From the Trader’s Desk: Billions Recap, S3 Ep3 – April 13, 2018

Attack of the Quants

by Lady Trader | Fan Fun with Damian Lewis | April 13, 2018

Greeting’s from the Trading Desk! This week’s recap will be broken down into three parts: the first part will be a bit of a rant before the actual recap, the second, on Axe Capital and the attack of the “Quants”, and last, but not least on the dealings of Axe and in keeping with his God Complex, how he gave two people their “lives” back.

Rant: I need to address Ira and his girlfriend. I usually don’t veer off into the non-financial aspect of Billions, but it was the opening scene, and it pissed me off and had me yelling at my screen.

Ira, if that chick doesn’t want to marry you when you’re broke, why the hell would you want to marry her when you’re loaded? She basically told you she was a gold digger! And, she knows you are in financial trouble, but still orders those damn truffles? GTFO with her. Maybe your revenge was giving her that fugly ring? Ira, go out and get yourself a real woman, not a money grubbing Barbie. It’s women like that who give us GOOD women a bad name.  OK, end of  first rant. (If anyone who knows me and just read that in my 100% Brooklyn accent, thank you!!)

Oh, and one more thing: these people who have can’t live on $320 million or $40 million? WTF is wrong with you? Lara is especially obnoxious. Girl, you love to tell everyone you’re from Inwood, and a tough chick; you came from nothing! I’m sure you can figure out how to economize on $320M! When I was let go from my last job, and decided to go out on my own, it meant that a regular paycheck was not going to be coming in for a time. Financial considerations and priorities had to be changed. Weekly shopping at Prada? Gone. Season Mets and Rangers tickets? Adios. You learn to live within your means, and “like to have” gives way to “need to have”. Lara has never been a character that I liked or believed in, but this put the nail in her coffin for me. Bye Felicia!

The analysts at Axe Capital are freaking out. Taylor is interviewing some dreaded “Quants”!!  It’s causing butt sweat for Mafee, and panic attacks for Ben and Rudy! They are all worried about being replaced by “the robots”.

Recently, there has been a move by pension funds and institutional money out of traditional hedge funds and into quant shops or passive investments (ETFs). These types of investments are less risky and are generally cheaper to invest in. They don’t have the costs of analysts, and don’t charge the usual 2 & 20. This trend has put many fundamental analysts out of work. Running an “algo” on a computer makes a fundamental research analyst redundant.

I was on the buy-side as a fundamental equity research analyst for many years. In that capacity, I researched a company’s financials, management, growth prospects, etc., and would then recommend it to my Portfolio Manager for inclusion in our Large Cap Growth Fund. We had a quant group at our firm, which we called the “goons”, as we looked down on what they did. Our thinking (at the time) was “anyone can feed info into a computer and have it spit out ideas; we actually have to know things!”

That was several years ago, and now quants are a lot more sophisticated and are more than just “goons”. My partner and I run a sort of hybrid strategy – the computer chooses the trades based on the criteria we have set, but that criteria is based on our fundamental knowledge and years (a combined 54 years!!!) of experience in the business.

It’s with this background that I totally get the uneasy feeling floating through Axe Capital and the thought of Taylor wanting to hire a quantitative analyst. The boys are worried, except for Dollar Bill. (I know Axe is my spirit animal, but Dollar Bill is a very close second!) He’s not worried at all, and as I have had to say in my prior two posts, speaks for me when he says “ No computer can get the kind of info I can or know what to do with it the way I do, so buck the fuck up! No Fear!!” I believe the future of investing is a hybrid strategy, similar to the one we run. A computer cannot make a judgment call on the management of a company or see changes in market sentiment due to a breaking news event. Algos are good for trading; analysts are good for investing. There is a big difference between the two.

Wags is not on board with hiring a quant. Over lunch with Axe he vents his apprehension about Taylor’s interviews with some candidates (“wild guesses, with math!”). He has no confidence that they can do as good a job as his people. Axe never used quants. (Wags, don’t you know Axe was the machine; he told Steph he was the Terminator!) Axe gives Wags his orders: help Taylor.

Read the rest of the original article at Fan Fun with Damian Lewis

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Taylor’s search reminds me of Goldilocks and the Three Bears: one is too soft, one is too hard, and one (seems) just right!

The first candidate is too soft. He can mimic Taylor’s trades, but Taylor doesn’t want that. They need something better! Good-bye!

The second is too hard. He can’t figure out the puzzle Taylor has tasked him with, so he busts it up. He’s way too cocky for Wags (did he really call Wags “Queen”?), and way too emotional for Taylor. See ya! (Just for the record, if someone came to my firm wearing flip-flops for an interview, I’d have shown them the door before a word was even uttered!! RUDE!)

And, the third one is just right! (Or so it seems.) 20 years at NASA, calm, cool and confident,“Major Tom” even impresses Wags (which unless you’re a stripper or a sushi master, is hard to do). He gives Axe Capital access to his model for a day, so that Taylor can see how the algo works in real time, during market hours.

It performs great (even Wags thinks so; second red flag!), but unlike in Goldilocks, Major Tom is a no-go as well. Taylor saw that his model was one that would make a recommendation/trade, and then thru a “back door” be able to support the transaction. In other words, Dollar Bill could tell Major Tom to put in a trade on info he obtained in his usual way (which is quite unusual!). If the trade was questioned, the “back door” would allow info to be imputed so that the trade would seem like it was generated by the algo itself.

Taylor knows Wags orchestrated the whole thing, and wants to know why he is so desperate not to hire a quant. Here Wags gives us a peek on why he is so loyal to Axe.

While Wags was still working at Lehman Brothers,  he saw firsthand what a “bunch of brilliant kids who thought they solved the secrets of the market” could do to a firm. (Lehman was one of the first dominoes to fall and start the financial panic of 2008.) No one really understood what these “kids” were doing, but as long as they were making money, no questions were asked. At a chance meeting at a golf outing, Axe told Wags to jump ship, and saved Wags from financial ruin. Wags sold his Lehman stock at $50; by September 15, 2008 Lehman Brothers had declared bankruptcy, resulting in the stock plunging 93% from its previous close.

Wags fears being in the position of not knowing or understanding what is happening at Axe Capital, and having a Lehman moment again.

Taylor points outs that there was many other reasons Lehman went under (yes, being 31x leveraged when the wheels come off will do that), but understands Wags resistance. Taylor makes an executive decision: they will not hire a quant – they will build their own algo. The only one who can truly understand what type of strategy Axe Capital needs is Taylor. The android will program the algo!

Axe and Lara realize that in a worst case scenario, they may “only” be left with $320 million. Axe needs to get more money in a way the government, who are bad as “mob bosses”, can’t get to or see. Axe is a man with a plan.

He goes to his old friend Raul Gomez, former NYPD and now on the Board of its Pension Fund. Raul is retired, and out of the game, just like Axe. But, he tells Axe he knows he needed to move on; can Axe do the same? Axe misses “walking into a room, knowing there were ten guys who’d been in front of me, 5 waiting for me to leave.” His “favorite sound in the world was the one I heard on the way out, when those saps in the lobby were told that their meetings were canceled.” I doubt Axe can move on. He needs that dominance, beating everyone in a room, being “the man”. The chip on his shoulder is as huge as his ego. Can Raul understand that? Can he help him out?

Raul wants to help Axe out, but even a hint of impropriety would be disastrous. But he knows what Axe can bring to the table. If Axe can set something up with no trace back to him, Raul just might be interested.

At the Whitney Museum, Axe meets with Michael Panay, who is in the process of selling everything and closing down his fund. He’ll walk away with “only” $40 million, which would be enough for us mere mortals. Axe is on a mission; he convinces Panay there is no way he can live off that pittance and that actually Panay (yes, with $40M) is “broke”. Panay panics; he can’t fly commercial! He’ll give anything to get back in. Axe offers to help Panay “get your life back”, but the question is: at what cost? (I find it interesting that he basically gives the same speech to Ira, equating money and wealth with life. He tells both men they are basically nothing without money.) Axe is like Dr. Frankenstein – he is creating “life” only because of his own vanity, and God complex. He cares nothing about these “monsters” he is creating; only about how it will benefit him.

Over burgers and billiards, Axe introduces Raul to Panay. If Raul can get Panay in front of the Pension Board, Axe will make sure Panay is a hit. Raul agrees and the game is afoot!

Panay does well at the meeting and is now indebted to Axe. How could he not be? He just got his “life” back.

As “Hans and Franz” (or as Wags calls them, the New Halls) barge into Panay’s office and give it a good security sweep, Axe lays down the terms of the deal.

Axe may have given Panay his life back but there’s a cost. The mental and emotional one is not quantified, but the financial one is plainly spelled out: Panay will charge the Pension Fund the usual 2 & 20; but half of that will go to Axe (who will then split it with Raul!) in the form of cryptocurrency so that it is not traceable.

I have been asked to give an example with numbers to explain exactly what 2 & 20 is, and to show the dollar amounts we are talking about here. If the Pension Fund is investing $2.2 billion with Panay, right off the top, the management fee is 2%, which works out to $44 million ($22 million of that goes to Axe, who will then give Raul $11 million). The 20% is the percentage of the profit that Panay will take from performance of the Pension Fund’s investment . If the return on the investment is 15%, that is $330 million. 20% of that is $66 million. Panay gets $33 million, Axe gets $16.5 million and so does Raul. I do hope Panay can live off of that.

Panay will sign documents agreeing to everything, and Axe will hold on to them, just in case.

Axe gave Panay his “life” back, but did he really? What kind of “life“ is it? His life is not his own; it’s all in the hands of Axe. It’s not Panay’s resurrection that Axe wanted, but his. That was the whole point.

Panay is “in” and all is as it should be in the world, or at least in Axe’s world that is.
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