly, that comparing themselves to shining stars is not the smartest strategy. So they leaven their comparison with well-chosen barbs aimed at these shining stars. For example: “John Paulson? Yeah, I worked with John for a few years. I always thought he was more lucky than smart.”
This strategy can be effective if the listener shares the name-dropper’s inferiority complex or otherwise has a chip on his shoulder. There are lots of Wall Street types who have precisely this mentality: wannabe players who love nothing more than to see celebrity figures being brought down to earth. So the odds of success are high. But the Aggressive name-drop technique can backfire spectacularly, especially if the shining star being dissed is self-evidently not a chump (e.g. John Paulson). For this reason I do not recommend this technique either.
3. The Mutually Respectful. More effective than fawning over a superstar (a la the Pathetic) or badmouthing him (a la the Aggressive), is simply treating him as an equal – and implying that he treats you as an equal. This has to be done subtly for maximum effect: “Have you read Bill Gross’s latest column? He thinks stocks are going up. It’s funny, I’ve always liked Bill, but his trading advice has never worked for me. I guess my advice has never worked for him either. Oh well, to each his own.” Notice how by disagreeing with Bill Gross you convince the listener that you are not fawning over him, when in fact that’s precisely what you’re doing. I like this technique but you must be careful not to overuse it.
4. The Implicit. Now we get into the higher echelons of name-dropping technique. The implicit name-drop occurs when you do not actually drop a name; instead, you refer obliquely to a personage and leave it to the listener to fill in the blanks. For example, “I’m sorry I’m late; I had to make a quick visit to Omaha for an investor meeting and my return flight was delayed”. Hopefully your interlocutor will guess which particular Omaha investor you’re talking about.
In addition to prominent Nebraskans, you can refer to Hungarian émigrés, Alabama farmboys and former squash champions. Depending on how chummy you are with the listener, you can even make wiggly quote marks in the air when referring to all these characters; the possibilities are endless. This is an excellent technique; its only drawback is that it depends, at least partly, on the eagerness of the listener to believe what he wants to believe. Fortunately this is not a huge drawback, given the nature of the average Wall Street listener.
5. The Reverse. The most subtle and sophisticated name-dropping technique. In the reverse name-drop, you get someone else to drop your name. Or rather, you imply to your listener that someone else drops your name with regularity. For instance, when meeting an investor for the first time: “Was it Jim who suggested Sopwith to you? It’s okay, you don’t have to tell me; I know he doesn’t like publicity. Must be the ex-academic in him.” Or if you’re late for a meeting, “Sorry to keep you waiting; I had to take a phone call from this investor, as a special favor to Stan. A complete waste of time, of course; I wish Stan had better judgment sometimes.”
This article was going to be a lot longer, but I have to run, I have Ben on the line wanting to talk about interest rates.
For these readers, and as a public service, I have decided to introduce a new feature: an occasional “how-to” column. This column will reveal everything you need to know about slithering up the greasy pole that is the financial industry.
Today’s topic: how to drop names.
(What, you thought I was going to teach you some actual finance? Ha ha, don’t make me laugh. Knowledge of actual finance is highly overrated in this game. Don’t waste your time and mine trying to learn what a bond is; it’s just not worth it.)
The ability to drop names strategically is a key element of Wall Street success. A good name-dropper will be perceived as a person of prestige and influence; and from perception to reality is but a short step. But as with all other skills, it needs to be practiced and perfected. Dropping names badly can often be worse than not dropping them at all.
There are various techniques that one can use to drop names; here is a brief taxonomy:
1. The Pathetic. I once had lunch with a banker who tried to convince me that Sopwith should open a prime brokerage account with his (second-tier) firm. He went out of his way to mention that he had once worked with Jon Corzine: “Yes, Jon and I traded the bond basis back in the 80s”. My unspoken reaction? “Dude, that’s pathetic. By your own admission you and Corzine were in the exact same position 30 years ago. And now look at you! He became head of Goldman Sachs and then governor of New Jersey. You on the other hand are trying to sell a second-rate product to a third-rate firm, for peanuts in commissions. You should be ashamed of yourself.”
Needless to say, I do not recommend the Pathetic name-drop technique.
2. The Aggressive. Some second-raters recognize, dimly, that comparing themselves to shining stars is not the smartest strategy. So they leaven their comparison with well-chosen barbs aimed at these shining stars. For example: “John Paulson? Yeah, I worked with John for a few years. I always thought he was more lucky than smart.”
This strategy can be effective if the listener shares the name-dropper’s inferiority complex or otherwise has a chip on his shoulder. There are lots of Wall Street types who have precisely this mentality: wannabe players who love nothing more than to see celebrity figures being brought down to earth. So the odds of success are high. But the Aggressive name-drop technique can backfire spectacularly, especially if the shining star being dissed is self-evidently not a chump (e.g. John Paulson). For this reason I do not recommend this technique either.
3. The Mutually Respectful. More effective than fawning over a superstar (a la the Pathetic) or badmouthing him (a la the Aggressive), is simply treating him as an equal – and implying that he treats you as an equal. This has to be done subtly for maximum effect: “Have you read Bill Gross’s latest column? He thinks stocks are going up. It’s funny, I’ve always liked Bill, but his trading advice has never worked for me. I guess my advice has never worked for him either. Oh well, to each his own.” Notice how by disagreeing with Bill Gross you convince the listener that you are not fawning over him, when in fact that’s precisely what you’re doing. I like this technique but you must be careful not to overuse it.
4. The Implicit. Now we get into the higher echelons of name-dropping technique. The implicit name-drop occurs when you do not actually drop a name; instead, you refer obliquely to a personage and leave it to the listener to fill in the blanks. For example, “I’m sorry I’m late; I had to make a quick visit to Omaha for an investor meeting and my return flight was delayed”. Hopefully your interlocutor will guess which particular Omaha investor you’re talking about.
In addition to prominent Nebraskans, you can refer to Hungarian émigrés, Alabama farmboys and former squash champions. Depending on how chummy you are with the listener, you can even make wiggly quote marks in the air when referring to all these characters; the possibilities are endless. This is an excellent technique; its only drawback is that it depends, at least partly, on the eagerness of the listener to believe what he wants to believe. Fortunately this is not a huge drawback, given the nature of the average Wall Street listener.
5. The Reverse. The most subtle and sophisticated name-dropping technique. In the reverse name-drop, you get someone else to drop your name. Or rather, you imply to your listener that someone else drops your name with regularity. For instance, when meeting an investor for the first time: “Was it Jim who suggested Sopwith to you? It’s okay, you don’t have to tell me; I know he doesn’t like publicity. Must be the ex-academic in him.” Or if you’re late for a meeting, “Sorry to keep you waiting; I had to take a phone call from this investor, as a special favor to Stan. A complete waste of time, of course; I wish Stan had better judgment sometimes.”
This article was going to be a lot longer, but I have to run, I have Ben on the line wanting to talk about interest rates.
Monday, February 15, 2010
The War for Talent
As a hedge fund manager I am self-evidently smarter than most of the rest of humanity combined. Nonetheless there are occasions when I am only too happy to give credit where it’s due, and recognize genius in others.
Case in point: the hiring strategy implemented by my colleague Howard.
Let me start by giving you some background. My own management philosophy is fairly simple. Hire the best people you can find, pay them well, teach them all you know, encourage them to ask questions, then let them loose. Give them lots of responsibility and allow them free rein to solve their own problems. This strategy is not without risk: mistakes will be made, but hopefully nothing that can’t be undone. 99% of what fresh hires produce is going to be dross, but the remaining 1% can hold some real nuggets. Pretty straightforward, really.
Of course, such a philosophy is a non-starter at a place like Sopwith. Sopwith is the enemy of innovation, of individual responsibility, of managerial flexibility, of anything that disrupts the comfortable and complacent existence of the higher powers. New hires at Sopwith – talented and motivated individuals, all looking to leave their mark on the world of high finance – would come up with numerous exciting new plans, not a single one of which ever saw the light of day. This was obviously somewhat dispiriting for the new hires and they lost no time in seeking greener pastures. And why wouldn’t they? Sopwith was clearly a firm that was going nowhere fast.
The exodus of talent reached such a state that at one point Sopwith had acquired a reputation for being an excellent finishing school for junior traders: Lehman Brothers alone poached 3 traders a year from us for 3 years in a row. (And now look where they are! Ha ha). This reputation certainly helped us in the eyes of investors, but it was not particularly conducive to our day-to-day productivity.
This was the situation my colleague Howard stepped in to remedy. He analyzed the problem, thought deeply about market conditions, surveyed the state of the industry, audited our requirements, and came up with these distilled words of wisdom: Hire Dumb People.
We decided as an explicit corporate policy not to hire the best applicants for any job, on the grounds that these best applicants would quickly jump ship. Instead we hired people who were ‘just good enough’ to do what we needed them to do. Furthermore we wanted people who knew that they were just good enough to do their job. Such people would be neither capable nor desirous of finding gainful employment elsewhere.
The new policy worked like a charm. This was one of the most brilliant strategies I had encountered in a lifetime of observing brilliant strategies.
The new hires never once entertained feelings of disloyalty; furthermore they were paid peanuts. Their ‘lead handcuffs’ were so strong that we could pay them minimum wage and get away with it. (Let’s not kid ourselves here: this is Wall Street minimum wage, enough for a Beemer but not a Ferrari). And they stayed with us for years and years.
Hats off to Howard.
Case in point: the hiring strategy implemented by my colleague Howard.
Let me start by giving you some background. My own management philosophy is fairly simple. Hire the best people you can find, pay them well, teach them all you know, encourage them to ask questions, then let them loose. Give them lots of responsibility and allow them free rein to solve their own problems. This strategy is not without risk: mistakes will be made, but hopefully nothing that can’t be undone. 99% of what fresh hires produce is going to be dross, but the remaining 1% can hold some real nuggets. Pretty straightforward, really.
Of course, such a philosophy is a non-starter at a place like Sopwith. Sopwith is the enemy of innovation, of individual responsibility, of managerial flexibility, of anything that disrupts the comfortable and complacent existence of the higher powers. New hires at Sopwith – talented and motivated individuals, all looking to leave their mark on the world of high finance – would come up with numerous exciting new plans, not a single one of which ever saw the light of day. This was obviously somewhat dispiriting for the new hires and they lost no time in seeking greener pastures. And why wouldn’t they? Sopwith was clearly a firm that was going nowhere fast.
The exodus of talent reached such a state that at one point Sopwith had acquired a reputation for being an excellent finishing school for junior traders: Lehman Brothers alone poached 3 traders a year from us for 3 years in a row. (And now look where they are! Ha ha). This reputation certainly helped us in the eyes of investors, but it was not particularly conducive to our day-to-day productivity.
This was the situation my colleague Howard stepped in to remedy. He analyzed the problem, thought deeply about market conditions, surveyed the state of the industry, audited our requirements, and came up with these distilled words of wisdom: Hire Dumb People.
We decided as an explicit corporate policy not to hire the best applicants for any job, on the grounds that these best applicants would quickly jump ship. Instead we hired people who were ‘just good enough’ to do what we needed them to do. Furthermore we wanted people who knew that they were just good enough to do their job. Such people would be neither capable nor desirous of finding gainful employment elsewhere.
The new policy worked like a charm. This was one of the most brilliant strategies I had encountered in a lifetime of observing brilliant strategies.
The new hires never once entertained feelings of disloyalty; furthermore they were paid peanuts. Their ‘lead handcuffs’ were so strong that we could pay them minimum wage and get away with it. (Let’s not kid ourselves here: this is Wall Street minimum wage, enough for a Beemer but not a Ferrari). And they stayed with us for years and years.
Hats off to Howard.
Thursday, February 11, 2010
Three Exhibits
Gah, investors. Can’t live with them, can’t shoot them in the kneecaps. (Well, you probably can shoot them in the kneecaps but then you’d have to register with the SEC and fill out Form 3126, Schedule B, to get an Investor Kneecapping License or something equally ridiculous. Who has the time? But I digress.)
Everybody talks about how tough it is to beat the market. But take it from me, knowing what the market will do is an absolute cakewalk compared to knowing what investors want. After double-digit years in the industry, I am convinced that I have barely scratched the surface of the mystery that is the investor mind. Consider:
Exhibit Number One: it’s January 2003, and we at Sopwith have just received a redemption notice from a large fund of funds that has invested with us. They want to pull their money.
Now, you would think that this meant we lost money in 2002. You would be wrong. We made money in 2002, quite a bit of it. And not just in absolute terms; we outperformed in relative terms as well. Indeed, this particular investor had money in about ten different hedge funds, and nine of them lost money in 2002. We at Sopwith, through superior competence, divine intervention or (most likely) sheer random luck, actually managed to eke out a profit. Our reward for this? A redemption notice.
Blame accounting rules. The portfolio manager at this fund of funds, like everyone else in the asset management industry, was paid an annual bonus based on the market value of his portfolio. But how do you calculate the market value of an investment in an illiquid and secretive vehicle like a hedge fund? The answer: you pretend that the current market value of an unredeemed investment is equal to the amount you paid to make the investment in the first place. Of course, for a redeemed investment, the market value is the amount you get for redeeming it.
In the case of Sopwith, the portfolio manager thus had an incentive to redeem his investment, since we made money in 2002 and hence the redemption amount was greater than the investment amount. But for the other hedge funds in his portfolio, it was in his interests to stay invested, and thus avoid realizing his losses.
I was ticked off at the time, but looking back, I have to say it made sense, in a perverse, twisted kind of way. But wait! It gets better! Now we come to:
Exhibit Number Two: it’s January 2007, and we at Sopwith have just received a redemption notice from another large fund of funds that has invested with us. They want to pull their money.
Once again, this seems perverse, because we made money in 2006. But this time, the problem was that other hedge funds made more money than us; in some cases, a lot more. And this time the driving factor was not short-term bonus-grabbing, but good old-fashioned long-term greed. Yes; our fund of funds investor was disappointed in us because we batted singles while others were hitting home runs; he thought that by switching his money elsewhere he would have a better shot at winning the pennant.
So you can’t win. If you lose less money than other people, you have your funds pulled. If you make less money than other people, you have your funds pulled. It appears that investors don’t want competent mediocrity; they want spectacular ups and downs.
But not to worry! We at Sopwith are nothing if not flexible in our ideology, and we quickly adjusted our trading strategy to conform to these revealed preferences. We decided to swing for the fences on every trade. Never again would we be left behind in the race for volatility.
Unfortunately, every other hedge fund in the world reached the same conclusion at around the same time, leading directly to the recent unpleasantness in the market. To wit:
Exhibit Number Three: it’s January 2009, and we at Sopwith have just received a redemption notice from four different funds of funds that had invested with us. They all want to pull their money.
Argh! What’s going on? We lost a ton of money in 2008, but so did everyone else; some lost more, some lost less. Why single us out for special punishment? Why not just replay the 2002 scenario?
Well, it turns out that each of these four fund managers had a different reasoning for pulling their money. Here’s what they had to say:
“Sopwith lost money, but Fund X lost less money. They are obviously better traders than you, so I’m switching my investment from Sopwith to Fund X.”
“Sopwith lost money, but Fund Y lost more money. This means there is obviously more opportunity in the market that Fund Y trades, so I’m switching my investment from Sopwith to Fund Y.”
“Sopwith lost money, and so did Fund Z. I have therefore decided to panic, take my investment out of both Sopwith and Fund Z, and hide it under the mattress.”
“Sopwith lost money. Hey, that’s great news! I can redeem my investment at a loss and claim a tax credit for future years. Thanks, guys!”
The moral is clear. In my next life I shall devote less time to studying the intricacies of the stock market, and more time to fathoming the depths of the investor mind.
Everybody talks about how tough it is to beat the market. But take it from me, knowing what the market will do is an absolute cakewalk compared to knowing what investors want. After double-digit years in the industry, I am convinced that I have barely scratched the surface of the mystery that is the investor mind. Consider:
Exhibit Number One: it’s January 2003, and we at Sopwith have just received a redemption notice from a large fund of funds that has invested with us. They want to pull their money.
Now, you would think that this meant we lost money in 2002. You would be wrong. We made money in 2002, quite a bit of it. And not just in absolute terms; we outperformed in relative terms as well. Indeed, this particular investor had money in about ten different hedge funds, and nine of them lost money in 2002. We at Sopwith, through superior competence, divine intervention or (most likely) sheer random luck, actually managed to eke out a profit. Our reward for this? A redemption notice.
Blame accounting rules. The portfolio manager at this fund of funds, like everyone else in the asset management industry, was paid an annual bonus based on the market value of his portfolio. But how do you calculate the market value of an investment in an illiquid and secretive vehicle like a hedge fund? The answer: you pretend that the current market value of an unredeemed investment is equal to the amount you paid to make the investment in the first place. Of course, for a redeemed investment, the market value is the amount you get for redeeming it.
In the case of Sopwith, the portfolio manager thus had an incentive to redeem his investment, since we made money in 2002 and hence the redemption amount was greater than the investment amount. But for the other hedge funds in his portfolio, it was in his interests to stay invested, and thus avoid realizing his losses.
I was ticked off at the time, but looking back, I have to say it made sense, in a perverse, twisted kind of way. But wait! It gets better! Now we come to:
Exhibit Number Two: it’s January 2007, and we at Sopwith have just received a redemption notice from another large fund of funds that has invested with us. They want to pull their money.
Once again, this seems perverse, because we made money in 2006. But this time, the problem was that other hedge funds made more money than us; in some cases, a lot more. And this time the driving factor was not short-term bonus-grabbing, but good old-fashioned long-term greed. Yes; our fund of funds investor was disappointed in us because we batted singles while others were hitting home runs; he thought that by switching his money elsewhere he would have a better shot at winning the pennant.
So you can’t win. If you lose less money than other people, you have your funds pulled. If you make less money than other people, you have your funds pulled. It appears that investors don’t want competent mediocrity; they want spectacular ups and downs.
But not to worry! We at Sopwith are nothing if not flexible in our ideology, and we quickly adjusted our trading strategy to conform to these revealed preferences. We decided to swing for the fences on every trade. Never again would we be left behind in the race for volatility.
Unfortunately, every other hedge fund in the world reached the same conclusion at around the same time, leading directly to the recent unpleasantness in the market. To wit:
Exhibit Number Three: it’s January 2009, and we at Sopwith have just received a redemption notice from four different funds of funds that had invested with us. They all want to pull their money.
Argh! What’s going on? We lost a ton of money in 2008, but so did everyone else; some lost more, some lost less. Why single us out for special punishment? Why not just replay the 2002 scenario?
Well, it turns out that each of these four fund managers had a different reasoning for pulling their money. Here’s what they had to say:
“Sopwith lost money, but Fund X lost less money. They are obviously better traders than you, so I’m switching my investment from Sopwith to Fund X.”
“Sopwith lost money, but Fund Y lost more money. This means there is obviously more opportunity in the market that Fund Y trades, so I’m switching my investment from Sopwith to Fund Y.”
“Sopwith lost money, and so did Fund Z. I have therefore decided to panic, take my investment out of both Sopwith and Fund Z, and hide it under the mattress.”
“Sopwith lost money. Hey, that’s great news! I can redeem my investment at a loss and claim a tax credit for future years. Thanks, guys!”
The moral is clear. In my next life I shall devote less time to studying the intricacies of the stock market, and more time to fathoming the depths of the investor mind.
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