The Fear Index

by Robert Harris

  ‘That didn’t put you off going into business with him?’

  ‘What? The fact he wasn’t “normal”? Good Lord, no. To quote Bill Clinton – not necessarily a fount of wisdom in all circumstances, I grant you, but right in this one – “normalcy is overrated: most normal people are assholes”.’

  ‘And you have no idea where Dr Hoffmann is at this moment?’

  ‘No, I do not.’

  ‘When did you last see him?’

  ‘At lunch. The Beau-Rivage.’

  ‘So he left without explanation?’

  ‘That’s Alex.’

  ‘Did he seem agitated?’

  ‘Not especially.’ Quarry swung his feet off the desk and buzzed his assistant. ‘Is Alex back yet, do we know?’

  ‘No, Hugo. Sorry. Incidentally, Gana just called. The Risk Committee is waiting for you in his office. He’s trying to get hold of Alex urgently. There’s a problem, apparently.’

  ‘You surprise me. What is it now?’

  ‘He said to tell you that “VIXAL is lifting the delta hedge”. He said you’d know what that meant.’

  ‘Okay, thanks. Tell them I’m on my way.’ Quarry released the switch and looked thoughtfully at the intercom. ‘I’m going to have to leave you, I’m afraid.’ For the first time he felt a definite spasm of anxiety in the pit of his stomach. He glanced across the desk at Leclerc, who was regarding him intently, and suddenly he realised he had been gabbling away much too freely: the copper didn’t seem to be investigating the break-in any more so much as investigating Hoffmann.

  ‘Is that important?’ Leclerc nodded at the intercom. ‘The delta hedge?’

  ‘It is rather. Will you excuse me? My assistant will show you out.’

  He left abruptly without shaking hands, and soon afterwards Leclerc found himself being conducted back across the trading floor, preceded by Quarry’s glamorous red-headed gatekeeper in her low-cut sweater. She seemed in a hurry to get him out of there, which naturally made him slow his pace. He noticed how the atmosphere had changed. Here and there around the room several groups of three or four were gathered in anxious tableaux around a screen, with one person seated, clicking on a mouse, and the others leaning over his shoulders; occasionally someone would point to a graph or a column of figures. And now Leclerc was reminded much less of a seminary and more of doctors assembled at the bedside of a patient displaying grave and baffling symptoms. On one of the big TV screens a network was showing pictures of an aircraft crashing. Standing beneath the TV was a man in a dark suit and tie. He was preoccupied, sending a text message on his mobile phone, and it took Leclerc a moment to recollect who it was.

  ‘Genoud,’ he muttered to himself, and then more loudly, moving towards him, ‘Maurice Genoud!’ at which Genoud looked up from his texting – and was it Leclerc’s imagination, or did his narrow features tense slightly at the sight of this figure bearing down on him from his past?

  He said warily, ‘Jean-Philippe.’ They shook hands.

  ‘Maurice Genoud. You’ve put on weight.’ Leclerc turned to Quarry’s assistant. ‘Would you excuse us a moment, mademoiselle? We’re old friends. You’ll see me out, won’t you, Maurice? Let me look at you, lad. Quite the prosperous civilian nowadays, I see.’

  Smiles did not come naturally to Genoud; it was a pity he bothered, thought Leclerc.

  ‘And you? I’d heard you’d retired, Jean-Philippe.’

  Leclerc said, ‘Next year. I can’t wait. Tell me, what on earth do they do here?’ He gestured to the trading floor. ‘Presumably you can understand it. I’m too old to get my head around it.’

  ‘I don’t know either. I’m just paid to keep them safe.’

  ‘Well you’re not doing a very good job of it!’ Leclerc clapped him on the shoulder. Genoud scowled. ‘I’m only joking. But seriously, what do you make of this business? A bit odd, wouldn’t you say, having all that security and then allowing a complete stranger to wander in off the street and attack you? Did you install it, I wonder?’

  Genoud moistened his lips before replying, and Leclerc thought, he’s playing for time; that’s what he used to do back in the Boulevard Carl-Vogt when he was trying to think up some story. He’d distrusted the younger man ever since the days when Genoud was a rookie under his command. There was, in his opinion, nothing that his former colleague would not do – no principle he wouldn’t betray, no deal he wouldn’t cut, no blind eye he wouldn’t turn – if he could make sufficient money and stay just within the law.

  Genoud said, ‘Yes, I installed it. What of it?’

  ‘There’s no need to get all defensive. I’m not blaming you. We both know you can surround someone with the best security in the world, but if they forget to use it there’s nothing you can do.’

  ‘That’s true. Now if you don’t mind, I ought to get on with my work. This isn’t the public sector, you know – I can’t stand here gossiping.’

  ‘You can learn a lot by gossiping.’

  They moved towards reception. Leclerc said, man-to-man, ‘So what’s he like, then, this Dr Hoffmann?’

  ‘I hardly know him.’

  ‘Enemies?’

  ‘You’d have to ask him.’

  ‘So there’s no one here dislikes him that you’ve heard about? No one he’s fired?’

  Genoud didn’t even pretend to think about it. ‘No. Enjoy your retirement, Jean-Philippe. You deserve it.’

  13

  The extinction of species and of whole groups of species, which has played so conspicuous a part in the history of the organic world, almost inevitably follows on the principle of natural selection; for old forms will be supplanted by new and improved forms.

  CHARLES DARWIN, On the Origin of Species (1859)

  THE RISK COMMITTEE of Hoffmann Investment Technologies met for the second time that day at 16.25, Central European Time, fifty-five minutes after the opening of the US markets. Present were the Hon. Hugo Quarry, chief executive officer; Lin Ju-Long, chief financial officer; Pieter van der Zyl, chief operating officer; and Ganapathi Rajamani, chief risk officer, who took the minutes and in whose office the meeting was held.

  Rajamani sat behind his desk like a headmaster. Under the terms of his contract he was not permitted to share in the annual bonus. This was supposed to make him more objective about risk, but in Quarry’s opinion it had simply had the effect of turning him into a licensed prig who could afford to look down his nose at big profits. The Dutchman and the Chinese occupied the two chairs. Quarry sprawled on the sofa. Through the open blinds he watched Amber leading Leclerc towards reception.

  The first item noted the absence, without explanation, of Dr Alexander Hoffmann, company president – and the fact that Rajamani wanted this dereliction of duty officially minuted was, to Quarry, the first indication that their chief prig officer was preparing to play hardball. Indeed, he seemed to take a grim delight in laying out just how perilous their position had become. He announced that since the last meeting of the committee, some four hours earlier, the fund’s risk exposure had increased dramatically. Every warning indicator in the cockpit was flashing red. Decisions needed to be taken fast.

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

  He turned and said, ‘We really need to talk to Alex before we put on an override. I mean, when was the last time any of us actually did a trade?’

  Rajamani said, ‘With respect, that’s not the point, Hugo.’

  ‘Of course it’s the point. It’s the whole point and nothing but the point. This is an algorithmic hedge fund. We’re not manned up to run a ten-billion-dollar book. I’d need at least twenty top-class traders out there with steel balls, who know the markets; all I’ve got are quants with dandruff who don’t do eye contact.’

  Van der Zyl said, ‘The truth is, this issue should have been addressed earlier.’ The Dutchman’s voice was rich and deep and dark, marinated in coffee and cigars. ‘I don’t mean that we should have thought about it earlier today – I mean we should have done it last week or last month. VIXAL has been so successful for so long, we have all become dazzled by it. We have never put in place adequate procedures for what to do if it fails.’

  Quarry knew in his heart that this was true. He had allowed technology to enfeeble him. He was like some lazy driver who had become entirely reliant on parking sensors and satellite navigation to get him around town. Nevertheless, unable to conceive of a world without VIXAL, he found himself rising to its defence. ‘Can I just point out that it hasn’t failed? I mean, the last time I looked, we were up sixty-eight mil on the day. What does the P and L say now, Gana?’