There is a pecking order on Wall Street.
We hedge fund dudes are, of course, at the top of the totem pole. Slightly below us (because they have to work much longer hours, the poor slobs) sit the private equity gang. Below them come the bulge bracket investment banks, in rigidly defined order: Goldman leading the way, Merrill bringing up the rear. Lower yet are the money center banks (snigger). And then, right at the bottom, is that vast and unexplored swathe of Middle America known to us only as ‘retail’.
Somewhere in the middle of this hierarchy one can find a curious tribe: the specialist brokers. These guys service, and simultaneously compete with, the market-making desks of various investment banks. It’s a thankless job, with razor-thin margins, intense production pressure and negligible job security.
Brokers typically have none of the advantages (capital base, risk appetite, cross-platform networks) of their investment-banking competition. So they have to rely on ever-more desperate measures to drum up business. And what, I hear you ask, might those measures be?
The answer is obvious: freebies that are even more lavish than those disbursed by their dealer counterparts. I have lost count of the number of gewgaws I have received from my broker friends: everything from gym bags and squeeze balls to golf trips toting free Blackberries.
(Aside: one particular broker even paid my monthly phone bill for the aforementioned free Blackberry. I think the rationale was that I could use the device to execute trades – not just phone them in, actually execute on the broker’s main electronic platform – and hence it was a legitimate business expense. Hey, if a broker can set up a special execution keyboard with a dedicated line connecting me to their servers at their expense, why not do the same thing wirelessly?
As it happens I don’t think I ever made a call, let alone executed a trade, on the Blackberry – I never could get used to its bulky form factor. I lost the phone when moving countries a few years ago, but I never informed the broker, and they never asked. For all I know they’re still paying the monthly bill. )
But the freebies were only part of the deal. The other part, inevitably, involved dinners on a scale that would put Roman emperors to shame. It’s no coincidence that every single broker salesman I know is morbidly obese. I don’t mean common-or-garden-variety overweight, I mean seriously, debilitatingly, grossly fat. Eating New York sized steaks four nights a week will do that to you.
Consider my broker friend Bill. Bill was the Platonic ideal of a frat boy: easygoing, friendly, not overly burdened with intellect, happy to have a good time, all the time. He liked nothing better than to head out, sink a few beers, try (and fail) to pick up any cute female bartenders, then drown his sorrows in chicken wings (or, if he was feeling ritzy, barbecue ribs). Bill was also fairly athletic in his youth: he played football for a well-known southern school.
Last I saw him, Bill was nearing 350 lbs, and he’s not more than 5’7”. He told me he was having difficulty sleeping at night because of stress- and weight-related breathing problems. He then suggested we go out to dinner at Babbo.
The amazing thing is that Bill was convinced he was living the American Dream. He was young, unattached, and making six figures in Manhattan: what more could a good ole boy want? That’s the essential perversity of Wall Street: it doesn’t just chew up your life (and other people’s money); it chews up your life (and other people’s money) and convinces you (and the aforementioned other people) that you wouldn’t have it any other way. Amazing, and sad.
(Postscript, September 2005: a miracle! Bill escaped the living death of being a broker salesman, and got a job on the buy side. Unfortunately, said job was as a mortgage trader. I heard the news and immediately doubled my short in TOL. What can I say, I’m a hedge fund dude. )
Tuesday, March 9, 2010
Tuesday, March 2, 2010
Flying Blind
The core of Sopwith’s financial analytics is a system called RADAR. Once upon a time, RADAR was an elegant, efficient, robust and powerful system with a single well-defined task: to produce live risk-management reports (the very name RADAR stands for “Real-time Aggregation, Decomposition and Analysis of Risk”). But over the years, users have requested myriads of extensions to the original functionality, and programmers have responded with a multitude of quick fixes, each one uglier than the last. Today’s version of RADAR is a baroque monstrosity, a bloated mess of code that churns out dozens of wildly disparate reports every day: profit and loss accounting, risk management analysis, cash-flow and settlements information, trade valuation and hedge calculation, financing and liquidity projections, everything but the weather forecast. It’s a miracle that RADAR runs at all, but run it does.
Unfortunately, all the many hacks cobbled onto RADAR over the years have failed to address a fundamental weakness in its structure: its human interface. RADAR was originally designed to be used by programmers, and for good reason: its hideous complexity requires a huge amount of effort and technical skill to understand and manage. But any programmer with that amount of skill would simply hate working on RADAR: it’s a tedious, repetitive and utterly mind-numbing job. In point of fact, every single programmer we’ve assigned to RADAR has either quit or asked for a transfer within six months of the assignment. Even the person who created the system, the semi-mythical Original Programmer, chose to gracefully retire from the finance industry when faced with the alternative prospect of having to maintain RADAR indefinitely.
A rational company would have tried to find a long-term solution to this problem: either by redesigning RADAR so that it was less tedious for programmers to work with, or by simplifying RADAR so that it could be used directly by accountants and back-office staff, or by looking for (and paying) a programmer who could tolerate working with the existing system, or, as a last resort, by junking RADAR wholesale and outsourcing all our analytic needs. But Sopwith is not, and has never been, a rational company. Management decided that if six months was the upper limit for a programmer to work with RADAR, then that was that: we would simply higher a new programmer every six months (give or take a few) to fill the gap.
Enter the Sprouts. Encouraged by the success of an early hire from a famous engineering school, Sopwith instituted a policy of hiring a newly-minted engineer every year. Typically, this engineer would spend his first six months at the firm learning his way around RADAR, his second six months running and maintaining it, and his third six months passing his knowledge down to the next hire. After that he would be at a loose end, but since Sopwith was culturally incapable of firing anyone (other than the occasional trader), a job would be found for him: quantitative research, analytics, risk management, trading, somewhere. At one stage last year we had three junior traders, a junior risk manager and two junior quants, all spinning their wheels in the service of the firm, with no functional senior traders, risk managers or quants to guide them.
The current set of Sprouts, the fifth generation since fund inception, is in a bad way. By unhappy coincidence, the three previous Sprouts quit Sopwith en masse a few months ago, leaving the latest recruits with no immediate supervisors to learn from. And our IT department is currently without a head, or indeed, any senior personnel at all. (This is not unusual for the IT department. Although management is admittedly a rare commodity throughout the firm, the IT department takes the scarcity to extreme levels even by Sopwith standards).
This leaves the junior Sprouts in a vacuum. There’s no one to teach them the basics of analytical finance, no one to allocate their time and effort, and (most importantly) no one to run interference between them and the rest of the company. As a result of the former circumstance they have to figure RADAR out for themselves, almost from first principles; this is an incredibly painful and time-consuming process. And the latter circumstance means that they’re always being interrupted by users who need minor fixes to their workstations, or their email, or their printers, or other trivial matters, leaving the Sprouts no time to embark on any sort of serious education or project work.
To their credit, the Sprouts make the best of a bad job diligently and uncomplainingly – they’re still too young to have become apathetic. Sprout One is the older and more experienced of the pair; he has almost a full year behind him, which means he knows (barely) what a derivative is. Sprout Two has just finished his seventh month at Sopwith, and hence has no such pretensions to knowledge. Between the two of them, and aided by a hefty amount of sheer doggedness, they manage to satisfy all the trivial user requests while somehow coaxing RADAR to run every day.
But it’s a balance poised on the edge of a knife. Every day brings a new crisis, and eventually the situation gets so bad that the Original Programmer is called out of retirement two continents away, and asked to teach the Sprouts how RADAR actually works. He gives it a shot, but learns quickly that getting two clueless newbies to understand a complex system long-distance is a losing proposition; instead of teaching the Sprouts anything, he simply fixes each day’s problems by himself.
Consider, if you will, the implications of this state of affairs. We have the very latest in risk management technology, capable of analyzing complex portfolio movements to immense (albeit spurious) precision. We have hundreds of thousands of dollars’ worth of hardware, and have invested millions more in our software. We have upwards of a hundred employees, all utterly dependent on their spreadsheets, their email, their web apps, their databases. And this entire edifice is being manned by two college graduates with a grand total of eighteen months of experience between them. Yet nobody seems to think this is a problem!
Our risk manager floats merrily along in his cloud of Olympian detachment: as long as the clauses in the official risk management policy are being followed to the letter he couldn’t care less if our IT department were run by a poodle. Our traders recognize that a new Dark Age is setting in, and have replaced their quantitative arbitrage strategies with simpler, more primitive trades: these days they merely make wild bets on the market going up or down, based on nothing more sophisticated than gut feeling. Our back office staff muddle along as they’ve always done; IT has never really done anything for them, so the lack of an IT department doesn’t faze them in the least. The Big Boss knows that the state of affairs is farcical, but he just got married to a model twenty years his junior, and he can’t be bothered to get involved. His emissary Jimmy the Kid is dimly aware that there’s a problem, but since he lacks the competence to solve it he’s ignoring it, in the hope that it’ll go away.
The only people capable of appreciating the magnitude of the danger and caring enough to do something about it are our investors. But in a truly delicious piece of irony, they remain blissfully unaware of the entire mess. These are people who stay up late at night obsessing about various real and imagined risks to our portfolio, who call us thrice a day to chat about every unfounded rumor that’s making the rounds, who think every dollar lost is a catastrophe beyond compare. Yet the biggest risk of all, and the one closest to home, is ignored.
I feel almost sorry for them.
Unfortunately, all the many hacks cobbled onto RADAR over the years have failed to address a fundamental weakness in its structure: its human interface. RADAR was originally designed to be used by programmers, and for good reason: its hideous complexity requires a huge amount of effort and technical skill to understand and manage. But any programmer with that amount of skill would simply hate working on RADAR: it’s a tedious, repetitive and utterly mind-numbing job. In point of fact, every single programmer we’ve assigned to RADAR has either quit or asked for a transfer within six months of the assignment. Even the person who created the system, the semi-mythical Original Programmer, chose to gracefully retire from the finance industry when faced with the alternative prospect of having to maintain RADAR indefinitely.
A rational company would have tried to find a long-term solution to this problem: either by redesigning RADAR so that it was less tedious for programmers to work with, or by simplifying RADAR so that it could be used directly by accountants and back-office staff, or by looking for (and paying) a programmer who could tolerate working with the existing system, or, as a last resort, by junking RADAR wholesale and outsourcing all our analytic needs. But Sopwith is not, and has never been, a rational company. Management decided that if six months was the upper limit for a programmer to work with RADAR, then that was that: we would simply higher a new programmer every six months (give or take a few) to fill the gap.
Enter the Sprouts. Encouraged by the success of an early hire from a famous engineering school, Sopwith instituted a policy of hiring a newly-minted engineer every year. Typically, this engineer would spend his first six months at the firm learning his way around RADAR, his second six months running and maintaining it, and his third six months passing his knowledge down to the next hire. After that he would be at a loose end, but since Sopwith was culturally incapable of firing anyone (other than the occasional trader), a job would be found for him: quantitative research, analytics, risk management, trading, somewhere. At one stage last year we had three junior traders, a junior risk manager and two junior quants, all spinning their wheels in the service of the firm, with no functional senior traders, risk managers or quants to guide them.
The current set of Sprouts, the fifth generation since fund inception, is in a bad way. By unhappy coincidence, the three previous Sprouts quit Sopwith en masse a few months ago, leaving the latest recruits with no immediate supervisors to learn from. And our IT department is currently without a head, or indeed, any senior personnel at all. (This is not unusual for the IT department. Although management is admittedly a rare commodity throughout the firm, the IT department takes the scarcity to extreme levels even by Sopwith standards).
This leaves the junior Sprouts in a vacuum. There’s no one to teach them the basics of analytical finance, no one to allocate their time and effort, and (most importantly) no one to run interference between them and the rest of the company. As a result of the former circumstance they have to figure RADAR out for themselves, almost from first principles; this is an incredibly painful and time-consuming process. And the latter circumstance means that they’re always being interrupted by users who need minor fixes to their workstations, or their email, or their printers, or other trivial matters, leaving the Sprouts no time to embark on any sort of serious education or project work.
To their credit, the Sprouts make the best of a bad job diligently and uncomplainingly – they’re still too young to have become apathetic. Sprout One is the older and more experienced of the pair; he has almost a full year behind him, which means he knows (barely) what a derivative is. Sprout Two has just finished his seventh month at Sopwith, and hence has no such pretensions to knowledge. Between the two of them, and aided by a hefty amount of sheer doggedness, they manage to satisfy all the trivial user requests while somehow coaxing RADAR to run every day.
But it’s a balance poised on the edge of a knife. Every day brings a new crisis, and eventually the situation gets so bad that the Original Programmer is called out of retirement two continents away, and asked to teach the Sprouts how RADAR actually works. He gives it a shot, but learns quickly that getting two clueless newbies to understand a complex system long-distance is a losing proposition; instead of teaching the Sprouts anything, he simply fixes each day’s problems by himself.
Consider, if you will, the implications of this state of affairs. We have the very latest in risk management technology, capable of analyzing complex portfolio movements to immense (albeit spurious) precision. We have hundreds of thousands of dollars’ worth of hardware, and have invested millions more in our software. We have upwards of a hundred employees, all utterly dependent on their spreadsheets, their email, their web apps, their databases. And this entire edifice is being manned by two college graduates with a grand total of eighteen months of experience between them. Yet nobody seems to think this is a problem!
Our risk manager floats merrily along in his cloud of Olympian detachment: as long as the clauses in the official risk management policy are being followed to the letter he couldn’t care less if our IT department were run by a poodle. Our traders recognize that a new Dark Age is setting in, and have replaced their quantitative arbitrage strategies with simpler, more primitive trades: these days they merely make wild bets on the market going up or down, based on nothing more sophisticated than gut feeling. Our back office staff muddle along as they’ve always done; IT has never really done anything for them, so the lack of an IT department doesn’t faze them in the least. The Big Boss knows that the state of affairs is farcical, but he just got married to a model twenty years his junior, and he can’t be bothered to get involved. His emissary Jimmy the Kid is dimly aware that there’s a problem, but since he lacks the competence to solve it he’s ignoring it, in the hope that it’ll go away.
The only people capable of appreciating the magnitude of the danger and caring enough to do something about it are our investors. But in a truly delicious piece of irony, they remain blissfully unaware of the entire mess. These are people who stay up late at night obsessing about various real and imagined risks to our portfolio, who call us thrice a day to chat about every unfounded rumor that’s making the rounds, who think every dollar lost is a catastrophe beyond compare. Yet the biggest risk of all, and the one closest to home, is ignored.
I feel almost sorry for them.
Thursday, February 25, 2010
Trading Up
I pride myself on my cynicism. There is never a situation so messed up that I can’t shrug my world-weary shoulders and say “Well, what did you expect?” Every year Wall Street engineers some scandal of monstrous proportions; every year I refuse to be outraged. I expect the worst, and, I have to say, usually the worst is precisely what transpires.
But now I have met my match. Nothing, nothing I have seen on Wall Street begins to compare with the toxic mix of incompetence, arrogance and self-generated bad luck that follows Jimmy the Kid everywhere he goes. In the past I occasionally wondered if Sopwith was truly the basket case it appeared to be; Jimmy’s promotion has removed all my doubts.
Jimmy is now the titular head of the trading desk. He is also, without exception, the most abject trader I have ever met. He is the worst kind of sucker: he falls for everything. When the market is booming he gets greedy and buys right at the top. When the market crashes he panics and sells right at the bottom. He falls for every rumor making the rounds, he is a sucker for every con job, he is a walking mark. He prefers gossip to facts, handwaving to analysis, ‘gut feeling’ to intellectual rigor. And he intends to remake the trading desk in his image.
What’s more, Jimmy has reserved a special place in his grandiose plans for me. You see, I was one of the few people to give him the time of day back when he was a grub. (Most traders think that analysts are only good for fetching coffee and sandwiches; at the risk of sounding elitist, I have to confess that most traders are correct in this view). As a result he has decided that he will look out for me. Jimmy has appointed himself my mentor.
Am I depressed? Oh no, quite the contrary. Jimmy’s promotion is wonderful news for me.
Say what you will about our previous head honchos – Olympian, detached, aloof, unmotivated – they at least had the virtue of being good at their jobs. So I too had to be good at my job. Jimmy on the other hand doesn’t have a clue, so I can get away with anything.
It’s just a question of knowing how to play him. I know how to inflame his greed, how to amplify his fear, how to massage his ego, how to feed his lust for power. In addition, I flatter him shamelessly – I ask for his advice, I hang on to his words of wisdom, I praise his every move. I am Jimmy’s number one fan.
As a result, I can get Jimmy to do whatever I want.
Some of the other traders couldn’t hack this young whippersnapper telling them what to do; they’d rather quit than report to Jimmy. Fortunately I have no ego; all I care about is taking risk and making money. Jimmy is my man.
Let the good times roll!
But now I have met my match. Nothing, nothing I have seen on Wall Street begins to compare with the toxic mix of incompetence, arrogance and self-generated bad luck that follows Jimmy the Kid everywhere he goes. In the past I occasionally wondered if Sopwith was truly the basket case it appeared to be; Jimmy’s promotion has removed all my doubts.
Jimmy is now the titular head of the trading desk. He is also, without exception, the most abject trader I have ever met. He is the worst kind of sucker: he falls for everything. When the market is booming he gets greedy and buys right at the top. When the market crashes he panics and sells right at the bottom. He falls for every rumor making the rounds, he is a sucker for every con job, he is a walking mark. He prefers gossip to facts, handwaving to analysis, ‘gut feeling’ to intellectual rigor. And he intends to remake the trading desk in his image.
What’s more, Jimmy has reserved a special place in his grandiose plans for me. You see, I was one of the few people to give him the time of day back when he was a grub. (Most traders think that analysts are only good for fetching coffee and sandwiches; at the risk of sounding elitist, I have to confess that most traders are correct in this view). As a result he has decided that he will look out for me. Jimmy has appointed himself my mentor.
Am I depressed? Oh no, quite the contrary. Jimmy’s promotion is wonderful news for me.
Say what you will about our previous head honchos – Olympian, detached, aloof, unmotivated – they at least had the virtue of being good at their jobs. So I too had to be good at my job. Jimmy on the other hand doesn’t have a clue, so I can get away with anything.
It’s just a question of knowing how to play him. I know how to inflame his greed, how to amplify his fear, how to massage his ego, how to feed his lust for power. In addition, I flatter him shamelessly – I ask for his advice, I hang on to his words of wisdom, I praise his every move. I am Jimmy’s number one fan.
As a result, I can get Jimmy to do whatever I want.
Some of the other traders couldn’t hack this young whippersnapper telling them what to do; they’d rather quit than report to Jimmy. Fortunately I have no ego; all I care about is taking risk and making money. Jimmy is my man.
Let the good times roll!
Monday, February 22, 2010
How To Drop Names
I realize that not every visitor to this blog comes here for entertainment. Yes, bashing investors, colleagues and rivals is fun, but I like to think that this blog serves a serious purpose as well. Many of my most devoted readers are, in fact, young hedge fund types who aspire to my current lofty heights.
For these readers, and as a public service, I have decided to introduce a new feature: an occasional “how-to” column. This column will reveal everything you need to know about slithering up the greasy pole that is the financial industry.
Today’s topic: how to drop names.
(What, you thought I was going to teach you some actual finance? Ha ha, don’t make me laugh. Knowledge of actual finance is highly overrated in this game. Don’t waste your time and mine trying to learn what a bond is; it’s just not worth it.)
The ability to drop names strategically is a key element of Wall Street success. A good name-dropper will be perceived as a person of prestige and influence; and from perception to reality is but a short step. But as with all other skills, it needs to be practiced and perfected. Dropping names badly can often be worse than not dropping them at all.
There are various techniques that one can use to drop names; here is a brief taxonomy:
1. The Pathetic. I once had lunch with a banker who tried to convince me that Sopwith should open a prime brokerage account with his (second-tier) firm. He went out of his way to mention that he had once worked with Jon Corzine: “Yes, Jon and I traded the bond basis back in the 80s”. My unspoken reaction? “Dude, that’s pathetic. By your own admission you and Corzine were in the exact same position 30 years ago. And now look at you! He became head of Goldman Sachs and then governor of New Jersey. You on the other hand are trying to sell a second-rate product to a third-rate firm, for peanuts in commissions. You should be ashamed of yourself.”
Needless to say, I do not recommend the Pathetic name-drop technique.
2. The Aggressive. Some second-raters recognize, dimly, that comparing themselves to shining stars is not the smartest strategy. So they leaven their comparison with well-chosen barbs aimed at these shining stars. For example: “John Paulson? Yeah, I worked with John for a few years. I always thought he was more lucky than smart.”
This strategy can be effective if the listener shares the name-dropper’s inferiority complex or otherwise has a chip on his shoulder. There are lots of Wall Street types who have precisely this mentality: wannabe players who love nothing more than to see celebrity figures being brought down to earth. So the odds of success are high. But the Aggressive name-drop technique can backfire spectacularly, especially if the shining star being dissed is self-evidently not a chump (e.g. John Paulson). For this reason I do not recommend this technique either.
3. The Mutually Respectful. More effective than fawning over a superstar (a la the Pathetic) or badmouthing him (a la the Aggressive), is simply treating him as an equal – and implying that he treats you as an equal. This has to be done subtly for maximum effect: “Have you read Bill Gross’s latest column? He thinks stocks are going up. It’s funny, I’ve always liked Bill, but his trading advice has never worked for me. I guess my advice has never worked for him either. Oh well, to each his own.” Notice how by disagreeing with Bill Gross you convince the listener that you are not fawning over him, when in fact that’s precisely what you’re doing. I like this technique but you must be careful not to overuse it.
4. The Implicit. Now we get into the higher echelons of name-dropping technique. The implicit name-drop occurs when you do not actually drop a name; instead, you refer obliquely to a personage and leave it to the listener to fill in the blanks. For example, “I’m sorry I’m late; I had to make a quick visit to Omaha for an investor meeting and my return flight was delayed”. Hopefully your interlocutor will guess which particular Omaha investor you’re talking about.
In addition to prominent Nebraskans, you can refer to Hungarian émigrés, Alabama farmboys and former squash champions. Depending on how chummy you are with the listener, you can even make wiggly quote marks in the air when referring to all these characters; the possibilities are endless. This is an excellent technique; its only drawback is that it depends, at least partly, on the eagerness of the listener to believe what he wants to believe. Fortunately this is not a huge drawback, given the nature of the average Wall Street listener.
5. The Reverse. The most subtle and sophisticated name-dropping technique. In the reverse name-drop, you get someone else to drop your name. Or rather, you imply to your listener that someone else drops your name with regularity. For instance, when meeting an investor for the first time: “Was it Jim who suggested Sopwith to you? It’s okay, you don’t have to tell me; I know he doesn’t like publicity. Must be the ex-academic in him.” Or if you’re late for a meeting, “Sorry to keep you waiting; I had to take a phone call from this investor, as a special favor to Stan. A complete waste of time, of course; I wish Stan had better judgment sometimes.”
This article was going to be a lot longer, but I have to run, I have Ben on the line wanting to talk about interest rates.
For these readers, and as a public service, I have decided to introduce a new feature: an occasional “how-to” column. This column will reveal everything you need to know about slithering up the greasy pole that is the financial industry.
Today’s topic: how to drop names.
(What, you thought I was going to teach you some actual finance? Ha ha, don’t make me laugh. Knowledge of actual finance is highly overrated in this game. Don’t waste your time and mine trying to learn what a bond is; it’s just not worth it.)
The ability to drop names strategically is a key element of Wall Street success. A good name-dropper will be perceived as a person of prestige and influence; and from perception to reality is but a short step. But as with all other skills, it needs to be practiced and perfected. Dropping names badly can often be worse than not dropping them at all.
There are various techniques that one can use to drop names; here is a brief taxonomy:
1. The Pathetic. I once had lunch with a banker who tried to convince me that Sopwith should open a prime brokerage account with his (second-tier) firm. He went out of his way to mention that he had once worked with Jon Corzine: “Yes, Jon and I traded the bond basis back in the 80s”. My unspoken reaction? “Dude, that’s pathetic. By your own admission you and Corzine were in the exact same position 30 years ago. And now look at you! He became head of Goldman Sachs and then governor of New Jersey. You on the other hand are trying to sell a second-rate product to a third-rate firm, for peanuts in commissions. You should be ashamed of yourself.”
Needless to say, I do not recommend the Pathetic name-drop technique.
2. The Aggressive. Some second-raters recognize, dimly, that comparing themselves to shining stars is not the smartest strategy. So they leaven their comparison with well-chosen barbs aimed at these shining stars. For example: “John Paulson? Yeah, I worked with John for a few years. I always thought he was more lucky than smart.”
This strategy can be effective if the listener shares the name-dropper’s inferiority complex or otherwise has a chip on his shoulder. There are lots of Wall Street types who have precisely this mentality: wannabe players who love nothing more than to see celebrity figures being brought down to earth. So the odds of success are high. But the Aggressive name-drop technique can backfire spectacularly, especially if the shining star being dissed is self-evidently not a chump (e.g. John Paulson). For this reason I do not recommend this technique either.
3. The Mutually Respectful. More effective than fawning over a superstar (a la the Pathetic) or badmouthing him (a la the Aggressive), is simply treating him as an equal – and implying that he treats you as an equal. This has to be done subtly for maximum effect: “Have you read Bill Gross’s latest column? He thinks stocks are going up. It’s funny, I’ve always liked Bill, but his trading advice has never worked for me. I guess my advice has never worked for him either. Oh well, to each his own.” Notice how by disagreeing with Bill Gross you convince the listener that you are not fawning over him, when in fact that’s precisely what you’re doing. I like this technique but you must be careful not to overuse it.
4. The Implicit. Now we get into the higher echelons of name-dropping technique. The implicit name-drop occurs when you do not actually drop a name; instead, you refer obliquely to a personage and leave it to the listener to fill in the blanks. For example, “I’m sorry I’m late; I had to make a quick visit to Omaha for an investor meeting and my return flight was delayed”. Hopefully your interlocutor will guess which particular Omaha investor you’re talking about.
In addition to prominent Nebraskans, you can refer to Hungarian émigrés, Alabama farmboys and former squash champions. Depending on how chummy you are with the listener, you can even make wiggly quote marks in the air when referring to all these characters; the possibilities are endless. This is an excellent technique; its only drawback is that it depends, at least partly, on the eagerness of the listener to believe what he wants to believe. Fortunately this is not a huge drawback, given the nature of the average Wall Street listener.
5. The Reverse. The most subtle and sophisticated name-dropping technique. In the reverse name-drop, you get someone else to drop your name. Or rather, you imply to your listener that someone else drops your name with regularity. For instance, when meeting an investor for the first time: “Was it Jim who suggested Sopwith to you? It’s okay, you don’t have to tell me; I know he doesn’t like publicity. Must be the ex-academic in him.” Or if you’re late for a meeting, “Sorry to keep you waiting; I had to take a phone call from this investor, as a special favor to Stan. A complete waste of time, of course; I wish Stan had better judgment sometimes.”
This article was going to be a lot longer, but I have to run, I have Ben on the line wanting to talk about interest rates.
Monday, February 15, 2010
The War for Talent
As a hedge fund manager I am self-evidently smarter than most of the rest of humanity combined. Nonetheless there are occasions when I am only too happy to give credit where it’s due, and recognize genius in others.
Case in point: the hiring strategy implemented by my colleague Howard.
Let me start by giving you some background. My own management philosophy is fairly simple. Hire the best people you can find, pay them well, teach them all you know, encourage them to ask questions, then let them loose. Give them lots of responsibility and allow them free rein to solve their own problems. This strategy is not without risk: mistakes will be made, but hopefully nothing that can’t be undone. 99% of what fresh hires produce is going to be dross, but the remaining 1% can hold some real nuggets. Pretty straightforward, really.
Of course, such a philosophy is a non-starter at a place like Sopwith. Sopwith is the enemy of innovation, of individual responsibility, of managerial flexibility, of anything that disrupts the comfortable and complacent existence of the higher powers. New hires at Sopwith – talented and motivated individuals, all looking to leave their mark on the world of high finance – would come up with numerous exciting new plans, not a single one of which ever saw the light of day. This was obviously somewhat dispiriting for the new hires and they lost no time in seeking greener pastures. And why wouldn’t they? Sopwith was clearly a firm that was going nowhere fast.
The exodus of talent reached such a state that at one point Sopwith had acquired a reputation for being an excellent finishing school for junior traders: Lehman Brothers alone poached 3 traders a year from us for 3 years in a row. (And now look where they are! Ha ha). This reputation certainly helped us in the eyes of investors, but it was not particularly conducive to our day-to-day productivity.
This was the situation my colleague Howard stepped in to remedy. He analyzed the problem, thought deeply about market conditions, surveyed the state of the industry, audited our requirements, and came up with these distilled words of wisdom: Hire Dumb People.
We decided as an explicit corporate policy not to hire the best applicants for any job, on the grounds that these best applicants would quickly jump ship. Instead we hired people who were ‘just good enough’ to do what we needed them to do. Furthermore we wanted people who knew that they were just good enough to do their job. Such people would be neither capable nor desirous of finding gainful employment elsewhere.
The new policy worked like a charm. This was one of the most brilliant strategies I had encountered in a lifetime of observing brilliant strategies.
The new hires never once entertained feelings of disloyalty; furthermore they were paid peanuts. Their ‘lead handcuffs’ were so strong that we could pay them minimum wage and get away with it. (Let’s not kid ourselves here: this is Wall Street minimum wage, enough for a Beemer but not a Ferrari). And they stayed with us for years and years.
Hats off to Howard.
Case in point: the hiring strategy implemented by my colleague Howard.
Let me start by giving you some background. My own management philosophy is fairly simple. Hire the best people you can find, pay them well, teach them all you know, encourage them to ask questions, then let them loose. Give them lots of responsibility and allow them free rein to solve their own problems. This strategy is not without risk: mistakes will be made, but hopefully nothing that can’t be undone. 99% of what fresh hires produce is going to be dross, but the remaining 1% can hold some real nuggets. Pretty straightforward, really.
Of course, such a philosophy is a non-starter at a place like Sopwith. Sopwith is the enemy of innovation, of individual responsibility, of managerial flexibility, of anything that disrupts the comfortable and complacent existence of the higher powers. New hires at Sopwith – talented and motivated individuals, all looking to leave their mark on the world of high finance – would come up with numerous exciting new plans, not a single one of which ever saw the light of day. This was obviously somewhat dispiriting for the new hires and they lost no time in seeking greener pastures. And why wouldn’t they? Sopwith was clearly a firm that was going nowhere fast.
The exodus of talent reached such a state that at one point Sopwith had acquired a reputation for being an excellent finishing school for junior traders: Lehman Brothers alone poached 3 traders a year from us for 3 years in a row. (And now look where they are! Ha ha). This reputation certainly helped us in the eyes of investors, but it was not particularly conducive to our day-to-day productivity.
This was the situation my colleague Howard stepped in to remedy. He analyzed the problem, thought deeply about market conditions, surveyed the state of the industry, audited our requirements, and came up with these distilled words of wisdom: Hire Dumb People.
We decided as an explicit corporate policy not to hire the best applicants for any job, on the grounds that these best applicants would quickly jump ship. Instead we hired people who were ‘just good enough’ to do what we needed them to do. Furthermore we wanted people who knew that they were just good enough to do their job. Such people would be neither capable nor desirous of finding gainful employment elsewhere.
The new policy worked like a charm. This was one of the most brilliant strategies I had encountered in a lifetime of observing brilliant strategies.
The new hires never once entertained feelings of disloyalty; furthermore they were paid peanuts. Their ‘lead handcuffs’ were so strong that we could pay them minimum wage and get away with it. (Let’s not kid ourselves here: this is Wall Street minimum wage, enough for a Beemer but not a Ferrari). And they stayed with us for years and years.
Hats off to Howard.
Thursday, February 11, 2010
Three Exhibits
Gah, investors. Can’t live with them, can’t shoot them in the kneecaps. (Well, you probably can shoot them in the kneecaps but then you’d have to register with the SEC and fill out Form 3126, Schedule B, to get an Investor Kneecapping License or something equally ridiculous. Who has the time? But I digress.)
Everybody talks about how tough it is to beat the market. But take it from me, knowing what the market will do is an absolute cakewalk compared to knowing what investors want. After double-digit years in the industry, I am convinced that I have barely scratched the surface of the mystery that is the investor mind. Consider:
Exhibit Number One: it’s January 2003, and we at Sopwith have just received a redemption notice from a large fund of funds that has invested with us. They want to pull their money.
Now, you would think that this meant we lost money in 2002. You would be wrong. We made money in 2002, quite a bit of it. And not just in absolute terms; we outperformed in relative terms as well. Indeed, this particular investor had money in about ten different hedge funds, and nine of them lost money in 2002. We at Sopwith, through superior competence, divine intervention or (most likely) sheer random luck, actually managed to eke out a profit. Our reward for this? A redemption notice.
Blame accounting rules. The portfolio manager at this fund of funds, like everyone else in the asset management industry, was paid an annual bonus based on the market value of his portfolio. But how do you calculate the market value of an investment in an illiquid and secretive vehicle like a hedge fund? The answer: you pretend that the current market value of an unredeemed investment is equal to the amount you paid to make the investment in the first place. Of course, for a redeemed investment, the market value is the amount you get for redeeming it.
In the case of Sopwith, the portfolio manager thus had an incentive to redeem his investment, since we made money in 2002 and hence the redemption amount was greater than the investment amount. But for the other hedge funds in his portfolio, it was in his interests to stay invested, and thus avoid realizing his losses.
I was ticked off at the time, but looking back, I have to say it made sense, in a perverse, twisted kind of way. But wait! It gets better! Now we come to:
Exhibit Number Two: it’s January 2007, and we at Sopwith have just received a redemption notice from another large fund of funds that has invested with us. They want to pull their money.
Once again, this seems perverse, because we made money in 2006. But this time, the problem was that other hedge funds made more money than us; in some cases, a lot more. And this time the driving factor was not short-term bonus-grabbing, but good old-fashioned long-term greed. Yes; our fund of funds investor was disappointed in us because we batted singles while others were hitting home runs; he thought that by switching his money elsewhere he would have a better shot at winning the pennant.
So you can’t win. If you lose less money than other people, you have your funds pulled. If you make less money than other people, you have your funds pulled. It appears that investors don’t want competent mediocrity; they want spectacular ups and downs.
But not to worry! We at Sopwith are nothing if not flexible in our ideology, and we quickly adjusted our trading strategy to conform to these revealed preferences. We decided to swing for the fences on every trade. Never again would we be left behind in the race for volatility.
Unfortunately, every other hedge fund in the world reached the same conclusion at around the same time, leading directly to the recent unpleasantness in the market. To wit:
Exhibit Number Three: it’s January 2009, and we at Sopwith have just received a redemption notice from four different funds of funds that had invested with us. They all want to pull their money.
Argh! What’s going on? We lost a ton of money in 2008, but so did everyone else; some lost more, some lost less. Why single us out for special punishment? Why not just replay the 2002 scenario?
Well, it turns out that each of these four fund managers had a different reasoning for pulling their money. Here’s what they had to say:
“Sopwith lost money, but Fund X lost less money. They are obviously better traders than you, so I’m switching my investment from Sopwith to Fund X.”
“Sopwith lost money, but Fund Y lost more money. This means there is obviously more opportunity in the market that Fund Y trades, so I’m switching my investment from Sopwith to Fund Y.”
“Sopwith lost money, and so did Fund Z. I have therefore decided to panic, take my investment out of both Sopwith and Fund Z, and hide it under the mattress.”
“Sopwith lost money. Hey, that’s great news! I can redeem my investment at a loss and claim a tax credit for future years. Thanks, guys!”
The moral is clear. In my next life I shall devote less time to studying the intricacies of the stock market, and more time to fathoming the depths of the investor mind.
Everybody talks about how tough it is to beat the market. But take it from me, knowing what the market will do is an absolute cakewalk compared to knowing what investors want. After double-digit years in the industry, I am convinced that I have barely scratched the surface of the mystery that is the investor mind. Consider:
Exhibit Number One: it’s January 2003, and we at Sopwith have just received a redemption notice from a large fund of funds that has invested with us. They want to pull their money.
Now, you would think that this meant we lost money in 2002. You would be wrong. We made money in 2002, quite a bit of it. And not just in absolute terms; we outperformed in relative terms as well. Indeed, this particular investor had money in about ten different hedge funds, and nine of them lost money in 2002. We at Sopwith, through superior competence, divine intervention or (most likely) sheer random luck, actually managed to eke out a profit. Our reward for this? A redemption notice.
Blame accounting rules. The portfolio manager at this fund of funds, like everyone else in the asset management industry, was paid an annual bonus based on the market value of his portfolio. But how do you calculate the market value of an investment in an illiquid and secretive vehicle like a hedge fund? The answer: you pretend that the current market value of an unredeemed investment is equal to the amount you paid to make the investment in the first place. Of course, for a redeemed investment, the market value is the amount you get for redeeming it.
In the case of Sopwith, the portfolio manager thus had an incentive to redeem his investment, since we made money in 2002 and hence the redemption amount was greater than the investment amount. But for the other hedge funds in his portfolio, it was in his interests to stay invested, and thus avoid realizing his losses.
I was ticked off at the time, but looking back, I have to say it made sense, in a perverse, twisted kind of way. But wait! It gets better! Now we come to:
Exhibit Number Two: it’s January 2007, and we at Sopwith have just received a redemption notice from another large fund of funds that has invested with us. They want to pull their money.
Once again, this seems perverse, because we made money in 2006. But this time, the problem was that other hedge funds made more money than us; in some cases, a lot more. And this time the driving factor was not short-term bonus-grabbing, but good old-fashioned long-term greed. Yes; our fund of funds investor was disappointed in us because we batted singles while others were hitting home runs; he thought that by switching his money elsewhere he would have a better shot at winning the pennant.
So you can’t win. If you lose less money than other people, you have your funds pulled. If you make less money than other people, you have your funds pulled. It appears that investors don’t want competent mediocrity; they want spectacular ups and downs.
But not to worry! We at Sopwith are nothing if not flexible in our ideology, and we quickly adjusted our trading strategy to conform to these revealed preferences. We decided to swing for the fences on every trade. Never again would we be left behind in the race for volatility.
Unfortunately, every other hedge fund in the world reached the same conclusion at around the same time, leading directly to the recent unpleasantness in the market. To wit:
Exhibit Number Three: it’s January 2009, and we at Sopwith have just received a redemption notice from four different funds of funds that had invested with us. They all want to pull their money.
Argh! What’s going on? We lost a ton of money in 2008, but so did everyone else; some lost more, some lost less. Why single us out for special punishment? Why not just replay the 2002 scenario?
Well, it turns out that each of these four fund managers had a different reasoning for pulling their money. Here’s what they had to say:
“Sopwith lost money, but Fund X lost less money. They are obviously better traders than you, so I’m switching my investment from Sopwith to Fund X.”
“Sopwith lost money, but Fund Y lost more money. This means there is obviously more opportunity in the market that Fund Y trades, so I’m switching my investment from Sopwith to Fund Y.”
“Sopwith lost money, and so did Fund Z. I have therefore decided to panic, take my investment out of both Sopwith and Fund Z, and hide it under the mattress.”
“Sopwith lost money. Hey, that’s great news! I can redeem my investment at a loss and claim a tax credit for future years. Thanks, guys!”
The moral is clear. In my next life I shall devote less time to studying the intricacies of the stock market, and more time to fathoming the depths of the investor mind.
Tuesday, December 29, 2009
A Time of Gifts
Christmas is here! Yes, it’s that time of year when we hedge fund managers reflect on the themes of charity, compassion, and, most important of all, free loot.
I look around the desks at Sopwith and I see men and women who can easily afford to buy anything they could reasonably desire. Yet every single one of them would rather receive a trinket worth a hundred bucks, no matter how useless a piece of junk it is, provided it’s free, than pay a hundred bucks out of their own pockets for something of actual utility. It’s a very curious phenomenon.
Mind you, there is no phenomenon so obscure, no tendency in human nature so venial, that our modern scientific society won’t take advantage of it. And by ‘modern scientific society’ I refer, of course, to our friends the investment banks.
That’s why at this time of year the offices of Sopwith Asset Management are flooded with greetings cards blazoned with messages of holiday cheer, peace on earth and goodwill to our fellow souls. And nestled underneath these cards are gift baskets packed with tons and tons of free loot.
My broker in Chicago fancies himself an amateur sommelier; he invariably sends me a case of fine wine. My salesman in London says he has an inside line at the distillery; he dispatches a bot or two of aged scotch. My man in Tokyo sends sake and the most exquisite floral displays. As for the New York crowd, they (true to form) outdo each other in sending me all of the above, and chocolates, and cigars, and caviar, and whatever else catches their eye.
It’s a profusion of presents, a glut of gifts, an oversupply of offerings. And to what purpose? Well, each of these bankers fondly imagines that come the New Year, when the time arrives for me to place my first trades of the season, I will remember their contribution with favor, and trade with them instead of with their hated rivals.
Note the economic calculations here. Even the most lavish of gift baskets won’t cost anywhere near as much as the commission from just one chunky trade. What’s more, trading commissions go directly into banker compensation; costs, on the other hand, are rarely subtracted directly from banker salaries. (The same logic, inverted, applies on our side of the equation: I pay broker commissions using my investors’ money, but get to drink the scotch myself).
Of course, the entire exercise is counterproductive, simply because everybody does it. If everybody sends a gift, then nobody stands out. So I end up trading with whoever offers me the best trade terms, expensive gifts be damned.
And the bankers know this. But they’re in a bind. If they, heaven forbid, choose not to bribe me any given Christmas, then they will stand out from the crowd, and I may choose to punish them by not trading with them. They can’t risk that, and so we settle into a happy (albeit unhealthy) equilibrium.
In any case I view the gift baskets as a sideshow. Because I never lose sight of what’s important – our real Christmas presents, and the ultimate in free loot: our annual bonuses. Merry Christmas, everyone!
I look around the desks at Sopwith and I see men and women who can easily afford to buy anything they could reasonably desire. Yet every single one of them would rather receive a trinket worth a hundred bucks, no matter how useless a piece of junk it is, provided it’s free, than pay a hundred bucks out of their own pockets for something of actual utility. It’s a very curious phenomenon.
Mind you, there is no phenomenon so obscure, no tendency in human nature so venial, that our modern scientific society won’t take advantage of it. And by ‘modern scientific society’ I refer, of course, to our friends the investment banks.
That’s why at this time of year the offices of Sopwith Asset Management are flooded with greetings cards blazoned with messages of holiday cheer, peace on earth and goodwill to our fellow souls. And nestled underneath these cards are gift baskets packed with tons and tons of free loot.
My broker in Chicago fancies himself an amateur sommelier; he invariably sends me a case of fine wine. My salesman in London says he has an inside line at the distillery; he dispatches a bot or two of aged scotch. My man in Tokyo sends sake and the most exquisite floral displays. As for the New York crowd, they (true to form) outdo each other in sending me all of the above, and chocolates, and cigars, and caviar, and whatever else catches their eye.
It’s a profusion of presents, a glut of gifts, an oversupply of offerings. And to what purpose? Well, each of these bankers fondly imagines that come the New Year, when the time arrives for me to place my first trades of the season, I will remember their contribution with favor, and trade with them instead of with their hated rivals.
Note the economic calculations here. Even the most lavish of gift baskets won’t cost anywhere near as much as the commission from just one chunky trade. What’s more, trading commissions go directly into banker compensation; costs, on the other hand, are rarely subtracted directly from banker salaries. (The same logic, inverted, applies on our side of the equation: I pay broker commissions using my investors’ money, but get to drink the scotch myself).
Of course, the entire exercise is counterproductive, simply because everybody does it. If everybody sends a gift, then nobody stands out. So I end up trading with whoever offers me the best trade terms, expensive gifts be damned.
And the bankers know this. But they’re in a bind. If they, heaven forbid, choose not to bribe me any given Christmas, then they will stand out from the crowd, and I may choose to punish them by not trading with them. They can’t risk that, and so we settle into a happy (albeit unhealthy) equilibrium.
In any case I view the gift baskets as a sideshow. Because I never lose sight of what’s important – our real Christmas presents, and the ultimate in free loot: our annual bonuses. Merry Christmas, everyone!
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