The Fear Index (15 page)

‘Nose-diving,’ added Klein, with a nervous giggle.

‘Save it, guys,’ said Quarry, ‘there are civilians present.’ He addressed the clients: ‘I remember a couple of traders at Goldman who happened to be shorting airline insurance on the morning of 9/11. They did a high-five in the middle of the office when the first plane hit. They weren’t to know. None of us knows. Shit happens.’

Klein’s eyes were still riveted to the market data. ‘Whoa,’ he murmured appreciatively, ‘your little black box is really cleaning up, Alex.’

Hoffmann stared over Klein’s shoulder. The figures in the Execution column were changing rapidly as VIXAL took profits on its options to sell Vista Airways’ stock at the pre-crash price. The P&L meter, converted into dollars, was a blur of pure profit.

Easterbrook said, ‘I wonder how much you guys are going to make from this one trade – twenty million, thirty million? Jesus, Hugo, the regulators are going to be swarming over this like ants at a picnic.’

Quarry said, ‘Alex? We should go and take that meeting.’

But Hoffmann, unable to take his eyes from the figures on the trading screen, was not listening. The pressure in his skull was intense. He put his fingers to his wound and traced his stitches. It felt to him as if they were stretched so tight they might split apart.

7

It can’t continue forever. The nature of exponentials is that you push them out and eventually disaster happens
.

GORDON MOORE, INVENTOR OF MOORE’S LAW (2005)

THE RISK COMMITTEE of Hoffmann Investment Technologies met briefly at 11.57 a.m., according to a note drawn up subsequently by Ganapathi Rajamani, the company’s chief risk officer. All five members of the senior management team were listed as present: Dr Alexander Hoffmann, president of the company; the Hon. Hugo Quarry, chief executive officer; Lin Ju-Long, chief financial officer; Pieter van der Zyl, chief operating officer; and Rajamani himself.

It was not quite as formal as the minutes made it sound. Indeed, afterwards, when memories were compared, it was agreed that nobody had even sat down. They all stood around in Quarry’s office, apart from Quarry himself, who perched on the edge of his desk so that he could keep an eye on his computer terminal. Hoffmann took up his former position at the window and occasionally parted the slats of the blinds to check on the street below. That was the other thing everyone remembered: how distracted he seemed.

‘Okay,’ said Quarry, ‘let’s keep this quick. I’ve got a hundred billion dollars on the hoof unattended in the boardroom and I need to get back in there. Close the door, will you, LJ?’ He waited until there was no chance of their being overheard. ‘I take it we all saw what just happened. The first question is whether by making such a large bet to the down side on Vista Airways shortly before its share price collapsed we’re going to trigger an official investigation. Gana?’

‘The short answer is yes, almost certainly.’ Rajamani was a neat, precise young man, with a strong sense of his own importance. His job was to keep an eye on the fund’s risk levels and ensure they complied with the law. Quarry had poached him from the Financial Services Authority in London six months earlier to serve as a bit of window-dressing.

‘Yes?’ repeated Quarry. ‘Even though we couldn’t possibly have known what was going to happen?’

‘The whole process is automatic. The regulators’ algorithms will have detected any unusual activity surrounding the airline’s stock immediately prior to the price collapse. That will already be leading them straight to us.’

‘But we haven’t done anything illegal.’

‘No. Not unless we sabotaged the plane.’

‘We didn’t, did we?’ Quarry glanced around. ‘I mean, I’m all in favour of people using their initiative …’

‘What they
will
want to know, however,’ continued Rajamani, ‘is why we shorted twelve and a half million shares at that precise moment. I know this sounds an absurd question, Alex, but is there any way VIXAL could have acquired news of the crash before the rest of the market?’

Reluctantly Hoffmann let the slats of the blind click shut and turned to face his colleagues. ‘VIXAL takes a direct digital news feed from Reuters – that might give it an advantage of a second or two over a human trader – but so do plenty of other algorithmic systems.’

Van der Zyl said, ‘Besides, you couldn’t do much in that time. A position the size of ours would have taken some hours to put together.’

‘When did we start acquiring the options?’ asked Quarry.

Ju-Long said, ‘As soon as the European markets opened. Nine o’clock.’

‘Can we just stop this right now?’ said Hoffmann irritably. ‘It will take us less than five minutes to show even the most dumb-assed regulator that we shorted that stock as part of a pattern of bets to the down side. It was nothing special. It was a coincidence. Get over it.’

‘Well, speaking as a former dumb-ass regulator,’ said Rajamani, ‘I have to say I agree with you, Alex. It’s the pattern that matters, which is why actually I tried to talk to you about it earlier this morning, if you remember.’

‘Yeah, well, I’m sorry, but I was late for the presentation.’ Quarry should never have hired this guy, Hoffmann thought. Once a regulator, always a regulator: it was like a foreign accent – you could never quite hide where you came from.

Rajamani said, ‘What we really need to focus on is the level of our risk if the markets rally – Procter and Gamble, Accenture, Exelon, dozens of them: tens of millions in options since Tuesday night. These are all huge one-way bets we have taken.’

‘And then there is our exposure to the VIX,’ added van der Zyl. ‘That’s been ringing alarm bells with me for some days now. I did mention this to you, Hugo, last week, if you remember?’ He had once taught engineering at the University of Technology in Delft and retained a pedagogic manner.

Quarry said, ‘So where are we on the VIX? I’ve been so busy preparing for the presentation, I haven’t actually checked our positions lately.’

‘The last time I looked, we were up to twenty thousand contracts.’

‘Twenty
thousand
?’ Quarry shot a look at Hoffmann.

Ju-Long said, ‘We started accumulating VIX futures back in April, when the index stood at eighteen. If we had sold earlier in the week we would have done very well, and I assumed that’s what would happen. But rather than following the logical course and selling, we are still buying. Another four thousand contracts last night at twenty-five. That is one hell of a level of implied volatility.’

Rajamani said, ‘I’m seriously worried, frankly. Our book has gone all out of shape. We’re long gold. We’re long the dollar. We’re short every equity futures index.’

Hoffmann looked from one to another – from Rajamani to Ju-Long to van der Zyl – and suddenly it was clear to him that they had caucused beforehand. It was an ambush – an ambush by financial bureaucrats. Not one of them was qualified to be a quant. He felt his temper beginning to rise. He said, ‘So what are you suggesting we do, Gana?’

‘I think we have to start liquidating some of these positions.’

‘That’s just about the stupidest goddam thing I’ve ever
heard
,’ said Hoffmann. In his frustration he slapped the back of his hand hard on the blinds, rattling them against the windows. ‘Jesus, Gana, we made close to eighty million dollars last week. We just made another forty million this morning. And you want us to ignore VIXAL’s analysis and go back to discretionary trading?’

‘Not ignore it, Alex. I never said that.’

Quarry said quietly, ‘Give him a break, Alex. It was only a suggestion. It’s his job to worry about risk.’

‘No, actually, I won’t give him a break. He wants us to abandon a strategy that’s showing massive alpha, which is exactly the kind of illogical, insane reaction to success, based on fear, that VIXAL is designed to exploit! And if Gana doesn’t believe that algorithms are inherently superior to human beings when it comes to playing the market, then he’s working in the wrong shop.’

Rajamani, however, was unfazed by his company president’s tirade. He had a reputation as a terrier: at the FSA he had gone after Goldman. He said, ‘I have to remind you, Alex, that the prospectus of this company promises clients exposure to a yearly volatility of no more than twenty per cent. If I see that those statutory risk limits are in danger of being breached, I am obliged to step in.’

‘Meaning what?’

‘Meaning, if the level of our exposure isn’t dialled back, I will have to notify the investors. Meaning I really must talk to their board.’

‘But this is
my
company.’

‘And the investors’ money, or most of it.’

In the silence that followed, Hoffmann started massaging his temples vigorously with his knuckles. His head was aching badly again: he needed a painkiller. ‘Their board?’ he muttered. ‘I’m not even sure who’s on their frigging board.’ As far as he was concerned, it was a purely technical legal entity, registered in the Cayman Islands for tax purposes, that controlled the clients’ money and paid the hedge fund its management and incentive fees.

‘Okay,’ said Quarry, ‘I don’t think we’re anywhere near that point yet. As they used to say in the war, let’s keep calm and carry on.’ He bestowed one of his most winning smiles upon the room.

Rajamani said, ‘For legal reasons I must ask that my concerns be minuted.’

‘Fine. Write up a note of the meeting and I’ll sign it. But don’t forget you’re a new boy and this is Alex’s company – Alex’s and mine, though we’re both only here because of him. And if he trusts VIXAL then we all should trust it – Christ knows, we can hardly fault its performance. However, I agree, we also have to keep an eye on the risk level – we don’t want to be so obsessed watching the instrument panel we fly into the side of a mountain. Alex, you’d accept that? So, given that most of these equities are US-traded, what I suggest is we reconvene in this office at three thirty when the American markets open, and review the situation then.’

Rajamani said ominously, ‘In that case, I think it would be prudent to have a lawyer present.’

‘Fine. I’ll ask Max Gallant to stay behind after lunch. You okay with that, Alex?’

Hoffmann made a weary gesture of agreement.

At 12.08, according to the minutes, the meeting broke up.

‘OH, ALEX, BY the way,’ said Ju-Long, turning in the doorway as they were filing out, ‘I almost forgot – that account number of yours you asked about? It turns out it is on our system.’

‘What account is this?’ asked Quarry.

Hoffmann said, ‘Oh, nothing. Just a query I had. I’ll catch up with you in a second, LJ.’

The trio walked back to their offices, Rajamani leading the way. As Quarry watched them go, the expression of suave conciliation with which he had ushered them out changed to a sneer of contempt. ‘What a pompous little shit that fellow is,’ he said. He imitated Rajamani’s flawless, clipped English: ‘“I really must talk to their board.” “It would be prudent to have a lawyer present.”’ He mimed taking aim at him along the barrel of a rifle.

Hoffmann said, ‘It was you who hired him.’

‘Yes, all right, point taken, and it’ll be me who fires him, don’t you worry.’ He pulled an imaginary trigger a second before the trio rounded a corner and moved out of sight. ‘And if he thinks I’m paying Max Gallant two thousand francs an hour to come and cover his ass he’s in for a shock.’ Suddenly Quarry dropped his voice. ‘We are okay here, aren’t we, Alexi? I don’t have to be worried? It’s just that for a second in there I had the same feeling I used to get when I was at AmCor, selling collateralised debt.’

‘What feeling was that?’

‘That every day I’m getting richer but I’m not sure how.’

Hoffmann regarded him with surprise. In eight years he had never heard Quarry express anxiety. It was almost as unsettling as some of the other things that had happened that morning. ‘Listen, Hugo,’ he said, ‘we can put an override on VIXAL this afternoon if that’s what you want. We can let the positions wind down and return the money to the investors. I’m actually only in this game in the first place because of you, remember?’