End Game (6 page)

Grey was fifty-one, a big, handsome man with slicked-back hair who was the principal partner of Red River Investments. The term hedge fund had gone out of fashion, discredited by the global financial crisis and made unattractive by regulation, and Red River was technically a DIV, or Diversified Investment Vehicle, but its activities were pretty much the same. Grey had come out of one of the few operations in the hedge fund world that had bet on the collapse of the subprime market and earned staggering returns for its temerity – or perspicuity – when the financial world was imploding in the heady summer of 2008. Grey himself had established his reputation with a series of audacious bets on oil and gas prices during the downturn and had garnered enough of a client following to go out on his own and set up Red River in 2012. He named the company after the ranch in Colorado that he had bought with a fraction of the earnings of those years. The vast bulk of his profits went into the fund, together with an initial subscription of $2 billion from external investors. Six years later, he had upwards of $16 billion of client funds under management, leveraged up to close to $60 billion through bank financing.

The people around him ranged in age from mid twenties to late thirties, mostly men, a couple of women. Casual dress was the order, chinos, even one or two in jeans. There were other people in Red River – the chief operations officer, finance officer, compliance officer, a couple of marketing people, various administrative people – but these twenty-two were the heart and brain of the firm. Six of them were portfolio managers, the traders who were allocated capital from the fund and structured the deals that made Red River’s money. The others were market analysts and quantitative analysts working for the portfolio managers, scouring the markets, developing ideas, doing research and running quantitative models that would enable the portfolio managers to make their trading decisions.

Ed Grey himself directly managed a portfolio of around thirty per cent of the firm’s capital, mostly in commodities and developing markets, as well as acting as the CEO and chief investment officer. His most senior portfolio manager, Tony Evangelou, was a big-hitting equities trader who focused on US and European markets, and managed around a quarter of the fund. The rest of the capital was more or less evenly divided among the other managers who had expertise in bonds and foreign exchange.

Communication across the group was essential. Grey and Evangelou were focused on finding the big, event-driven opportunities that could earn forty, fifty, sixty per cent returns as one-off bets. The other managers largely worked steady, low-risk trades that earned a reliable eight to ten per cent a year and gave the DIV a baseline return. But any one of the managers might come across a one-off opportunity for extraordinary returns or be seeing trends in his or her market that might be relevant to any of the others. As a multistrategy, global DIV, the portfolio manager group had to be able to form a view of the way key economic trends around the world were heading, and structure their trades accordingly. They sat at the same desk and were always exchanging information, but Grey liked to get them together in the meeting room as well, sometimes daily. Most times he got the analysts in with them also. Discussion was open. Anyone could put forward an idea and anyone could challenge it.

Today, he had Uganda on his mind.

Tony Evangelou thought it was nothing. ‘No one cares, Ed. No one sees it making a difference to anything.’

‘It’s a big yawn from where I sit,’ said Maria Lomax, who traded foreign exchange. ‘No one’s seeing a scenario where it matters.’

The other portfolio managers agreed.

‘Then we challenge that,’ said Grey. When the market uniformly expected trends to go in one direction, the trick was to find the reason the market might be wrong, quantify the probability and structure a trade that gave a huge payout if you were right and that imposed no loss – or even made you some money – if you weren’t.

But there was no trade to be done if the probability was zero.

‘What makes the market care?’ said Evangelou. ‘Nothing. It’s too small, Ed. It’s not a bite on a rat’s ass.’

‘Say the military lose some guys in there.’

Evangelou shrugged.

‘Say we get sucked in.’

‘It’s not Iraq. What’s the spend? It’s chickenfeed.’

‘You want to check that?’ said Ed to one of the analysts.

The analyst nodded. Through research into Defense Department spending at various levels of foreign-deployed force, he would be able to create a set of scenarios for military spending that he could run through his models. A significant rise in military spend would raise the budget deficit, which would affect the dollar, interest rates, bond prices and likely a bunch of other asset classes as well.

‘What about Uganda?’ said Adil Menon, one of the portfolio managers. ‘Maybe Kenya. Let’s think about opportunity. We have no exposure at all to those markets. It’s no-lose. If this intervention gets rid of the LRA, there’ll be some kind of economic payoff. If it fails, they’re no worse off than they are today.’

Grey knew nothing about the Central African region and had never invested there. Adil, who mostly traded currency, was keen to develop a specialism in fourth-wave countries, as the least developed of the emerging markets were known.

‘You want to get out there?’ he said.

Adil nodded.

‘Maybe we put a couple of hundred million into Uganda if we can find some opportunities,’ said Ed. He liked the idea. He had made a heap of money in Ghana at one stage after having read a couple of articles about the country in
The Economist
and getting out there to investigate.

‘Liquid opportunities,’ said Evangelou. ‘Don’t get us stuck in some shitty trades we can’t get out of, Adil.’

Menon smiled. That was Evangelou’s mantra, liquidity, having a market that was deep enough with a sufficient number of counter-parties so you could get out of a large position when you wanted to. You never wanted to be the last guy holding the parcel with no one to pass it to. Evangelou hated developing markets, especially fourth wave, because liquidity was always an issue.

‘So apart from local effects in the region, this Uganda thing is a storm in a teacup, huh?’ said Grey.

There were nods around the table.

Grey thought so himself, but he was going to continue to challenge that view as the situation developed. Markets across the world had been on a slow but steady bull run for almost three years and event-driven opportunities for outsize returns were few. He didn’t think this was one of them, but he was going to keep watching. The conflict looked so trivial that if it blew up into something big and began to have a material impact, the opportunity for those who spotted the effect early was going to be substantial.

‘Anything else?’ he said.

There was silence for a moment.

‘I have an idea.’

Ed looked along the table and two rows back to see who had spoken. Boris Malevsky was a new joiner Ed and Tony had hired out of Morgan Stanley to work as an analyst on Evangelou’s team. He was the child of Russian immigrants and had a slight accent courtesy of the first eleven years of his life in Moscow. Boris was curly-headed, overweight, sweaty and, in the fortnight since he had joined Red River, rarely clean-shaven. Grey liked him. There was something about Malevsky that made Grey think he might have what it takes to be a trader, a mix of intellect, rebelliousness and contrarianism that you always find in truly great portfolio managers who are capable of backing themselves against the market to win the kind of iconic bets that he himself had won over the years. On the other hand, you often found those same qualities in truly terrible fund managers who were capable of losing more money than most people knew existed. The difference between the two was another set of qualities: the stomach to hold a position, the discipline to execute your strategy, and most importantly, the humility to accept that you were wrong when the market had turned against you and the flexibility to act on that realization quick enough to save yourself from a trap door that was opening under your feet. Ed Grey had no idea if Malevsky had those qualities, but he wanted to find out.

‘What is it?’ he said.

‘We short US banks.’

There were smirks around the table. Ed Grey wondered if Malevsky was saying that just to show how contrarian he could be. The line between a contrarian and an idiot was a thin one.

‘What’s that got to do with Uganda?’ said Evangelou.

‘Nothing. I didn’t say it did.’

‘Then what the fuck are you talking about?’

‘I’m saying we should short some banks,’ said Boris, with a slight Slavic slur just detectable in his accent.

‘Boris, right now banks are on a one-way ride.’

‘And we’re long all the way.’

‘Because they’re on a one-way ride.’

‘And if there’s a correction?’

‘They’re still on a one-way ride. If there’s a correction, it’s limited. At Red River we look at a six month to one year horizon and our investors know that. If banks correct, over that time horizon they’ll come back and they’ll still keep going up.’

‘I agree,’ said Malevsky. ‘But shouldn’t we make some money in the correction?’

Grey watched him with interest. ‘How do you know there’s going to be a correction?’

‘You think this Uganda thing’s going to do it?’ said Maria Lomax. ‘You know some banks with exposure to Uganda?’

‘It’s going to be good for them,’ said Evangelou. ‘Adil’s right.’

‘It’s got nothing to do with Uganda,’ said Malevsky.

‘Boris, why the correction?’ asked Grey.

‘This administration is scared of a bubble. It’s scared of anything that looks like a bubble.’

‘We haven’t got a bubble,’ said Evangelou impatiently.

‘No, but we’re in a bull market that’s run eleven consecutive quarters. You look at any public statement that’s ever come from Knowles, from the Fed, from the Treasury. This administration will not allow the banks to drive a bubble.’

Evangelou rolled his eyes. ‘We haven’t
got
a bubble.’

‘We’re coming up to the midterms. If anything happens, even the slightest thing, they’re going to overreact. They’re going to do something, or say something, that’ll haul the sector back. The Fed especially. You look at the way Strickland talks.’

Ron Strickland was chairman of the Federal Reserve, appointed by the previous administration explicitly to do what Alan Greenspan and Ben Bernanke hadn’t done, burst the bubbles that inevitably develop in the financial system before they get too big to bust. When Knowles took office he affirmed that was exactly what he wanted Strickland to keep doing.

‘That’s his job. That’s what this administration is focused on. They’ll sacrifice twenty-five, fifty basis points of growth if they think they have to. They won’t say that, but that’s what they’ll do.’

‘Why now?’ said Grey.

‘I’m not sure it’s going to be right now. I’m only saying, this is the kind of time when it might happen. Midterms coming up. Maybe there’s a feeling things have been going good a little too long and we’re getting to that point where you need to be watchful. The Democrats are saying this administration isn’t committed to regulation. There’s just a bunch of things that might make them damp down somewhat. Not do anything dramatic – just show they’re in control.’

Grey considered it. The rationale was way too vague, too wishful, to back with any of the fund’s capital.

‘I’m not saying we short the whole sector,’ said Malevsky. ‘It’s going to be a wobble, not a crash. But when it wobbles, there’ll be some that really drop.’

‘Really?’ said Evangelou skeptically. ‘Do you have any in mind?’

Malevsky glanced around the table, then looked back at Grey.

Grey understood. ‘Okay,’ he said.

BEING A TRADER
for two decades had taught Ed Grey a bunch of lessons. One of them was that it’s easy to be right at the wrong time. You could have the greatest trade in the world, and if you did it at the wrong time you’d lose a shitload of money. The fact that six months or a year later the market moved in the direction you predicted was zero consolation. Everyone had done it, himself included. The trick was not to do it too often.

Was a correction coming? Probably. Markets always get a little twitchy after prolonged periods of rising value and some participants decide to sell and take their profits, if for no other reason than everyone knows the party has to end some time. More and more people were talking about it, and at some point that kind of talk becomes self-fulfilling. But that wasn’t stopping anyone yet. It was the typical schizophrenic behavior of the market, where investors rationally know that the good times can’t last forever and yet keep acting as if they can.

The question was: when, how long and how deep was the inevitable dip going to be?

If market fears and desire for a little profit-taking were the only reasons for the correction, it would be shallow and short-lived, as Tony Evangelou expected, with a rapid return to growth. In that case, the risk-reward for trying to pick the timing of a minor correction didn’t add up.

Was there any reason for it to be deeper? There was a general sense in the financial community that regulation was falling behind again. The new rules that had been introduced under Obama in the years after the crisis had been around long enough now for smart people to start finding ways around them. Everyone knew there were novel financial products and practices that could potentially – in certain circumstances – create the same kind of risks that had brought down Lehman Brothers at the height of the last financial crisis. But those circumstances didn’t exist and no one believed anything like that level of risk had actually developed. No one believed the world was back to anything like the corrupted, hollow shell of a financial system that had been in place in 2008.

Globally there were the usual tensions. An implicit deal had been struck in the worst days of the financial crisis: China would increase consumption and reduce savings as a way of rebalancing the world’s trade flows, and in return it would receive a greater say in global financial governance and institutions such as the IMF and G20. The deal had been breached by both sides. The old G7 powers still retained enough votes to get pretty much whatever they liked in the IMF, and the G22, as it was now, was an empty talkfest that left the western powers to do their deals in informal meetings in Washington, London and Tokyo. China continued to maintain an artificially undervalued currency, paying lip service to its obligations with occasional tiny revaluations, and sequestered its citizens’ savings in state banks instead of encouraging domestic consumption. The disturbances in China in 2014 had only entrenched the problems – making it easier for the Chinese regime to argue that it couldn’t make any of the necessary changes and for the west to argue that China wasn’t ready for a larger international role. Essentially, then, nothing had changed but for the added resentment on each side towards the other for having, as each side saw it, reneged on their side of the deal. Red River had some big, long-term bets placed on the way the dollar, euro and yuan would move in relation to one another, and Ed Grey was confident that eventually those bets would pay out. In the meantime, growth continued, stretching the global imbalances even more, and it was in no one’s immediate interest to do anything about it.