宽客:暗池

On a sultry Tuesday evening in late April 2009, the quants convened for the seventh annual Wall Street Poker Night in the Versailles Room of the St. Regis Hotel in midtown Manhattan. It was a far more subdued affair than the heady night three years earlier when the elite group of mathematical traders stood atop the investing universe. Many of the former stars of the show—Ken Griffin, Cliff Asness, and Boaz Weinstein—were missing. They didn’t have time for games anymore. In the new landscape, the money wasn’t pouring in as it used to.
Now they had to go out and hustle for their dollars.
Griffin was in Beverly Hills hobnobbing with former junk bond king Michael Milken at the Milken Institute Global Conference, where rich people
gathered for the primary purpose of reminding one another how smart they  are. His IPO dreams had evaporated like a desert mirage, and he was furiously trying to chart a new path to glory. But the wind was blowing  against him in early 2009. Several of his top traders had left the firm. And  why not? Citadel’s main fund, Kensington, had lost more than half its assets in 2008. In order to collect those lucrative incentive fees—the pie slice managers keep after posting a profit—the fund would need to gain more than 100 percent just to break even. That could take years. To instant-gratification hedge fund managers, you might as well say forever. Or how about never?

Griffin wasn’t shutting down the fund, though. Instead, he was launching   new funds, with new strategies—and new incentive fees. He also was venturing into the investment banking world, trying to expand into new businesses as others faded. The irony was rich. As investment banks turned into commercial banks after their failed attempt to become hedge funds, a hedge fund was turning into an investment bank.
Some saw it as a desperate move by Griffin. Others thought it could be another stroke of genius. The toppled hedge fund king from Chicago was moving to take over business from Wall Street as his competitors were shackled by Washington’s bailouts. His funds had made something of a comeback, advancing in the first half of the year as the chaos of the previous year abated. Whatever the case, Griffin hoped investors would see the debacle of 2008 as a one-time catastrophe, never to be repeated. But it was a tough sell.

Weinstein, meanwhile, was in Chicago hustling for his hedge fund launch. He was busy trying to convince investors that the $1.8 billion hole he’d left behind at Deutsche Bank was a fluke, a nutty mishap that could only happen in the most insane kind of market. By July, he’d raised more than $200 million for his new fund, Saba Capital Management, a big fall from the $30 billion in positions he’d juggled for Deutsche Bank. Setting up shop in the  Chrysler Building in mid-town Manhattan, Saba was set to start trading in
August.
Asness stayed home with his two pairs of twins and watched his beloved  New York Rangers lose to the Washington Capitals in the decisive game  seven of the National Hockey League’s Eastern Conference playoff series. He was also busy launching new funds of his own. AQR had even ventured  into the plain-vanilla—and low-fee—world of mutual funds. In a display of  confidence in his strategies, Asness put a large chunk of his own money  into AQR funds, including $5 million in the Absolute Return Fund. He also  put $5 million into a new product AQR launched in 2008 called Delta, a low-fee hedge fund that quantitatively replicated all kinds of hedge fund  strategies, from long-short to “global macro.” Several of AQR’s funds had  gotten off to a good start for the year, particularly his convertible bond  funds—the decades-old strategy laid out by Ed Thorp in Beat the Dealer that had launched Citadel and hundreds of other hedge funds in the 1990s.
Asness even dared to think the worst, finally, was behind him. He managed  to find a bit of time to unwind. After working for months straight with barely a weekend off, Asness took a vacation in March to hike the craggy hills of  Scotland. He even left his BlackBerry behind. But there were still reminders  of his rough year. A newspaper article about AQR mentioned Asness’s  penchant for smashing computers. To his credit, he was now able to laugh at the antics he’d indulged in at the height of the turmoil, writing a tongue-in-cheek note to the editor protesting that it had “happened only three times, and on each occasion the computer screen deserved it.”

But there was Peter Muller, walking briskly among the poker crowd in a brown jacket, well tanned, slapping old friends on the back, beaming that California smile. Muller seemed calm on the outside, and with good reason: having earned north of $20 million in 2008, he was one of Morgan’s highest earners for the year. Inside, he was seething. The Wall Street Journal had broken a story the week before that PDT might split off from Morgan Stanley, in part because its top traders were worried that the government, which had given the bank federal bailout funds, would curb their massive bonuses. Muller had been working on a new business model for PDT for more than a year
but was biding his time before he went public with his plans. The Journal  article beat him to the punch, causing him no end of bureaucratic
headaches. PDT had, in a flash, become a pawn in a game of giants—Wall  Street versus the U.S. government. The move looked to some as if Morgan  had crafted a plan to have its cake and eat it, too—spin off PDT, make a big  investment, and get the same rewards while none of the traders lost a dime of their fat bonuses.

To Muller, it was a nightmare. Ironically, Morgan insiders even accused  Muller of leaking the story to the press. Of course, he hadn’t: Muller didn’t  talk to the press unless he absolutely needed to.  But he had one thing to look forward to: poker. And when it came to
poker, Muller was all business.  Jim Simons, now seventy-one years old, was in attendance, hunched  over a crowded dining table in a blue blazer and gray slacks, philosophically  stroking his scraggly gray beard. But all was not well in Renaissance land.
While the $9 billion Medallion fund continued to print money, gaining 12  percent in the first four months of the year, the firm’s RIEF fund—the fabled  fund that Simons once boasted could handle a whopping $100 billion (a  fantasy it never even approached)—had lost 17 percent so far in 2009,  even as the stock market was rising, tarnishing Simons’s reputation as a  can’t-lose rainmaker. RIEF investors were getting upset about the disparity  between the two funds, even though Simons had never promised that it  could even approach the performance of Medallion. Assets in Renaissance  had fallen sharply, sliding $12 billion in 2008 to $18 billion, down from a  peak of about $35 billion in mid-2007, just before the August 2007  meltdown.

There were other big changes in Simons’s life, hints that he was  preparing to step down from the firm he’d first launched in 1982. In 2008,
he’d traveled to China to propose a sale of part of Renaissance to the China Investment Corp., the $200 billion fund owned and run by the
Chinese government. No deal was struck, but it was a clear sign that the aging math whiz was ready to step aside. Indeed, later in the year Simons retired as CEO of Renaissance, replaced by the former IBM voice  recognition gurus Peter Brown and Robert Mercer.
Perhaps most shocking of all, the three-pack-a-day Simons had quit  smoking.
Meanwhile, other top quants mixed and mingled. Neil Chriss, whose  wedding had seen the clash of Taleb and Muller over whether it was
possible to beat the market, held session at a table with several friends.  Chriss was a fast-rising and brilliant quant, a true mathematician who’d  taught for a time at Harvard. He’d recently launched his own hedge fund,  Hutchin Hill Capital, which received financial backing from Renaissance and  had knocked the cover off the ball in 2008.  In a back room, before play began, a small private poker game was in
session. Two hired-gun poker pros, Clonie Gowen and T. J. Cloutier,  looked on, wincing from time to time at the clumsy play.
The crowd, still well heeled despite the market trauma, was dining on rack  of lamb, puff pastry, and lobster salad. Wine and champagne were served  at the bar, but most were taking it slow. There was still a lot of poker to play.
And the party atmosphere of years gone by was diminished.  A chime rang out, summoning the players to the main room. Rows of
tables with cards fanned out across them and dealers prim in their vested  suits awaited them. Simons addressed the gathering crowd, talking about  how the tournament had been getting better and better every year, helping  advance the cause of teaching students mathematics. The quants in  attendance somehow didn’t think it ironic that their own profession  amounted to a massive brain drain of mathematically gifted people who  could otherwise find careers in developing more efficient cars, faster  computers, or better mousetraps rather than devising clever methods to  make money for the already rich.
Soon enough play began. The winner that night was Chriss, whose hot  hand at trading spilled over to the poker table. Muller didn’t make the final  rounds.
It had been a wildly tumultuous three years on Wall Street, drastically  changing the lives of all the traders and hedge fund managers who’d
attended the poker tournament in 2006. A golden era had come and  passed. There was still money to make, but the big money, the insane
money, billions upon billions … that train had left the station for everyone
but a select few.
Muller, ensconced in his Santa Barbara San Simeon, was hatching his plans for PDT. Its new direction wasn’t just a change for Muller and
company; it marked a seminal shift for Morgan Stanley, once one of the  most aggressive kill-or-be-killed investment banks on Wall Street. By 2009,  PDT, even in its shrunken state, was the largest proprietary trading  operation still standing at Morgan. Its departure, if it happened, would  cement the historic bank’s transformation from a cowboy, risk-hungry,  money-printing hot rod into a staid white-shoe banking company of old that  made money by making loans and doing deals—not by flinging credit  default swaps like so many Frisbees through the Money Grid and trading  billions in other tangled derivatives through souped-up computers and  clumsy quant models.
Most assuredly, it would be a big change for PDT, once Morgan’s secret  quant money machine, and its mercurial captain.
Griffin, Muller, Asness, and Weinstein were all intent on making it work  again, looking boldly into the future, chastened somewhat by the monstrous  losses but confident they’d learned their lessons.  But more risk lurked. Hedge fund managers who’ve seen big losses can
be especially dangerous. Investors, burned by the losses, may become  demanding and impatient. If big gains don’t materialize quickly, they may  bolt for the exits. If that happens, the game is over.

That means there can be a significant incentive to push the limits of the  fund’s capacity to generate large gains and erase the memory of the  blowup. If a big loss is no worse than a small loss or meager gains—since  either can mean curtains—the temptation to jack up the leverage and roll  the dice can be powerful.  Such perverse and potentially self-destructive behavior isn’t  countenanced by the standard dogmas of modern finance, such as the  efficient-market hypothesis or the belief that the market always trends  toward a stable equilibrium point. Those theories were increasingly coming  under a cloud, questioned even by staunch believers such as Alan  Greenspan, who claimed to have detected a flaw in the rational order of  economics he’d long championed.  In recent years, new theories that captured the more chaotic behavior of  financial markets had arisen. Andrew Lo, once Cliff Asness’s teacher at  Wharton and the author of the report on the quant meltdown of August  2007 that warned of a ticking Doomsday Clock, had developed a new  theory he called the “adaptive market hypothesis.” Instead of a rational  dance in which market prices waltz efficiently to a finely tuned Bach cantata,
Lo’s view of the market was more like a drum-pounding heavy-metal  concert of dueling forces that compete for power in a Darwinian death
dance. Market participants were constantly at war trying to squeeze out the  last dime from inefficiencies, causing the inefficiencies to disappear (during  which the market returns briefly to some semblance of equilibrium), after  which they start hunting for fresh meat—or die—creating a constant, often  chaotic cycle of destruction and innovation.
While such a vision seems unnerving, it appeared to many to be far more  realistic, and certainly captured the nature of the wild ride that started in  August 2007.
Then there were the behavioral finance theories of Daniel Kahneman,  who picked up a Nobel Prize for economics in 2002 (his colleague, Amos  Tversk, had passed away years earlier). The findings of behavioral finance  —often studies conducted on hapless undergraduate students in stark  university labs—had shown time and again that people don’t always make  optimal choices when it comes to money.
A similar strand of thought, called neuroeconomics, was delving into the  hardwiring of the brain to investigate why people often make decisions that  aren’t rational. Some investors pick stocks that sound similar to their own  name, for instance, and others pick stocks with recognizable ticker  symbols, such as HOG (Harley-Davidson). Evidence was emerging that  certain parts of the brain are subject to a “money illusion” that blinds people  to the impact of future events, such as the effect of inflation on the present  value of cash—or the possibility of a speculative bubble bursting.  A small group of researchers at a cutting-edge think tank called the Sante  Fe Institute, led by Doyne Farmer (the hedge fund manager and chaotician  who briefly met Peter Muller in the early 1990s), was developing a new way
to look at financial markets as an ecology of interacting forces. The hope  was that by viewing markets in terms of competing forces vying for limited  resources, much like Lo’s evolutionary vision, economists, analysts, and  even traders will gain a more comprehensive understanding of how markets  work—and how to interact with those markets—without destroying them.
And while quants were being widely blamed for their role in the financial  crisis, few—aside from zealots such as Taleb—were calling for them to be  cast out of Wall Street. That would be tantamount to banishing civil  engineers from the bridge-making profession after a bridge collapse.

（to be continued）