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!
Thursday, February 25, 2010
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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