Friday, November 23, 2007
A late November tempest howled outside in the London night, and the gale rattled the room’s ancient windows, disturbing what had heretofore been a pleasant evening’s reading. Still, the chamber was warm and snug, and a comforting safe haven against the late autumn storm.
“You’re right, Watson,” said the voice of Mr. Sherlock Holmes, disturbing me from my reverie, “it’s a good thing we took out that price guarantee from British Energy.”
“My word, Holmes!” I exclaimed, leaping from my chair. “How the deuce did you know I was contemplating that very thing?”
“Tut, tut, Watson,” came the gently mocking reply from my friend. “Nothing could be easier. I observe that you’ve been perusing the markets section of the Financial Times, doubtless to check on the progress of that South African issue you purchased a few months back. I can see from here that you had turned to the commodity section, where you’ve no doubt read that energy prices are, yet again, threatening to breach all time highs.
“The requirement for adequate heating is painfully obvious on an evening such as this,” he added, glancing ruefully out the window, “as the ferocity of the storm outside cannot elude even your powers of observation. Indeed, I saw you stare outside this very window not five minutes ago, and the disgusted shake of your head told me that you were not pleased with what you saw. When you then glanced at the thermostat immediately thereafter, I surmised that you must be ruminating on the likely rise in heating bills over the next few months, and the serendipity of our having chosen to lock in what I’m sure you’ll agree is a competitive rate. I merely agreed with your rather excellent deduction.”
“Extraordinary, Holmes! When you describe it like that, it all seems so simple. And yet no one but you manages to see what, when you explain it afterwards, would appear to be the most obvious thing in the world.”
“Most of my observations are obvious, Watson, for those who are prepared to see rather than merely look. Unfortunately, many of my colleagues, such as the well-meaning but hopelessly bumbling Lestrade, are only prepared to look for those facts which appear to support their prior beliefs. I, on the other hand, keep an open mind and thus am able to see what others often miss."
It was a measure of the esteem in which I held my friend Sherlock Holmes that I didn’t raise an eyebrow at his description of the Chief Inspector of Scotland Yard as “hopelessly bumbling.”
“And what I see this evening,” he continued, “is a night best-suited to a comfortable chair, a good book, a pipe full of tobacco, and perhaps a passage or two of Mendelssohn upon the violin.”
As if to prove that even the ablest of sleuths can miss his mark on occasion, the bell at the door of 221B Baker Street rang vigorously just as Holmes reached for his violin, announcing the presence of a visitor who no doubt required the services of my illustrious friend.
“Ah, Watson,” remarked Holmes, shaking his head with a wry grin, “I was mistaken. For unless my powers of observation have departed me altogether, we shall have a more stimulating pursuit this evening, courtesy of this gentleman here, Mr....?”
Our visitor strode into the room through the door opened by Mrs. Hudson, but was taken aback to see us both looking at him expectantly. After gathering himself for a moment, he then resumed his forward progress and seized Holmes by the hand. “Charles Danforth Ogden, Mr. Holmes, Charles Danforth Ogden. It’s a pleasure to meet you, sir, but you must help me!”
Mr. Charles Danforth Ogden was a youngish man in his mid-thirties, dressed in crisply pressed chinos, a dark blue jumper over a collared white shirt, and dark blue raincoat, from which he shook the water unconsciously as he stood before us. Although his visage retained a certain boyish aspect, he nevertheless carried himself in the manner of a man who is accustomed to having his orders carried out by others.
“Well, Mr. Ogden, what can I do for you? Is there a problem with your fund that you wish me to help you with?”
“Yes, Mr. Holmes, yes, it’s all gone horribly wrong and I can’t figure out why!” our guest exclaimed, before gaping at Holmes. “But...but...how did you know I was a hedge fund manager?”
“Please, Mr. Ogden, you insult me. If I couldn’t spot a hedge fund manager (what with your business casual attire, Rolex, and expensive jacket) from a mile away, I wouldn’t be much of a detective, would I?”
“Ah ah, Mr. Holmes, I see you’re right. Very clever!” Charles Danforth Ogden then straightened up and assumed an air of authority. “Yes, well, I am the founding principal and Chief Investment Officer of the C/D/O Enhanced Multi-Strategy Fund, a diversified hedge fund that seeks to generate stable returns for our investors with moderate volatility and low drawdowns.”
“Yes, yes,” said Holmes, “I’m not a fund-of-funds manager so you can spare us the marketing spiel. Please proceed to describing your problem; the sooner tell us your story, the sooner we can be of service to you.”
Ogden glanced at me uneasily. “Perhaps it would be best if we got you and your friend to sign a non-disclosure agreement. If investors found out....”
“Now really, sir,” burst out Holmes, angrily. “Dr. Watson is my friend and colleague, and you can trust him as you trust me. And if you do not trust me to keep my lip buttoned, then I’ll wish you goodnight and ask you to leave, for I had rather planned to treat Watson to a spot of Mendelssohn.”
Ogden’s shoulders slumped at this rebuke. “I’m sorry, Mr. Holmes,” he said. “I’m just so worried about my fund that I’m not sleeping or thinking straight.” His body crashed into the chair that Holmes gestured him towards. “Here’s the story.
“Our fund has been running for a year and a half. For the first year or so things went swimmingly, with steady monthly returns and a nice growth in assets. Early in the summer, though, we ran into a bit of a bother, as some of our holdings appeared to decline in value; however, they don’t really trade so it was difficult to know exactly what sort of hit we were taking.
“In August things got quite bad, really, with credit imploding and funding rates blowing out. Some of the fund-of-funds investors that we picked up in May and June told us that if we didn’t make money in September, they’d pull their assets.
“Naturally, this was a stressful time for us, and we felt a bit adrift. However, one of my trusted brokers sent us a research piece that seemed to show the way to recouping our losses. Here, here it is.” Ogden’s hand dipped into his jacket pocket and emerged clutching a rumpled sheet of paper, which he handed to Holmes.
Looking over my friend’s shoulder, I read the following pearl of financial market wisdom:
Date: August 31, 2007
Subject: How to make money in equities
Cheat sheet: reacting to data and market releases
1) weak data = Fed ease, stocks rally
2) consensus data = lower volatility, stocks rally
3) strong data = economy strengthening, stocks rally
4) bank loses $4bln = bad news out of the way, stocks rally
5) oil spikes = great for energy companies, stocks rally
6) oil drops = great for the consumer, stocks rally
7) dollar plunges = great for multinationals, stocks rally
8) dollar spikes = lowers inflation, stocks rally
9) inflation spikes = will inflate all assets, stocks rally
10) inflation drops = improves earnings quality, stocks rally
“We were a bit desperate for returns, and this research seemed more insightful than the usual rubbish coming out of investment banks. So in early September we went limit long the S&P, AUD/JPY, EEM, and the Hang Seng. By mid September it was working so well that we figured credit was going to tighten back in hard, so we bought some of the A-rated tranche of the latest ABX index. When the Fed cut 50 basis points on September 18, it was like we’d won the lottery. Stocks moved so far, so fast that by the end of the month we’d made a new high water mark for the fund and were mentally spending our performance fees.
“Sure, the credit trade wasn’t working so well, but we were making so much money in equities that it didn’t matter. We had Fed liquidity supporting the S&P and the carry trade, and de-coupling plus Chinese investment buoying EEM and the Hang Seng. It was bid, no-lid, and we were making money hand over fist.
“But by the time mid-October rolled around, things had cooled off. Our ABX position was sinking like a stone, most of our structured credit holdings had actually been downgraded, the yen quit going down, and then even some of our equity longs started to retreat. EEM and the Hang Seng were the only things keeping our P/L afloat.
“I tried getting ahold of Johnny Wideboy, the analyst who’d made us so much money with that research piece. But my contacts at BigI-Bank said that he’d been made redundant following a $12 billion subprime writedown.
“And now every bit of our portfolio is falling in value, even the emerging market equity position! Mr. Holmes, it’s doing my head in! Our fund-of-funds investors are once again ringing up and threatening to pull their assets unless we right the ship quickly. So I ask you, Mr. Holmes, to tell me: what happened to the bid? Why has it vanished, and when will it come back?”
Sherlock Holmes sat back in his chair and stared earnestly at our visitor. “I must tell you, Mr. Ogden, that this is not my area of expertise. Watson here spends more time reading the financial pages than I.” Charles Danforth Ogden looked crestfallen. “Nevertheless, I will look into the matter. I shall ring you at the number on your card when I have reached a satisfactory conclusion.”
Ogden sprang from his chair and shook Holmes warmly by the hand. “Oh thank you sir, thank you very much! I’m at my wits’ end, and if I don’t discover where the bid has gone to, my fund is finished for sure!” And with that, he turned on his heel and strode out the door, leaving Holmes stroking his chin thoughtfully. Sensing that my friend was entering one of those contemplative reveries that so often yielded fruits of progress, I returned to my pipe and my newspaper. Not a word was spoken in our Baker Street rooms for the rest of the evening.
Will Holmes get to the bottom of the mystery?
Why has the bid for risk assets vanished, and when will it come back?
To be continued.....