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.
Monday, April 26, 2010
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.
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