The Fear Index (26 page)

He decided they should call themselves Hoffmann Investment Technologies in a nod to Jim Simons’s legendary quant shop, Renaissance Technologies, over in Long Island: the daddy of all algorithmic hedge funds. Hoffmann had objected strongly – the first time Quarry had encountered his mania for anonymity – but Quarry was insistent: he saw from the start that Hoffmann’s mystique as a mathematics genius, like that of Jim Simons, would be an important part of selling the product. AmCor agreed to act as prime brokers and to let Quarry take some of his old clients with him in return for a reduced management fee and ten per cent of the action. Then Quarry had hit the road of investors’ conferences, moving from city to city in the US and across Europe, pulling his wheeled suitcase through fifty different airports. He had loved this part – loved being a salesman, he who travels alone, walking in cold to an air-conditioned conference room in a strange hotel overlooking some sweltering freeway and charming a sceptical audience. His method was to show them the independently back-tested results of Hoffmann’s algorithm and the mouth-watering projections of future returns, then break it to them that the fund was already closed: he had only fulfilled his engagement to speak in order to be polite but they didn’t need any more money, sorry. Afterwards the investors would come looking for him in the hotel bar; it worked nearly every time.

Quarry had hired a guy from BNP Paribas to oversee the back office, a receptionist, a secretary, and a French fixed-income trader from AmCor who had run into some regulatory issues and needed to get out of London fast. On the technical side, Hoffmann had recruited an astrophysicist from CERN and a Polish mathematics professor to serve as quants. They had run simulations throughout the summer and had gone live in October 2002 with $107 million in assets under management. They had made a profit in the first month and had gone on doing so ever since.

Quarry paused in his tale to let Leclerc’s cheap ballpoint catch up with his flow of words.

And to answer his other questions: no, he was not sure exactly when Gabrielle had moved in with Hoffmann: he and Alex had never seen one another much socially; besides, he had been travelling a lot that first year. No, he had not attended their wedding: it had been one of those solipsistic ceremonies conducted at sunset on a Pacific beach somewhere, with two hotel employees as witnesses and no family or friends in attendance. And no, he had not been told that Hoffmann had had a mental breakdown at CERN, although he had guessed it: when he went to the loo in his apartment that first night, he had rummaged through Hoffmann’s bathroom cabinet (as one does) and found a veritable mini-pharmacy of antidepressants – mirtazapine, lithium, fluvoxamine – he couldn’t remember them all exactly, but it had looked pretty serious.

‘That didn’t put you off going into business with him?’

‘What? The fact he wasn’t “normal”? Good Lord, no. To quote Bill Clinton – not necessarily a fount of wisdom in all circumstances, I grant you, but right in this one – “normalcy is overrated: most normal people are assholes”.’

‘And you have no idea where Dr Hoffmann is at this moment?’

‘No, I do not.’

‘When did you last see him?’

‘At lunch. The Beau-Rivage.’

‘So he left without explanation?’

‘That’s Alex.’

‘Did he seem agitated?’

‘Not especially.’ Quarry swung his feet off the desk and buzzed his assistant. ‘Is Alex back yet, do we know?’

‘No, Hugo. Sorry. Incidentally, Gana just called. The Risk Committee is waiting for you in his office. He’s trying to get hold of Alex urgently. There’s a problem, apparently.’

‘You surprise me. What is it now?’

‘He said to tell you that “VIXAL is lifting the delta hedge”. He said you’d know what that meant.’

‘Okay, thanks. Tell them I’m on my way.’ Quarry released the switch and looked thoughtfully at the intercom. ‘I’m going to have to leave you, I’m afraid.’ For the first time he felt a definite spasm of anxiety in the pit of his stomach. He glanced across the desk at Leclerc, who was regarding him intently, and suddenly he realised he had been gabbling away much too freely: the copper didn’t seem to be investigating the break-in any more so much as investigating Hoffmann.

‘Is that important?’ Leclerc nodded at the intercom. ‘The delta hedge?’

‘It is rather. Will you excuse me? My assistant will show you out.’

He left abruptly without shaking hands, and soon afterwards Leclerc found himself being conducted back across the trading floor, preceded by Quarry’s glamorous red-headed gatekeeper in her low-cut sweater. She seemed in a hurry to get him out of there, which naturally made him slow his pace. He noticed how the atmosphere had changed. Here and there around the room several groups of three or four were gathered in anxious tableaux around a screen, with one person seated, clicking on a mouse, and the others leaning over his shoulders; occasionally someone would point to a graph or a column of figures. And now Leclerc was reminded much less of a seminary and more of doctors assembled at the bedside of a patient displaying grave and baffling symptoms. On one of the big TV screens a network was showing pictures of an aircraft crashing. Standing beneath the TV was a man in a dark suit and tie. He was preoccupied, sending a text message on his mobile phone, and it took Leclerc a moment to recollect who it was.

‘Genoud,’ he muttered to himself, and then more loudly, moving towards him, ‘Maurice Genoud!’ at which Genoud looked up from his texting – and was it Leclerc’s imagination, or did his narrow features tense slightly at the sight of this figure bearing down on him from his past?

He said warily, ‘Jean-Philippe.’ They shook hands.

‘Maurice Genoud. You’ve put on weight.’ Leclerc turned to Quarry’s assistant. ‘Would you excuse us a moment,
mademoiselle
? We’re old friends. You’ll see me out, won’t you, Maurice? Let me look at you, lad. Quite the prosperous civilian nowadays, I see.’

Smiles did not come naturally to Genoud; it was a pity he bothered, thought Leclerc.

‘And you? I’d heard you’d retired, Jean-Philippe.’

Leclerc said, ‘Next year. I can’t wait. Tell me, what on earth do they do here?’ He gestured to the trading floor. ‘Presumably you can understand it. I’m too old to get my head around it.’

‘I don’t know either. I’m just paid to keep them safe.’

‘Well you’re not doing a very good job of it!’ Leclerc clapped him on the shoulder. Genoud scowled. ‘I’m only joking. But seriously, what do you make of this business? A bit odd, wouldn’t you say, having all that security and then allowing a complete stranger to wander in off the street and attack you? Did you install it, I wonder?’

Genoud moistened his lips before replying, and Leclerc thought, he’s playing for time; that’s what he used to do back in the Boulevard Carl-Vogt when he was trying to think up some story. He’d distrusted the younger man ever since the days when Genoud was a rookie under his command. There was, in his opinion, nothing that his former colleague would not do – no principle he wouldn’t betray, no deal he wouldn’t cut, no blind eye he wouldn’t turn – if he could make sufficient money and stay just within the law.

Genoud said, ‘Yes, I installed it. What of it?’

‘There’s no need to get all defensive. I’m not blaming you. We both know you can surround someone with the best security in the world, but if they forget to use it there’s nothing you can do.’

‘That’s true. Now if you don’t mind, I ought to get on with my work. This isn’t the public sector, you know – I can’t stand here gossiping.’

‘You can learn a lot by gossiping.’

They moved towards reception. Leclerc said, man-to-man, ‘So what’s he like, then, this Dr Hoffmann?’

‘I hardly know him.’

‘Enemies?’

‘You’d have to ask him.’

‘So there’s no one here dislikes him that you’ve heard about? No one he’s fired?’

Genoud didn’t even pretend to think about it. ‘No. Enjoy your retirement, Jean-Philippe. You deserve it.’

13

The extinction of species and of whole groups of species, which has played so conspicuous a part in the history of the organic world, almost inevitably follows on the principle of natural selection; for old forms will be supplanted by new and improved forms
.

CHARLES DARWIN,
On the Origin of Species
(1859)

THE RISK COMMITTEE of Hoffmann Investment Technologies met for the second time that day at 16.25, Central European Time, fifty-five minutes after the opening of the US markets. Present were the Hon. Hugo Quarry, chief executive officer; Lin Ju-Long, chief financial officer; Pieter van der Zyl, chief operating officer; and Ganapathi Rajamani, chief risk officer, who took the minutes and in whose office the meeting was held.

Rajamani sat behind his desk like a headmaster. Under the terms of his contract he was not permitted to share in the annual bonus. This was supposed to make him more objective about risk, but in Quarry’s opinion it had simply had the effect of turning him into a licensed prig who could afford to look down his nose at big profits. The Dutchman and the Chinese occupied the two chairs. Quarry sprawled on the sofa. Through the open blinds he watched Amber leading Leclerc towards reception.

The first item noted the absence, without explanation, of Dr Alexander Hoffmann, company president – and the fact that Rajamani wanted this dereliction of duty officially minuted was, to Quarry, the first indication that their chief prig officer was preparing to play hardball. Indeed, he seemed to take a grim delight in laying out just how perilous their position had become. He announced that since the last meeting of the committee, some four hours earlier, the fund’s risk exposure had increased dramatically. Every warning indicator in the cockpit was flashing red. Decisions needed to be taken fast.

He started reading facts from his computer. VIXAL had almost entirely abandoned the company’s long position on S&P futures, its principal hedge against a rising market, stranding them with their plethora of shorts. It was also in the process of disposing of all – ‘I repeat, all’ – of its matching pairs of long bets on the eighty or so stocks it was shorting: in the last few minutes alone, the final remnants of a $70 million long position on Deloitte, taken up to hedge their massive short against its competitor Accenture, had been liquidated. And perhaps most troubling of all, as one by one the bets to the long side were lifted, there had been no corresponding move to buy back the stocks that were being shorted.

‘I have never seen anything like it before in my life,’ concluded Rajamani. ‘The plain fact is, this company’s delta hedge has gone.’

Quarry maintained a poker face, but even he was startled. His faith in VIXAL had always been unshakeable, but this was supposed to be a
hedge
fund – the clue was in the name, dummy. If you took away the hedge – if you dispensed with all the immensely intricate mathematical formulae that were supposed to ensure that you covered your risk – you might as well take the family silver and bet the lot on the 3.45 at Newmarket. It was true, the hedge put a ceiling on your gains, but it also put a floor under your losses. And given that there wasn’t a fund on earth that didn’t go through a rough patch every so often, if you didn’t put on a hedge, a run of bad calls could wipe you out. His skin felt clammy at the thought. He could taste his lunchtime
filet mignon de veau
rising like bile in his throat. He put the back of his hand to his forehead. I am literally breaking out in a cold sweat, he realised.

Rajamani continued to hammer away: ‘We have not merely abandoned our long position on S and P futures, we are actually
shorting
S and P futures. We have also increased our position on VIX futures to something approaching one billion dollars. And we are buying out-of-the-money puts that are so extreme – that presuppose such a massive deterioration in the market generally – that our only consolation is that we are at least picking them up for cents. In addition—’

Quarry held up his hand. ‘Okay, Gana. Thanks. We get it.’ He needed to take charge of this meeting quickly, before it turned into a rout. He was conscious that they were being scrutinised from the trading floor. They all knew the hedge had gone. Anxious faces kept bobbing up and down from behind their six-screen arrays like targets in a shooting gallery.

Van der Zyl said, ‘I’ll close the blinds.’ He started to rise.

Quarry said sharply, ‘No, leave them open, Piet, for God’s sake or they’ll think we’re forming a suicide pact in here. Actually, I’d like to see some smiles from you all, gentlemen, if you don’t mind – everybody smile: that’s an order. Even you, Gana. Let’s show the troops a little officer-class sangfroid.’

He hoisted his feet up on to the coffee table and laced his fingers behind his head in a parody of nonchalance, even though his fingernails were digging into his flesh so sharply the indentations would look like scars for the rest of the day. He glanced around at the personal photographs Rajamani had brought in from home to alleviate the gleaming Scandinavian gloom of the decor: a big wedding group taken at night in a Delhi garden, the garlanded bride and groom in the centre, grinning maniac ally; Rajamani as a student graduating from Cambridge, standing in front of the University Senate House; and two young children in school uniform, a boy and a girl, staring sombrely at the camera.