Friday, July 20, 2007

The grey-haired men

The recruitment director said to me: “No pressure, just go along and see if you like it. The session will go on most of the morning. If you think it’s for you we’ll arrange a formal interview.”

And so, with only the haziest notion of what a hedge fund was, I found myself in the conference room of a country hotel. Actually I was in the vestibule to the conference room, waiting with about eighty fund managers, financial advisors and associated financial marketing personnel. The cherry cookies were delicious, but there was no tea, and the coffee had just run out.

“Go on into the seminar” one of the organisers said, “and we’ll bring the coffee to you in your seat.”

The ten of us who had arrived late sat in the back row, and in due course cups of coffee were brought to us with lots of whispered enquiries as to milk and sugar. More noise as several of the back row stirred their coffee. Yet more noise as the coffee was finished and the clinking cups and saucers were put down on the floor (with subsidiary clatter whenever someone’s foot accidentally kicked the discarded china).

This muted racket wouldn’t normally have mattered, except that the darkened conference room contained an atmosphere of intense concentration. The other seminar attendees didn’t exactly turn round and shush us, but there were a few sharp looks in our direction. It was as if the back row had a frivolous attitude to a subject that the rest of the room regarded with acute seriousness.

Unlike other financial seminars I have attended, the audience was not the usual barrow boys hungry for success (new suits, gelled hair, incapable of keeping quiet). This gathering was older, leaner and uniformly grey-haired. Only two women were present (apart from Claudia, the business development manager on the presentation team).

The subject was hedge funds.

A bald, dome-headed, man from the presentation team talked us through a Power Point show about hedge funds:

Above: hedge funds are one of the key attributes of the economy, and they influence all our lives in various ways, yet very few people understand them (and still less can control them).

“The big sea change in recent years is the growing acceptability of hedge funds - after leverage there is about two trillion of private equity money that is the wall that keeps the London market buoyant. Hedge funds will NOT outperform equities but they will keep pace with them, and are much less volatile. There are approximately ten thousand hedge funds in the world today, and they are attracting the best people in the financial markets…”

Often he used betting terminology (which seemed appropriate considering the walls were hung with prints of race horses). Some of the slides were incomprehensible. We went through the presentation at a fast pace, no consideration given for those who couldn’t keep up.

“Shorting is a useful tool to have in your armoury” the dome-headed man said. There must have been some puzzled expressions as he added (looking as if he were particularly addressing us dim-wits in the back row) “Short means a short-term killing, in other words not a long-term investment. Short selling enables hedge fund managers to make money in falling markets. The manager borrows securities on collateral, immediately selling them in the market with the intention of buying them back later at a lower price. By taking both long and short positions in similar sectors the manager is able to protect the fund against losses. That way you can make money from a stock that you think is going to fall in value.”

Above: some of the slides were as clear as mud!

“Hedge funds use prime brokers such as Merrill Lynch in three ways - to act as their banker, to buy and sell shares, and also to act as a custodian. Very few institutions can offer this range of versatility. Hedge funds rely upon liquidity, so usually they focus on the top one hundred FTSE. All hedge funds utilise the concept of stop loss so if shares rise by three to five per cent it triggers an automatic sell. You have to be very careful hedge funds don’t migrate into other areas. You have to watch they do not change their strategy bit by bit…”

Above: looking from our table back into the restaurant - it was early so we had the place to ourselves for a while. Apparently all the staff in this restaurant are female (from owners down to kitchen hands). It doesn't advertise or do any overt marketing but relies solely on word of mouth recommendation.

After the seminar I found my contact in the presentation team and introduced myself. Everyone was very kind, considering I was a complete outsider looking for a job. I was asked to join them for dinner, the party also including a bona fide hedge fund manager. We went to an attractive restaurant, where we had a table in a big conservatory extension overlooking the terrace and the water garden (fountains, Victoria water lilies, hundreds of ducks). Rain from a summer tempest thundered down on the conservatory roof, making the purple bougainvillea tremble above us. Seven or eight peacocks, mournful from the rain, walked up and down the terrace outside the French windows watching us eat.

Above: the torrential rain falling on the conservatory roof gently shook the bourgainvillea.

It was obvious that the hedge fund manager was the guest of honour, the rest of the party hanging onto his every word. Aged about forty, the hedge fund manager was the very antithesis of a celebrity - dreary demeanour, very expensive black plastic glasses (that ironic look where expensive things look cheap), BIG shirt cuffs with oval gold cuff links. For someone so wealthy and successful, he appeared to have no ego problems, and was modest and polite to everyone.

“This guy is the Mycroft Holmes of hedge funds” said the dome-headed man admiringly. “It’s difficult to get information out of him, but when you do it’s all pure gold. Stick around and you can’t help but make money.”

The hedge fund manager talked about his frequent visits to Medallion, a secretive hedge fund based on Long Island (where they have campus-style headquarters complete with nuclear-proof bunkers):

“They trade about three hundred thousand times a day. Represents a massive proportion of the New York markets. It’s all due to quantitative people who write the models which generate signals to trade. It’s all automated. It’s all model driven - these are not individuals making decisions. They only trade their own money.”

“If it’s all their own money, how can anyone else invest through Medallion?” I asked.

“You can latch onto Medallion via Renaissance” said the dome-headed man knowingly. “They have the same strategy.” There was something about the way he said this that made me think I had asked a really stupid question.

Later there was a discussion about Gordon Brown’s stewardship of the economy.

“It’s not the success people think” said one of the grey-haired men. “We have coasted for ten years on the hard decisions taken by Norman Lamont, who is in fact one of the unsung heroes of the British economy. He’s the one who established the Exchequer’s reputation for being tough on inflation.”

“Well, you’ve a vested interest in saying that” said Claudia teasingly.

“On the contrary, I’ve no interest in talking-down the British economy” said the grey-haired man. “I just think Brown’s not all he’s cracked up to be. Take the independence of the Bank of England. There are persistent rumours that it was part of a botched attempt to take us into the Euro. That’s why the gold reserves were sold off at the same time. Far from being an inspired and courageous decision, it was actually a segment of a policy that failed - the fact that Bank independence worked is entirely co-incidental.”

“What’s your evidence for saying that?” said the dome-headed man.

“Well I’ll tell you my evidence. Just read The State We’re In by Will Hutton. That is the manifesto Brown has been covertly following since ninety-seven. When Blair would let him that is. It’s all in Hutton - Bank of England independence, stripping out the powers of the Royal Prerogative, all the stakeholder business. It’s all there if you look.”

A few days later I went to the library and requested a copy of The State We’re In.

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