The Fear Index

morning, if you remember.’
    ‘Yeah, well, I’m sorry, but I was late for the presentation.’ Quarry should never have hired this guy, Hoffmann thought. Once a regulator, always a regulator: it was like a foreign accent – you could never quite hide where you came from.
    Rajamani said, ‘What we really need to focus on is the level of our risk if the markets rally – Procter and Gamble, Accenture, Exelon, dozens of them: tens of millions in options since Tuesday night. These are all huge one-way bets we have taken.’
    ‘And then there is our exposure to the VIX,’ added van der Zyl. ‘That’s been ringing alarm bells with me for some days now. I did mention this to you, Hugo, last week, if you remember?’ He had once taught engineering at the University of Technology in Delft and retained a pedagogic manner.
    Quarry said, ‘So where are we on the VIX? I’ve been so busy preparing for the presentation, I haven’t actually checked our positions lately.’
    ‘The last time I looked, we were up to twenty thousand contracts.’
    ‘Twenty thousand ?’ Quarry shot a look at Hoffmann.
    Ju-Long said, ‘We started accumulating VIX futures back in April, when the index stood at eighteen. If we had sold earlier in the week we would have done very well, and I assumed that’s what would happen. But rather than following the logical course and selling, we are still buying. Another four thousand contracts last night at twenty-five. That is one hell of a level of implied volatility.’
    Rajamani said, ‘I’m seriously worried, frankly. Our book has gone all out of shape. We’re long gold. We’re long the dollar. We’re short every equity futures index.’
    Hoffmann looked from one to another – from Rajamani to Ju-Long to van der Zyl – and suddenly it was clear to him that they had caucused beforehand. It was an ambush – an ambush by financial bureaucrats. Not one of them was qualified to be a quant. He felt his temper beginning to rise. He said, ‘So what are you suggesting we do, Gana?’
    ‘I think we have to start liquidating some of these positions.’
    ‘That’s just about the stupidest goddam thing I’ve ever heard ,’ said Hoffmann. In his frustration he slapped the back of his hand hard on the blinds, rattling them against the windows. ‘Jesus, Gana, we made close to eighty million dollars last week. We just made another forty million this morning. And you want us to ignore VIXAL’s analysis and go back to discretionary trading?’
    ‘Not ignore it, Alex. I never said that.’
    Quarry said quietly, ‘Give him a break, Alex. It was only a suggestion. It’s his job to worry about risk.’
    ‘No, actually, I won’t give him a break. He wants us to abandon a strategy that’s showing massive alpha, which is exactly the kind of illogical, insane reaction to success, based on fear, that VIXAL is designed to exploit! And if Gana doesn’t believe that algorithms are inherently superior to human beings when it comes to playing the market, then he’s working in the wrong shop.’
    Rajamani, however, was unfazed by his company president’s tirade. He had a reputation as a terrier: at the FSA he had gone after Goldman. He said, ‘I have to remind you, Alex, that the prospectus of this company promises clients exposure to a yearly volatility of no more than twenty per cent. If I see that those statutory risk limits are in danger of being breached, I am obliged to step in.’
    ‘Meaning what?’
    ‘Meaning, if the level of our exposure isn’t dialled back, I will have to notify the investors. Meaning I really must talk to their board.’
    ‘But this is my company.’
    ‘And the investors’ money, or most of it.’
    In the silence that followed, Hoffmann started massaging his temples vigorously with his knuckles. His head was aching badly again: he needed a painkiller. ‘Their board?’ he muttered. ‘I’m not even sure who’s on their frigging board.’ As far as he was concerned, it was a purely technical legal entity, registered in the Cayman Islands for tax purposes, that controlled the clients’ money and paid the hedge fund its management and incentive fees.
    ‘Okay,’ said Quarry, ‘I don’t think we’re anywhere near that point yet. As they used to say in the war, let’s keep calm and carry on.’ He bestowed one of his most winning smiles upon the room.
    Rajamani said, ‘For legal reasons I must ask that my concerns be minuted.’
    ‘Fine. Write up a note of the