By John Helmer, Moscow
In this thriller the evil genius (EG) is, for once, not a Russian oligarch, Kremlin grandee, Russian computer hacker – not even a Moscow muzhik trained to use Facebook and Twitter to make or join flash mobs.
No, this time round he is an American particle physicist whose post-graduate misfortune at the hands of a US Congressional budget cut turned him into an obsessive with a short attention span at cocktail parties, almost no libido, and the not so novel idea that when people are frightened, they behave in predictable ways. Applied to stock markets, and to every type of investible stock, security, currency, commodity, or derivative, the idea is that terror and panic are programmable, and generate huge returns if the right computer algorithm can be devised to trigger counter-trend buying or selling.
Robert Harris, the author of this one, claims that Alexander Hoffman, the EG, principal of HIT (Hoffmann Investment Technologies) and inventor of the VIXAL algorithm series, has generated a rate of return on investment in his fund of 83% over the past three years, while the Dow Jones Industrial Average fell 25%. “Whoever woke at four in the morning because they were feeling happy?” asks EG Hoffman, at a briefing session with investors who are so impressed, they hand him a combined $2 billion in new funds.
These investors are identified as a couple of Swiss-French private bankers who made their early money stealing assets from Jews on the run from the Germans; a mega US banker; an Englishman with a name and background sounding suspiciously like the Rothschilds (“the Herxheimer banking and trading dynasty”), and two Chinese from Shanghai who try to bring six cyber-spies into the meeting-room. Unsuccessfully.
Representing the old Soviet Union at the HIT table in a manner of speaking, there is a billionaire who started in a communist youth movement, became a mathematics professor, and then generated a fortune selling insurance. In this tale he is Polish. Then there is “Elmira Gulzhan, the thirty-eight-year-old daughter of the President of Azakhstan [and] a resident of Paris.”
Hoffman goes on with his thought about waking up at 4 am. “[Fear] is so strong we’ve actually found it relatively easy to filter out the noise made by other emotional inputs and focus on this one signal. One thing we’ve been able to do, for instance, is correlate market fluctuations with the frequency rate of fear-related words in the media – terror, alarm, panic, horror, dismay, dread, scare, anthrax, nuclear. Our conclusion is that fear is driving the world as never before… digitalisation itself is creating an epidemic of fear…The rise of market volatility, in our opinion, is a function of digitalisation, which is exaggerating human mood swings by the unprecedented dissemination of information via the internet.”
While he’s saying this, his VIXAL-4 algorithm whirring away in the backroom was shorting the stock of a highly profitable airline, betting on a disaster. That materializes as the investors tour the trading room, when there’s an air crash at Domodedovo Airport. Hoffman earns about $30 million in the ball of fire.
Air traffic control at Domodedovo isn’t the only source of data for HIT’s fear index. The shadow Russia throws on the EG’s business model might be said to start with that ultimate fear word since Joe Stalin – Russia itself. But neither author Harris nor his HITman Hoffmann go that far. Still, the fear Russia casts is repeatedly summoned into play – by the Geneva policeman, for instance, who investigates the unravelling business at HIT. He complains he can no longer afford to live in Geneva, his home town, because all the residential real estate has been bought up at premium prices by “politicians from the central Asian republics, Russian oligarchs, Afghan warlords, arms-dealers – the real criminals of the world.”
When the cop opens his investigation of a break-in and biff on the head which Hoffmann suffers, he asks the EG if he has any enemies. “Some rich investor – Russian, perhaps – who’s lost money?” Hoffman’s reply is a corker: “We don’t lose money”.
And when the roster is called around the table of investors at HIT HQ – the Azakh billionairess says she’s in for several hundred million but will speak to her father, “and he will do as I say” – the EG and his Oxford-educated chief executive officer (PPE, 1st class hons.) announce: “if there ever there was a time for a spontaneous toast in the Russian manner, then I think this must be it.”
By the time they have downed the champagne and eaten their way through the business lunch that follows the pledging, HIT’s VIXAL-4 has wagered a billion dollars on short-sell options, including a short on a global volatility index. Then follows the predictable thriller chase sequence in which Hoffman murders two people – okay, let’s say it was manslaughter. One of the corpses belonged to HIT’s chief risk officer, an Anglo-Indian, who was running away from Hoffman with incriminating company records when he fell headlong into an empty liftwell.
Hoffman also threatens a middle-aged lady psychiatrist who had earlier treated him for paranoia, depression and death fantasies – only to discover his case records have been hacked into and stolen by, would you believe? VIXAL-4 going viral.
Hoffman then calls an emergency meeting at HIT HQ with his CEO. “VIXAL may be making decisions that are not entirely compatible with our interest”, Hoffman starts. “You mean our interest as a company?” the CEO interjects. “No, I mean our interest – the human interest.” “Aren’t they the same?” “Not necessarily.”
Not to spoil this drama and its nail-biter ending – you think you are speed-reading, but the 323 pages display only half the usual number of words – it turns out that the EG isn’t to blame for what happens. He also recovers from his head and burn injuries; gets his wife back; and earns $4.1 billion in a day. The wife says: “It’s all right, darling. Everything’s going to be all right now.” You betcha.
The beauty of the outcome, says one of HIT’s traders, is that the stock market regulators won’t be able to find fault with HIT. The profit came to “only zero-point-four per cent of total market volatility. No one will ever notice, except us.” And the impeccably expert list of advisors to the plot whom Harris lists up front – men from Citi Bank, Morgan Stanley, Merrill Lynch, Oxford Asset Management, The Turquoise Fund, Polar Capital Alva Fund, BlueCrest Capital Management, Jabre Capital Partners, and more. Of course, as Harris points out, “none of these…is responsible for the errors of fact, misguided opinions and Gothic flights of fantasy that follow.”
Of course, if everything that did follow in the tale was so stupid, Harris would hardly have bothered writing it to the end, selling it, and thanking the experts for their help in the enterprise. And there is a corollary — the data processed by VIXAL-4 all come from the news everyone can read from the financial wire services, the Financial Times, the Wall Street Journal, and even Harris’s former employers – the BBC, Observer, Sunday Times, and Daily Telegraph.
If what they have to report can be processed into a panic-inducing sell spiral that earns someone $4.1 billion on a wager of $1 billion in half a day, then the subliminal message appears to be that night terrors can be jolly good for you, if you manage to see through the fear message to the cash line. So if Harris’s mates in banking, hedge funds, and the London media tell you that Russia means volatility, isn’t it time you too woke up, and put your money, not where they tell you your mouth is, but where they set your bowels to rumbling?
And so it seemed last week, the first week of the investment year, when emerging market investors like those around the HIT table once again opted to put their money on Russia risk, according to the data collected by Emerging Portfolio Fund Research (EPFR) of Cambridge, Massachusetts.
Stay tuned to find out how much money will be made if, even before the presidential election due on March 4, readers reverse the line of the Financial Times, go short on the Fear Index, and long on Russia
Buyer note: The Fear Index by Robert Harris is published by Hutchinson of London, which is owned by the Random House Group, formerly a US-owned conglomerate. Since 1998, the group has been owned by Bertelsmann AG of Germany. That’s a privately owned company controlled by the family of the late Reinhard Mohn and his widow, Liz Mohn.