Updated: April 30, 2011 12:05 IST

Guard against mood swings and hubris

D. Murali
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When the markets went down in ‘The Age of Malevolence,’ it was not just the high and mighty hedge fund managers who were hurting, reminisces Barton Biggs in ‘A Hedge Fund Tale: Of reach and grasp’ (

Ordinary people – analysts, assistants, vice presidents, secretaries, and back-office clerks – were suffering too as the big and small Wall Street firms were doing massive layoffs, he adds. “The desperately dispossessed were standing in lines for hours for five-minute interviews at job fairs in New York, Chicago, and London. Equally demeaning so-called Pink Slip Parties promoted by blogs with the tag line ‘If you’ve got misery, we got company’ were drawing huge crowds who aimlessly milled around hoping to connect with recruiters and ending up mingling only with other lost souls and crying in each other’s wine. There was carnage everywhere…”

Story retold

The book is a business and investing book masquerading as a fable, the author introduces. He believes that professional investors, especially the hedge fund types, must not only have superb analytical and judgmental skills, tremendous intensity, and a dollop of luck, but, to survive and be successful, they must also profoundly comprehend that they are going to be vulnerable to and enslaved by extreme mood swings and terribly susceptible to hubris. “Both can be mortally dangerous not just to their investment health but also to the well-being of their most innate life relationships.”

A chapter titled ‘Revenge of the geeks’ takes you inside the world of ‘computer-driven formula’ to unlock ‘the secret soul of the market’ – a model back-tested under every conceivable situation! “In a negative value versus growth environment it may produce less alpha, but negative alpha is virtually inconceivable because of the number of names and the momentum and fundamental adjustments,” reads a snatch of a forceful presentation by ‘Mickey’ in the fable.

Model chasing

There are questions, however, from the audience. “Aren’t you in your quant arrogance assuming that the long period of growth beating value is about over? Aren’t you trying to time a huge secular bottom in value and top in growth?”

Conceding all that, Mickey argues that the stars are aligned this time. “I got the charts here that show that growth stocks have never been this extended both in momentum and valuation compared to value. This is a seven- or eight-standard-deviation event bottom.”

To know how obsessive model chasing can be, you need to read in the book about the protagonists who love the purity of manipulating and analysing numbers – be they baseball batting averages, football statistics, or stock valuations – and searching for the hidden messages in them. “The computer could unlock what was happening deep within that great churning mass that was the stock market and find the best stocks to own and to sell short. If Renaissance could find a magic formula, why couldn’t they?”

Instructive read.


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