Robert Harris - The Fear Index

He started reading facts from his computer. VIXAL had almost entirely abandoned the company’s long position on S amp;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.

He said, ‘Okay, Gana, so what is your recommendation?’

‘There is only one option: override VIXAL and put the hedge back on.’

‘You want us to bypass the algorithm without even consulting Alex?’ asked Ju-Long.

‘I would most certainly consult him if I could find him,’ retorted Rajamani. ‘However, he is not answering his phone.’

Van der Zyl said, ‘I thought he was at lunch with you, Hugo.’

‘He was. He left halfway through in a hurry.’

‘Where did he go?’

‘Lord knows. He just took off without a word.’

Rajamani said, ‘That is just breathtaking irresponsibility. I’m sorry. He knew there was a problem. He knew we were scheduled to meet again this afternoon.’

There was a silence.

‘In my opinion,’ said Ju-Long, ‘and I would not say this except among us, I believe Alex is having some kind of breakdown.’

Quarry said, ‘Shut up, LJ.’

Van der Zyl chimed in: ‘But he is, Hugo.’

‘And you should shut up too.’

The Dutchman backed off quickly. ‘Okay, okay.’

‘Shall I minute this?’ enquired Rajamani.

‘No you damn well won’t.’ Quarry pointed an elegantly shod toe across the table at Rajamani’s computer terminal. ‘Now hear me well and good, Gana: if there’s any hint in these minutes of Alex in any way being mentally unreliable, then this company will be finished and you will have to take responsibility for that fact to all those colleagues out there, who are right now watching our every move, and to all our investors, who have made a great deal of money thanks to Alex and who will never forgive you. Do you understand what I’m saying? Let me summarise the situation in four words for you: no Alex, no company.’

For several seconds, Rajamani stared him out. Then he frowned and lifted his hands from the keyboard.

‘Okay then,’ resumed Quarry. ‘In the absence of Alex, let’s try looking at this the other way. If we don’t override VIXAL and put the delta hedge back on, what are the brokers going to say?’

Ju-Long said, ‘They are just so hot on collateral these days, after what happened to Lehman’s. For sure they won’t allow us to trade unhedged on existing terms of settlement.’

‘So when will we have to start showing them some money?’

‘I would expect we’ll need to provide a substantial level of fresh collateral before close of business tomorrow.’

‘And how much do you reckon they’ll want us to put up?’

‘I’m not sure.’ Ju-Long moved his neat, bland head from side to side, weighing it up. ‘Maybe half a billion.’

‘Half a billion total?’

‘No, half a billion each.’

Quarry briefly closed his eyes. Five prime brokers – Goldman, Morgan Stanley, Citi, AmCor, Credit Suisse – half a billion to be deposited with each: two and a half billion dollars. Not funny money, not promissory notes or long-term bonds, but the pure crystal meth of liquid cash, wired over to them by 4.00 p.m. tomorrow. It was not that Hoffmann Investment Technologies didn’t have that kind of money. They only traded about twenty-five per cent of the cash lodged with them by their investors; the rest they didn’t need to show. The last time he looked, they had at least four billion dollars stashed in US Treasury bills alone. They could dip into that whenever they needed it. But my God – what a colossal hit on their reserves; what a step towards the precipice…

Rajamani interrupted his thoughts. ‘I am sorry, but this is madness, Hugo. This level of risk is far outside what is promised in our prospectus. If the markets were to rise strongly, we would be left facing billions in losses. We might even go bankrupt. Our clients could sue us.’

Ju-Long added: ‘Even if we continue trading, it will be unfortunate – will it not? – if the board of the fund has to be notified of our accelerated risk levels just as we are approaching individual investors to put another billion dollars into VIXAL-4.’

‘They will pull out,’ said van der Zyl mournfully. ‘Anyone would.’

Quarry was unable to sit still any longer. He jumped up and would have paced around the office but there wasn’t sufficient room. That this should happen now, after his two-billion-dollar pitch! The unfairness of it! He clawed the air and grimaced at the heavens. Unable to stomach Rajamani’s expression of moral superiority for a moment longer, he turned his back on his colleagues and leaned against the glass partition, his palms spread wide, staring out at the trading floor, heedless of who was watching. For a moment he tried to visualise what it would be like to manage an uncontrolled, unhedged investment fund exposed to the full force of the global markets: the seven-hundred-trillion-dollar ocean of stocks and bonds, currencies and derivatives that rose and fell ceaselessly against one another day after day, whipped by currents and tides and storms into vast maelstroms that no one could fathom. It would be like trying to cross the North Atlantic on an upturned dustbin lid with a wooden spoon for a paddle. And there was a part of him – the part that saw existence itself as a gamble that sooner or later one was bound to lose; the part that used to bet $10 K on which fly would take off first from a bar table, just to feel the thrill of fear – that side of his personality would have relished it, once. But nowadays he also wanted to hold on to what he had. He enjoyed being known as a rich hedge-fund manager, the cream of the elite, the financial equivalent of the Brigade of Guards. He was ranked 177 in the latest Sunday Times rich list; they had even printed a picture of him on the bridge of a Riva 115 (‘Hugo Quarry leads the dream bachelor life on the shores of Lake Geneva – and why not, as CEO of one of the most successful hedge funds in Europe?’). Was he really going to jeopardise all that, just because some bloody algorithm had decided to ignore the basic rules of investment finance? On the other hand, the only reason he was on the rich list in the first place was because of the bloody algorithm. He groaned. This was hopeless. Where was Hoffmann?