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.
Subscribe to:
Posts (Atom)
Posts
