Hedge Fund, The Novel
Holger Berndt
Smashwords Edition
Copyright © 2009 by Holger Berndt
All Rights Reserved
ISBN 978-0-615-22558-6
Hard Copy Available at UnfungibleBooks.com
The story and characters in this book are fictional. Any similarities to real people or events are purely unintentional.
1
It was an early Saturday morning in Silicon Valley. The sun was beginning to shine brightly as Jasper Weatherly sat in his Range Rover, drinking the last of his barely lukewarm coffee while scrolling through old emails on his BlackBerry. During the hour he had burned in this office building parking lot, signs of life had been scarce. Maybe he had made a mistake the day before, and this was all for naught.
The lot he was in was deserted, except for the shiny new Jaguar convertible parked near the entrance to the building behind him. As he sat idly waiting for something to happen, his eyes were drawn to the car’s image in his mirror by its beautiful lines and his own lust for sports cars. Meanwhile, the only activity in the area consisted of the odd car driving by on the adjacent street.
He contemplated packing it in and heading back home to San Francisco, but just then he looked up to see some activity across the way. A large newer-model Mercedes sedan was pulling into the parking lot. The driver, a slender middle-aged man with short wavy hair, got out and entered the building.
Jackpot! thought Jasper. It was the firm’s CEO. He recognized him from company investor presentations that he had attended in the past.
Suddenly, Jasper’s cell phone began to ring. He was so focused on observing the CEO that the phone almost fell out of his hand. His first inclination was to let the call go into voicemail and switch it to silent mode to avoid further disturbances. However, when he glanced down at the caller ID, he decided to answer it.
“Hi, Ange,” he said to his girlfriend as he continued to focus his attention across the street. “What’s up?”
“Where are you?” she bellowed back at him. “I dropped by your place with some breakfast, and the only one here is Katoomba.”
Another car pulled into the lot across the street and parked near the Mercedes. It was a nondescript Japanese sedan, probably a Toyota Camry.
Jasper replied hurriedly, “I’m in the Valley, doing some work. I’ll be back in a few hours…call you then. Gotta go.”
He hung up the phone and tossed it on the passenger seat.
Instantly, he recognized the man from the second car. It was the company’s CFO, whom he had met twice, including just the day before. He crouched down so that the man wouldn’t see him, despite the considerable distance between them.
A few more luxury European sedans drove up. The men got out, shook hands, and exchanged pleasantries with the CFO as the small group headed inside the building.
Jasper only recognized one of the men as someone he had passed in the lobby there, also the prior afternoon–a distinguished-looking man he recalled having seen at a technology company conference put on by one of the local brokerage firms. Jasper thought the man had Investment Banker written all over him.
After twenty minutes of inactivity, deciding that he had learned all he needed to know, Jasper drove off. He clipped his wireless Bluetooth headset on his ear as he reached for his phone and dialed the number for his business partner, Alex Stillwell. However, he got Alex’s voicemail, so he left a message.
“Alex, it’s Jaz. My hunch about INSI was right on the money. I’m down on the Peninsula and heading back now. Call me later…we need to talk about this ASAP.”
When Jasper got back home to Pacific Heights, Angie was seated on the couch in the living room of his flat, gabbing away on her cell phone with her friend Judith, watching tennis on the large flat screen TV, and petting Katoomba.
She was an attractive woman in her early thirties with shoulder-length brown hair and stunning blue-green eyes. Her intelligence and charm appealed to Jasper as much as her lovely looks.
He waved at her on the way to the bathroom. She quickly ended her phone conversation.
“Hey, where’ve you been?” she asked, slightly annoyed. “I picked up bagels, and the only one to share them with was the dog!”
“Remember yesterday,” he called out as he washed his hands, “when I said I had some business in the Valley?”
“Uh huh.”
“Well, I had a meeting with the CFO at INSI…you know, Integral Silicon…which turned out to be very interesting. I hadn’t been to their offices before, but I’d met with the guy at a conference one time and remember him as being very gung ho and a little too promotional… Picture a used car salesman at month end.”
He came out into the hallway.
She looked at him quizzically. “So, what’s the point of this story?”
“Well, yesterday, he was much more reserved. I didn’t think much of it until I was leaving their offices. There was a man signing in at the reception desk and getting a visitor badge as I was walking up who looked oddly familiar. I browsed at the visitor log as I was signing out and couldn’t make out his name, but the firm name next to it was that of a local boutique investment bank. The other entries before his were all people from some law firm. My gut told me something important was brewing there, since these heavyweights from the city were all there late on a Friday afternoon.”
“That does seem odd,” she said.
“So, purely on instinct, I went down this morning to check it out. Sure enough, the company’s top brass were in for an early morning meeting…on a Saturday, no less…with a top I-Banker and probably some legal people. It was a meeting of the fat paycheck club, secret handshake and all.” He amused himself at the thought of this.
As he walked into the kitchen and took some bottled water from the refrigerator, Angie asked, “So, they had a meeting. This helps you how?”
“INSI has always had good technology. Their chips are in second-tier cell phones, PDA’s, MP3 players, things like that. But they’re a small player that’s never been able to land the big contracts. I’ve always thought that it made much more sense for them to be part of a bigger company that provides other content to the consumer electronics guys and also owns factories that produce the chips, so they could offer a more complete solution to customers. The stock has been in a tight trading range for a while now, but has moved up a bit lately. Now I know why… I think they’re finally being bought out!”
“So, Firestorm owns INSI stock?”
“We will on Monday morning,” he replied snidely, “unless the deal gets announced before the stock market opens.”
2
On Monday morning, Jasper headed to the office sooner than usual to get an early start on his day, leaving home shortly after 5:00a.m. He always hated that his life revolved around stock market hours in New York. He’d like nothing more than for the trading day to start at 9:30 local time, instead of 6:30, but he loved living in San Francisco too much to ever make that happen. So, during his career he had begrudgingly grown accustomed to having to be in the office before the stock exchange’s opening bell.
On this particular day, the early morning start was even worse than usual, since it was still dark outside on his drive in. The good news was that his commute to the Financial District was quick and stress-free at that time of day, thanks to the lack of traffic.
Jasper and Alex had established their firm only six years ago. The market hit a rough patch during the first two years, but partly by luck and somewhat by cunning, the two entrepreneurs turned in positive returns for their small hedge fund throughout that stretch. Those early results attracted additional capital during the ensuing years. What began with twenty million dollars eventually mushroomed to more than three hundred million.
Just as important to Jasper as being successful was looking the part. Alex, as the older and more conservative of the two, was content with their original dreary office space. They had shared a floor in a dingy old office building with several other small hedge funds, a space that had been provided at low cost by their prime broker, the institution where the actual assets were held. The two of them had occupied one medium-sized room divided in half, filled with used furniture that had seen better days. A shared conference room and a small kitchen area were also part of the package. It was cheap and instantly recognizable as such. Jasper, who had grander aspirations, always viewed this location as a temporary stop along the way.
To his way of thinking, the new place had to scream, “We’ve arrived!” Nothing less than Class A office space in the Financial District would do, preferably up high in a swanky skyscraper with stunning views of the city and the bay. And that’s exactly what they got.
It was a huge leap for them at the time, but as their assets grew so did their needs for employees and equipment, and what initially seemed like a large space was soon filled with busy, hard-working people sitting at computers and manning phones.
Many thoughts were going through Jasper’s head this morning as he stepped off the elevator onto the twenty-fifth floor, crossed the hallway, passed the brushed aluminum sign for Firestorm Partners, and entered the office. The reception area was still dark, but he could hear a TV faintly buzzing in the back. The financial channel was blaring away the morning’s news events from a large flat-screen monitor perched on the wall next to the trading area.
As Jasper walked up to the trading desk, he caught the heavyset, disheveled Tony “Rocky” Roccoco by surprise. Rocky was busy multitasking–flipping through the pages of the Wall Street Journal while talking to someone on his wireless phone headset with a half-eaten pastry and a mug of coffee by his side. He was there alone and hadn’t heard Jasper come in.
“Let’s talk when you’re off the phone, Rocky,” Jasper said as he whisked by on the way to his corner office.
Without missing a beat in his phone conversation, the trader nodded.
Jasper’s office contained a large desk on one side with four flat-screen monitors looming over the right-hand corner. There was a small stack of periodicals and brokerage research reports on the opposite end of the desk and a keyboard in the center on a slide-out shelf. The rest of the room was filled with a small leather couch and two leather chairs separated by a small round table. A flat-screen TV hung on the wall above the couch. However, all of these things were overshadowed by the magnificent scenery outside. Full-length glass exterior walls revealed almost unobstructed views of San Francisco Bay looking north and east. The Golden Gate Bridge, Marin County, Angel Island, Alcatraz, Treasure Island, and the Bay Bridge were just starting to peek through the morning fog. Jasper always treasured his roost and the daily spectacle it offered him. Today, however, he barely noticed the stunning view.
He turned on the TV with a click of the remote and brought his computer monitors to life by jiggling his mouse, overriding their annoying screen saver programs. As the business channel chatter droned on, he glanced at his daily barrage of emails while he started listening to his voicemail.
Firestorm was an actively traded fund that did business with many different brokerage firms to access their research and attend their conferences and meetings. The institutional salespeople that covered Jasper’s account flooded him with “morning calls” and emails in an effort to drum up additional business with their latest research and investment ideas. He had learned early on that if he didn’t set his phone to go directly into voicemail, he’d get very little else done during the day.
Since the Firestorm portfolio contained more than sixty different stocks at any one time, there was always some news activity that needed to be reviewed. Today was no different, but Jasper quickly concluded from what he was seeing in front of him that no events of any real significance were going to impact Firestorm’s stocks on this day.
He leaned back in his Aeron chair and glanced over at the TV set. A female reporter was on the floor of the New York Stock Exchange, summarizing what had happened in the foreign markets overnight. Then she commented on the activity in the futures market and what that indicated for the level at which the stock market would open in less than an hour. To Jasper, this all seemed like a waste of time today, since there was no major news that would move the market much in either direction. In his opinion, the TV people were simply going through the motions to fill air time.
Just then, Rocky walked into Jasper’s office.
“What’s up?” asked the portly trader.
“I need you to take a look at INSI. How quickly can we build a position in the stock? I was there on Friday…I want to get the ball rolling on this.”
“I’ll check it out and get back to you,” said Rocky as he left the room.
A little later, Alex dropped into Jasper’s office. He was a sophisticated looking gentleman in his late forties with a medium-to-slender build and a pleasant demeanor. His friendly presence and natural way with words made him come across as both knowledgeable and trustworthy. Alex had been a modestly successful retail stockbroker at a large well-known brokerage firm when he teamed up with Jasper to start Firestorm. Cold-calling prospects and pressuring clients to make transactions, some totally inappropriate for their situations, was not his idea for how to spend the rest of his life. Therefore, when Jasper suggested that they start a hedge fund together, Alex was highly receptive. It gave him the opportunity to build a “buyside,” or money management, firm that would take care of its clients the way he would want to be treated-a concept that was completely foreign to his “sellside” employer at the time. He brought along many of Firestorm’s original clients and remained the firm’s primary marketer, while Jasper mainly focused on the investment side of the business.
“Morning, Jaz,” he said as he sat down in front of his partner. “I took the family camping this weekend and didn’t get your call until late last night. What’s up?”
“Hi, buddy, how was it?”
“Fantastic! We finally made it to that spot on the beach near Mendocino that you told me about last year. The girls loved it. The water was freezing, but they ran around on the sand, and we cooked over a campfire. We also hiked that trail you raved about. It was a great weekend.”
“Yeah, Ange and I loved it there. We really need to go back. I’m glad you guys enjoyed it so much… But I hope you passed on that seafood shack that stinks like low tide.”
“I think the health department closed it down.”
“Good! I still get nauseous just looking at raw oysters after eating there.”
“So, what’s with the urgent voicemail?”
“Okay, so Friday I met with INSI’s CFO during my trip to the Valley. I got this weird vibe that something major was going on there. The guy was not his usual self…he was acting strange. I sensed that his attention wasn’t really focused on our meeting. Also, I passed an I-Banker there in the hallway on the way out and saw that their visitor log was full of lawyers’ names. So, I went down there again on Saturday morning, parked in the lot across the street, and watched these same people come in for a meeting with the CEO. That’s when I called you. Why would they all meet secretively on a Saturday morning? I think they’re working on a deal to sell the company…and soon.”
Jasper was clearly excited.
Alex thought for a moment. “That could be huge for shareholders. Have you given an order to Rocky yet to buy the stock?”
“No, I wanted to run it by you first, so you could tell me if I’m crazy.”
“If you think the fundamentals at the company are solid, Jaz, let’s take a shot…although rolling the dice on a possible takeover isn’t really our style. Have you thought about what size position to take in the fund?”
Just then, Alex’s high-energy assistant started calling his name from down the hall. Alex looked over in her direction. “Be right over, Juanita.” To Jasper, he said, “She works me like a dog, but where would I be without her?”
“Right. Anyway, as far as INSI goes, I was thinking maybe four percent.”
“That sounds reasonable,” Alex replied. “If you’re right about a potential deal, we could make some real money with that size position.”
If Firestorm owned INSI shares equal to four percent of the value of the portfolio, that would rank INSI among the larger holdings in the fund.
Jasper immediately intercommed Rocky to find out what the trading situation for the stock looked like.
“A few small buyers around, but no sellers of size.”
“I don’t want to miss this one, Rocky. Start buying the stock and don’t be afraid to push the price up a little to get some shares bought right away. Be more price sensitive later to fill the remainder of the order. I’ll calculate the number of shares that we need to buy and give you an order ticket in a few minutes.”
Rocky purchased the full position for the fund over the next two days.
3
The firm’s receptionist, Donna Chow, buzzed Jasper’s intercom. “Your two o’clock meeting is waiting in the conference room,” she announced.
Jasper had forgotten all about the appointment.
“Huh? Oh, right…I’ll be there in a few minutes.”
Alex was out of the office visiting a local client and had asked Jasper to make a quick pitch to some prospects from Marin County–a middle-aged couple who had done well in real estate with some inherited money and were looking into hedge funds to diversify their assets.
Marketing presentations had never been one of Jasper’s strong suits. He could talk intelligently about stocks, the economy, interest rates, the fund, or anything else related to investments, but he never felt that he connected with people quite the same way that Alex did. However, Jasper had learned much simply from watching Alex over the years. His partner wasn’t too wordy and excelled at making smooth transitions between topics. He also was an excellent listener and always knew the right things to say. Jasper had absorbed some of these techniques, which had bolstered his confidence, yet he still considered Alex to be the master presenter and was always envious of him for his superb people skills.
Jasper found his two guests basking in the glorious views of a lovely fall afternoon. They were so entranced by the sight of Marin County at the other end of the Golden Gate Bridge that they didn’t hear Jasper enter the room.
“Look!” said the husband. “There’s that lovely house in Sausalito we sold five years ago.”
“Nice view of Marin today, isn’t it?” Jasper said to get their attention before introducing himself.
“I’m Bob Stanyan, and this is my wife, Suzie… Who do we make the check out to?”
They certainly are anxious to join the hedge fund world, Jasper thought. The topic probably keeps coming up at cocktail parties.
“Make it out to me, and I’ll overnight it to my retirement account in the Caymans,” Jasper said, but the joke didn’t really sink in with his visitors. “Seriously, let’s talk about what it is that we do here at Firestorm and see if it makes sense for you to become one of our limited partners.”
Jasper had them sit at one end of the large conference table and asked a few questions to gauge their level of sophistication regarding hedge funds, while he retrieved presentation packages from the nearby credenza. As he suspected, these people knew very little about what a hedge fund even was.
This may take longer than I thought.
As he sat down near the couple, he placed a presentation booklet in front of each of them.
“Before we get into the nitty-gritty,” Jasper began, “let’s talk a little about what a hedge fund is. For starters, a hedge fund is a private limited partnership.”
“Private partnership…so far, it sounds like my country club,” joked Bob.
“Good analogy, Bob. In this country club, as the general partner, we manage the assets that are contributed by limited partners like you…assuming you meet certain legal net worth requirements as qualified and accredited investors.”
“No problem there,” Bob said. “We get that it’s like a mutual fund for rich folks.”
Jasper grinned, nodded in agreement, and continued on.
“Hedge fund is a generic term that’s applied to many different investment strategies. Most hedge funds make money by exploiting spreads between various assets.”
He was attempting to simplify his explanation, but he could already see looks of confusion on their faces.
“For example,” he said, trying to be more understandable, “in our hedge fund, we invest in stocks. We look at a lot of different companies and try to figure out what they’re worth. Then we compare that with the stock price…what the market says they’re worth. We buy those stocks we think are undervalued, which is called ‘going long.’ And with stocks we determine to be overpriced, we ‘short.’”
“Short?” asked Bob. “What does that mean?”
“Good question. When we short, we borrow shares from a broker and sell them. Later, we buy those shares back…hopefully at a lower price…and return them to the broker, pocketing the difference in price.”
Bob and Suzie still look puzzled.
“Okay,” said Jasper, sitting back. “Let’s use some real numbers. Suppose I short a stock at eighty and then buy it back…also called ‘covering’…at fifty. I’ve made a thirty-point profit. It’s the same as buying low and selling high, only in reverse order.”
The fog around the concept started to lift for Bob and Suzie.
“So,” Jasper continued, “unlike most mutual funds, we don’t have to hope for the market to go up to have a good year. We have a greater latitude of investments and can even make money in down markets. This is because we’re simultaneously betting on some stocks to go up in price and for others to go down. Therefore, our returns have what’s called a ‘low correlation’ with those of the market. This means that our portfolio won’t automatically be up when the market rises, but…more importantly for people who’ve already accumulated substantial assets…we aren’t necessarily down when the market averages decline.”
“But you can still lose money if your bets are wrong, right?” Bob asked.
“That’s very true, Bob…in theory. However, we run a concentrated portfolio of just our best ideas. Why settle for second-rate picks? Not all of them will work, but not all of them will fail, either, and the size of any one position in the fund is based on our perception of the possible risk versus reward for that stock. We put more money into stocks that we feel have greater potential to achieve our objectives. Also, for additional protection, we have various risk-control techniques that we use, like limiting position sizes and exiting any position that moves twenty percent against us. When you look at the results, you’ll see that our investment process has worked well for a number of years now in both up and down markets.”
As Bob and Suzie began looking through the pages in the presentation booklets, Jasper launched into Firestorm’s history and philosophy. He began with how he and Alex had started the firm and grown the assets. Then he showed the couple the organizational chart and the employee biographies. Next, he directed their attention to the fund’s historical performance.
“No negative years so far!” Jasper declared with pride. “Although the market was down for two of our six years, our results have been much less volatile than the comparable stock market indexes. In layman’s terms, we had better returns with less risk than the market.”
He pointed to his favorite graph, the three-dimensional one that compared the growth over the years of an investment in the fund versus an the same amount invest m ed nt in comparable stock indexes. Firestorm’s results trounced all the other alternatives. The diagram was easy to comprehend, looked impressive, and was more persuasive than anything else he might tell them.
The couple glanced at each other and smiled, making no effort to hide the fact that they were visibly impressed by the fund’s consistently strong performance.
Jasper knew he had them now. “I’ve already briefly touched on how we achieved those returns,” he said. “We use an in-depth fundamental process whereby each stock is judged on its own merits, a so-called ‘bottom up’ approach. Most of the stocks are smaller or mid-sized companies, since they’re the most under-followed by analysts and other investors, and that’s where we feel that we can add the most value. I mean, what am I gonna figure out about IBM or General Electric that hundreds of people don’t already know? I might as well own an index fund that tracks the entire stock market if I only focus on stocks like those.”
“That makes sense,” Bob said.
Jasper could literally see a light bulb turning on over Bob’s head. Feeling more comfortable with the couple now, he veered a little off script to dole out some of his own homespun wisdom. “I’ve always believed,” he began, “that three primary factors determine the ultimate outcome of any investment…information, analysis, and timing. Usually, for an investment to be successful, you need a lot of any one of them and at least a little of the other two. That’s what motivates us to work so hard for our clients…to nail at least one of those three.”
He started to wind up the meeting with some technical details about the fund.
“I’m sure you’re wondering where the assets are held,” he said.
Looking around with amusement, Bob said, “I don’t see a big enough mattress here.”
“No, our mattress is down the street at a big bank-owned brokerage house. They like to call themselves a prime broker. Also, every January, an independent accounting firm audits the fund and certifies the results… I guess you want to know about our fees, too.”
Bob and Suzie nodded.
“Well, we charge one percent of assets annually, plus we get to keep twenty percent of any net profits at the end of the year.”
This provoked Suzie to speak up for the first time. “What justifies the fees being so high? You people must really make a lot of money!”
Jasper chuckled. This was not an uncommon question from potential clients. What he really wanted to say was, “We like to live well…like you…so we charge what we think we can get away with.” Instead, he said, more diplomatically, “Suzie, this strategy is not your typical index-mimicking operation, like many mutual funds. We’re very active in the market every day, adjusting positions and adding and eliminating holdings. There’s a great deal of work that goes into running this fund, and we need to be able to attract bright, hard-working people.”
“No argument there,” she conceded.
“Well, as you know, nothing does that better than money. Also, the fees align our interests more fully with those of our clients. We do well only when you do well.” He paused for emphasis. “And remember, those performance numbers you saw earlier were net of all fees.”
She still looked skeptical.
“Plus,” he continued, “there’s a high-water mark, so any losses must be made up before the twenty percent incentive fee resumes.”
Suzie still wasn’t convinced. “We don’t pay that level of fees to any of the brokers that we use to sell properties,” she said.
“You would,” Jasper responded confidently, “if they could get you above market prices and do it quickly.”
The next day, despite Jasper’s modest evaluation of his own sales abilities, the couple agreed to become limited partners in the fund.
4
That Saturday night, Jasper and Angie went out to dinner with their friends Wayne and Kendall. Wayne had done the legal work for Jasper and Alex when they first started Firestorm Partners, and Jasper and Wayne had been friends ever since. The two couples enjoyed each other’s company and would get together about once a month to explore new restaurants in San Francisco’s ballyhooed food scene.
On this particular evening, they were dining at a new eponymous hotspot started by an up-and-coming chef who had worked under some of the finest in the city and was now ready to make a big splash on his own. Kendall’s family was well established in the high-end hospitality business, and therefore it was fairly easy for her to land one of the highly coveted reservations. Jasper was always disillusioned by how hard it was to get into these places. It was as if the restaurant was doing you a favor by allowing you to pay top dollar for the latest experimental cuisine served by people who considered themselves too good to be waiting on tables. Also, the restaurants were often located in some cramped, obnoxiously loud space with no parking anywhere nearby. Nevertheless, he liked trying new places, and it made him feel part of the “in” crowd.
The food that evening was acceptable to Jasper, but nothing special. However, he was totally turned off by its ostentatious presentation. Also, he was growing weary of the whole “fusion” trend that had every new restaurant trying to outflank the others by pairing odd combinations of food and spices into the same dish. This new chef apparently did not want to limit himself, so he billed his cuisine as “global.”
Jasper ordered conservatively, choosing a garden salad appetizer and a filet mignon entre–or so he thought. The salad was built in the shape of the Eiffel Tower and contained what he guessed were miniature bamboo shoots and ingredients indigenous to the tropics. The whole concoction was coated with ponzu sauce. The filet, which had a mango rub on it, sat on mashed yams interspersed with shitake mushrooms and sliced beets. The meal would have appealed to him much more if it had been less artistic and more basic, although even comfort food had lost its way in this town these days.
Angie’s dishes were all the more absurd–foie gras tempura and a scallop kabob.
Wayne and Kendall both had soup followed by who-knows-what as mains.
Jasper commented that it was “food creativity run amuck.”
“Jaz,” Angie said, “you need to quit being so analytical. Open your mind and enjoy the experience.”
“Ange, you’ve been listening to too much reggae music again,” he replied.
Wayne and Kendall laughed at their friendly banter.
After everyone declined dessert, the group headed across the street to an upscale wine bar.
When Jasper had moved west after graduating from Penn State, this South of Market neighborhood was still very seedy. A number of popular nightclubs were located there, thanks to the low rents and easy access. In keeping with the recent gentrification of the area, the shabby watering hole where Jasper used to meet up with friends, which had been called “Papa’s,” was now “The Corkscrew,” a trendy wine bar. It was large by wine bar standards, with lots of modern decor couches and decorations spread throughout. It also featured a large decanter-shaped counter in the center. The back wall was made of lightly smoked glass with a voluminous two-story wine cellar behind it, where the patrons could watch young ladies in spandex outfits use sliding ladders to retrieve bottles of wine from the various compartments. It was an odd cross between Napa Valley and Cirque du Soleil.
Since the place was already crowded when the foursome entered, they decided to stand near the counter to wait for a table. Wayne considered himself a budding oenophile, so they prodded him to select a bottle of wine from the textbook-sized list. Soon, the bartender was pouring them an older vintage Chateauneuf-du-Pape, a Southern Rhone red wine that Wayne was quite fond of. They all tasted the delightful wine and thanked Wayne for making such an outstanding selection.
As the others made small talk, Jasper looked around to take in the scene.
“Jaz!” someone called from behind him. “Long time no see!”
Jasper quickly recognized the man approaching him. It was Richard Klein, an old co-worker from the days when they both started out in the business as junior analysts at a large local mutual fund firm.
Jasper reached out to shake his hand.
“Richard, how’ve you been? I haven’t seen you in ages.”
Richard looked genuinely pleased to have run into Jasper.
“I’m good. It’s been some time since I’ve seen you. I hear your fund is doing great. In fact, you look terrific, Jaz.”
“Life is good. Alex and I are having another fine year. Are you still working for Sandy?”
“Yep, I’m still there…for now.”
Jasper was confused by this.
“Why, are you thinking of leaving?”
“As you know, Sandy calls all the shots at his fund, and he’s very temperamental. We had crappy results last year, and this year didn’t start off much better. When some of the big clients started getting restless, Sandy felt the heat to make them money, so he made some big sector bets that didn’t pan out…like the railroads prior to the strike and the biotechs before they swooned.”
“Ouch! That sucks.”
“It sure does. So he’s been a difficult guy to work with lately, even more so than usual. Also, I just heard from our marketing schlub that a few big fund-of-funds have notified us that they want to pull their money at quarter’s end. We could lose almost a third of our assets right there. I think the firm will come through this okay, but bonuses are gonna be really skimpy for the second year in a row, and it’ll take time to get things back on track.”
“How big is the fund right now?”
“It’s just shy of a billion dollars. We peaked at one-point-two billion early last year before performance crapped out.”
Jasper was envious. Firestorm was only a quarter of that size. “It’s a shame,” he said, “how quickly things can shrink in this business.”
But Jasper also felt sympathetic toward Richard, believing that he deserved better. He’s a smart, hard-working guy with good investment instincts.
However, Sandy’s reputation in the financial community was not pretty. He was known to churn through employees like a buzz saw through lumber, and the only thing more volatile than his performance results were his mood swings. But he somehow always managed to keep his fund chugging along. Now, however, it looked as if the wheels might finally be coming off.
As Richard left to rejoin his group, Jasper found that his friends were now seated on a semicircular leather couch twenty feet away.
“You were so engrossed in your conversation,” Angie said sarcastically, kicking him gently under the table, “that we figured you wouldn’t mind if we grabbed some seats.”
“That was an old friend I worked with years ago,” Jasper apologized. “It’s been a long time since we’ve seen each other. Sorry for ignoring you guys.”
Giving him a hug, she said, “It’s great to have you back with us.”
Wayne ordered another bottle of wine, a vibrant red Burgundy, along with a small platter of cheese. He made some comments about the wine’s “balance” and “elegance,” which meant nothing to Jasper, but he liked the wine anyway.
“What do you think of this grand cru, Jaz?” Wayne asked, putting him on the spot.
“Wayne,” he said, with all his charm, “if I could pick stocks the way you pick wine, I would’ve retired to my own island somewhere in the South Pacific years ago.”
They all raised a toast to that.
For the next hour, the ladies gossiped about the latest fashion trends and which celebrity was seen wearing what, while the men mostly talked about sports. Not wanting to appear rude for a second time, Jasper tried to stay focused on the various topics, but his mind was really on his earlier conversation with Richard.
The next morning, Angie awoke early to the humming sound of Jasper’s printer spewing out page after page. Jasper was at his desk, typing away at his laptop.
“What the hell are you working on this early, Jaz?”
“That guy I was talking to last night…Richard Klein…he gave me some interesting news about his fund…info that can make Firestorm money!”
“Huh?” Angie yawned.
“He works for Sandy Wilson at SWC. Their fund hit the skids and is starting to implode after some bad stock picks. I looked up their 13-F filing with the SEC online, which lists all of their holdings as of the end of last quarter. Then I threw together a spreadsheet with their positions ranked by dollar value and downloaded from the internet the average trading volume for each stock… He’s screwed!”
Angie wasn’t connecting the dots.
Are there any times when he’s not thinking about work?
Jasper continued enthusiastically. “He owns many days’ worth of trading volume in some of his bigger positions, and he’s gonna need liquidity due to some major withdrawals from his fund.”
“So?”
“So, his forced selling could easily drive down some of those stock prices in the coming weeks. We’ll get short the most vulnerable ones in the next few days and have Rocky spread the word around to the other trading desks about what’s happening at SWC. It’s just like chumming the waters…those other traders will smell blood and attack like the sharks they are. They’ll do the same thing as us and bet against SWC’s stocks. The good news is that we’ll be there first and already making money!”
Angie yawned. “Wonderful…you’re gonna stab your friend in the back.”
Jasper got defensive. “Not at all. Their selling will push the prices down…we’ll just be on the other side of the trade and make a few shekels.”
“How about making us some breakfast first?”
5
There was a week every fall when Jasper trekked to New York to attend a series of investment conferences that all took place simultaneously. This was a fine way for him to make contact with a lot of companies in a short period of time. It also gave him a good perspective on the stock market–the higher the attendance, the more likely the stocks were to be peaking.
On the Sunday morning prior to his flying out, Angie and Jasper had breakfast at a small neighborhood cafe. After laughing over a particularly bad movie they had seen the night before, Angie focused on Jasper’s trip.
“I’m sure all the stockbrokers will want to take you out while you’re there. Try not to overdo it on the lap dances,” she said jokingly as she winked at him.
“I wish I had time to go to those places. I’ve got more meetings this year than I’ve ever had, including company dinners some of the firms have set up. Alex also has me doing some introductory marketing meetings at the end of the week. Fun, it won’t be.”
The scene at the airport was hectic when Angie dropped him off. They quickly said their goodbyes at the curbside, and Jasper shuffled off into the terminal.
As he waited in line for a check-in kiosk to become available, he wondered what the problem was with the traditional way of checking in.
This new way takes just as long, he thought, since you’re likely to get stuck behind people who can’t follow directions on a touch screen, or else they act as if it’s their first time in an airport. And the airlines don’t seem to be saving any money on smaller staffs, since they still need people to check identifications and tag the bags anyhow.
After a while, he tried to focus on something other than the airlines’ ineptitude. But then he had to go through security, the next bottleneck. While still cumbersome, this process seemed to have become somewhat smoother over the past few years. The irony to Jasper was that all these highly advanced security machines hadn’t caught any terrorists, but were more useful as propaganda tools for politicians. As far as he could tell, this expensive new equipment was there primarily to convey the idea to the public that airport personnel finally had security under control.
I can think of a hundred other places those tax dollars could’ve been better spent.
Once he was on the plane, Jasper had hours more to kill. He searched through his bag for the schedules of the conferences he would be attending. Each one of the three different conferences had long lists of companies that would be presenting to investors. The presentations would all last twenty to thirty minutes, with four or five of them going on simultaneously. These would be followed by “breakout” sessions closed to the media, where small groups of investors could ask detailed questions of the presenting management teams in a more intimate setting. Additionally, Jasper had scheduled a few private one-on-one meetings with companies that he was especially interested in or in whose stocks he already had positions. On top of everything else, there were the company dinners he had been invited to, which needed to be factored into his schedule. So, he had plenty of logistical issues to deal with to maximize the usefulness of this trip. Fortunately, the hotels where the conferences were being held were all near each other, so he could easily go from one to the next and back again.
His plane arrived at JFK Airport on time–a rarity in his experience. After retrieving his luggage, he headed off in a cab to Manhattan. When he entered his hotel, he could see other conference attendees checking into their rooms and heading off in various directions. There was a distinct buzz of activity in the spacious lobby. Jasper gathered his key and made his way up to his room.
The next morning, he headed down to the conference in the basement of his hotel. This required him to walk down a grand staircase from the lobby to a very crowded hallway, where a swarm of people had congregated around a row of tables to register for the event. Jasper eventually made his way to a young woman sitting at one of the tables, who looked him up on her laptop, printed his badge, and handed it to him along with a cloth bag emblazoned with the sponsoring brokerage firm’s name and logo: Goldsmith Associates. The heavy bag contained two large spiral-bound books filled with information on each presenting company. A blank notepad, pen, and miscellaneous promotional materials touting the brokerage firm were also stuffed into the bag.
As the company presentations were about to begin, the hallway was mobbed with people. The scene was a fire marshal’s worst nightmare. There were five large conference rooms connected by one meandering hallway, in which people were frantically bouncing off each other as they tried to go in various directions. Needing to get to a room just up ahead, Jasper was nearly run over twice by pushy over-caffeinated Type-A personalities, but managed to enter the room and claim a seat. He guessed that there were at least ten rows of seats with a dozen chairs per row on each side of the aisle. The room was two-thirds full.
Looks like a strong turnout for a company this size.
As Jasper sat down, one of the men on a small raised platform stepped up to a microphone to speak. It was the Goldsmith analyst who followed the company, DeltaGro. He gave a brief summary of the firm and introduced the CEO, who would be making today’s presentation.
Jasper flipped through one of the books in his bag to the page on this particular company, and then took out a pen to take notes. A large screen next to the speaker displayed a PowerPoint presentation with bullet points and graphics for each of his topics. While he spoke, the CEO nervously directed a laser pointer at the screen for emphasis.
DeltaGro was in the residential and commercial fertilizer business, which also included weed killers and pesticides. Prior to the presentation, a legal disclaimer slide had flashed briefly on the screen, containing print so small that no human eye could possibly read it. From past experience, Jasper knew that the disclaimer roughly stated that nothing the company said this day should be relied on to be accurate or meaningful. If taken literally, there would be no reason for Jasper or the others to be there at all.
After presenting a brief overview of DeltaGro’s product lines, the CEO cited industry statistics about the size of the market, historic growth rates, and projections for both of these from third-party analysts. Next he drilled down to his specific products, displaying a series of spiffy three-dimensional charts that highlighted DeltaGro’s growing revenues. Eventually, his presentation transitioned to the recent acquisitions his company had made and the holes these filled in its product lineup, as well as other initiatives DeltaGro had undertaken in both marketing and distribution. Finally, he turned the podium over to the CFO, who quickly went through the company’s financial results until the buzzer sounded.
Jasper wasn’t overwhelmed by this presentation, but he sensed that the fundamentals were headed in the right direction. The stock was reasonably priced, and judging by the size of the audience relative to the size of the company, other money managers were starting to put the name on their radar. Therefore, he decided to participate in the breakout session. To do this, he headed back out into the frightfully overcrowded hallway to perform the bumper car ballet to the other end of the building, where the breakout rooms were located.
After passing a security guard, who checked his badge to verify that he wasn’t a member of the media, Jasper entered the small breakout room. It had a table and a few chairs near the far wall, which faced tightly packed folding chairs set up for an audience of perhaps forty people. To get some leg room, he grabbed a seat on the aisle.
The CEO and CFO walked in, chatting with investors who had sat in on their presentation and followed them to the breakout room. The two men strolled through the room, sat down at the table, poured themselves water from a pitcher, and began taking questions.
The first question came from someone who seemed to know DeltaGro well, since he addressed the CEO by his first name. The query was a softball toss about acquisition possibilities. This gave the CEO a chance to pontificate about all the opportunities available to the company and the value these could conceivably create for shareholders through his empire-building strategy.
It occurred to Jasper that a ringer might have been planted in the audience to start the conversation off on a positive note. DeltaGro would not be the first company in the history of these conferences to pull off a stunt like that. Nevertheless, Jasper decided that, more likely, the man was just a brown-nosing institutional shareholder who liked to feel important and get in the good graces of management by asking friendly questions.
The next question concerned the rising input costs for fertilizer and DeltaGro’s ability to pass those along to customers while still maintaining profit margins. The CFO jumped on this one with a clearly canned response, one that he likely had been feeding to investors lately, suggesting that any higher costs would be passed through. He also noted that the company had some long-term contracts with suppliers and did some hedging. According to him, competitors hadn’t done much of that, so there was the possibility that the company could either have higher margins or be more competitive on price in the future.
Jasper was still lukewarm on buying the stock, but he liked what he had heard up till now, so he posed a question of his own.
“Can you address the impact of organic farming on your business?”
The CEO replied, “There’s no doubt that organic is a rapidly growing trend, although it’s currently only a small part of the industry. But the organic folks still need fertilizer…just not the conventional type. We expect to launch innovative products for that market in the near future. Stay tuned.”
Jasper followed that up with, “Where do you see the strongest growth? Domestic, international, commercial, or residential?”
The CEO beamed. “International is booming. Developing nations are demanding more higher-quality food as their income levels rise. That’s raising the demand for crop nutrients. We’re making strong inroads there with local partners who know the landscape and have distribution systems in place. Right behind that is the domestic residential market. We’re beginning to see the payoff from some new products that we’ve acquired and marketed heavily.”
At that moment, the buzzer went off, indicating that the session was over and the next presentations and breakout sessions would begin in five minutes.
A small group of people rushed the management team to get in a quick question or two. Jasper introduced himself to the CFO, and they exchanged business cards. Before leaving the room, he made a few notes in his book, including one to follow up with some additional questions for the CFO when he returned to his office the next week.
Jasper headed back to the large meeting rooms to observe the next presentation, this one by a popular internet retailer, HyperShop.com. He could barely get in the door because the meeting was already standing room only. Slithering over to a side wall, he leaned up against it shoulder-to-shoulder with other investors, who already had their notebooks and pens out.
The Goldsmith analyst for HyperShop, whom Jasper always considered a shill for the firms he covered, said some glowing words about the company. Then he introduced the CEO, who did something odd by stepping down from the podium and launching into his spiel while pacing in front of the audience and frantically waving his arms around. It turned out that he was using a wireless microphone clipped to his shirt.
This guy’s a modern-day P. T. Barnum!
The audience of money managers was clearly enthralled by the man’s charisma. He spewed all the latest business school cliches, including phrases like “core competencies,” “customer-centric,” and “rationalizing.” The audience loved it, completely mesmerized by every New Age business concept that rolled off this man’s lips. Meanwhile, the large screen behind him filled with graphics that would make a Hollywood producer proud. It was a big letdown for everyone when the CEO eventually gave way to the CFO to talk about mere mundane things like revenues and profits.
The market valued the stock as if HyperShop was going to reshape the whole concept of retailing so that no one would ever have to set foot in a store with walls again. Jasper could see where people would momentarily buy into that notion, but he knew that one day the stock would be a great short when the wind went out of its sails as the financial results inevitably fell shy of the hyperbole. The underlying fundamentals in no way justified the value that the market was currently placing on the company. This was another investment idea for Jasper to keep an eye on. Timing would be critical for a profitable trade in this stock. He would need to bet against it at the first sign of a chink in its armor, since the stock price collapse could happen abruptly.
As he left the room with the rest of the herd, Jasper recognized some of the other attendees, although no one he knew personally. These were the “conference whores,” a group of analysts employed by some of the large hedge funds and mutual funds, who appeared to do nothing but go from one conference to another. In a nutshell, their job was to get cozy with the upper management teams and look for body language or words from them that could indicate changing conditions at their companies. The funds they worked for had large positions in many stocks, so company CEO’s and CFO’s knew these analysts well. Often they had private one-on-one meetings with them so the analysts could pick their brains, since a CEO’s job is not only to run a company but also to champion its stock at all times. Lofty stock prices keep shareholders happy, CEO’s employed, and their personal stock and options in their companies more valuable. If this required pandering to the whores, so be it.
Jasper headed out of the hotel and down the block to the next conference. The routine was the same there regarding registration, except that it took place in a separate room and wasn’t crowded, since the conference had been under way for a few hours. After he took off his badge from the previous conference and put it in his pocket, he was handed a cheap burlap-like faux attache case emblazoned with logos for the host brokerage firm, WebberPeabody, and filled with materials similar to those he had received at the other hotel.
Checking his watch, he realized that he had twenty minutes to kill before the presentation he wanted to attend. As he pulled out his BlackBerry to read his messages, he looked around the registration room. There was a coat rack along one wall with a few tables and mostly empty chairs nearby. The tables were strewn with newspapers, empty coffee mugs, and small plates with remnants of breakfast. On the other side of the room was a longer table with what was left of the breakfast muffins and fruit, along with pitchers of orange juice and thermal carafes of coffee. Hanging on the wall behind the tables were two large flat-screen monitors. One listed real- time stock quotes for all the companies that were presenting at the conference that day. The other displayed conference-related information.
It was the second screen that caught Jasper’s attention when he saw a short list of changes to the conference schedule. These included the company that Jasper had come to see, Integral Silicon, which had cancelled its presentation. As Jasper wondered why, he glanced at the first screen to see that INSI’s stock price was up by a few pennies on the day, in line with the overall market.
As INSI was one of the largest positions in his fund, Jasper quickly called back to his office.
“Rocky, it’s Jaz. INSI’s a no-show at the conference. Any idea why?”
“I haven’t heard a thing. Checking the news now…there’s nothing there to explain it.”
Jasper was curious, but not overly concerned. If he had time, he would look into this later. After chatting a bit longer with Rocky about what was happening in the stock market that day and giving him some initial feedback on the conferences, he wandered through the hallway and into a presentation already under way.
By now the presentations were all starting to sound generic to him, as if the companies were all working from the same template. Fortunately, this one would be over in just a few minutes.
For lunch, two of the large conference rooms were joined together and set up with big round tables. Each one, accommodating a dozen people, had a sign in the middle with the name of a company whose entourage would be seated there, enabling interested investors to join them.
Jasper wasn’t paying much attention when he plunked down in an unoccupied chair near the middle of the room. A woman who sat down next to him introduced herself as the head of investor relations for an emerging health-care company, Franklin Biogenetics. To make small talk, he asked her about the company and tried to act interested when she explained that Franklin was working on a drug derived from coconut milk for people with some obscure genetic disease. Her voice changed noticeably when she bragged about the large amount of money they could charge patients to stay alive if the drug proved successful. To Jasper, the whole idea sounded more like something that graduate students should be working on in a lab somewhere, rather than a commercial enterprise that aimed to hold sick people financially hostage.
“What’ll happen,” he asked, “if the drug fails to work?”
“They’ll still be sick, and we’ll all be looking for work elsewhere… Or if there’s enough cash left over to keep the company going, we’ll rush another compound into testing.”
Jasper quickly determined that buying Franklin ’s stock was eerily similar to purchasing a lottery ticket. He really wasn’t too keen on binary investment events, in which he would either hit a home run or strike out, with no middle ground. That was highly likely in a case like this, since he didn’t feel that he had any competitive advantage over other investors.
It sure seems like a coin toss. What do I need that for?
The wait staff soon started bringing out the food: the standard rubber chicken and soggy vegetables. It took a while for Jasper’s table to be served.
A speaker stepped up to the podium and began to talk, an older gentleman with scholarly-looking eyeglasses. His thinning gray hair was combed over the top of his head in a pitiful attempt to hide his sharply receding hairline. He was WebberPeabody’s director of research, Clifford Mortensen. After thanking everyone for attending, he gave a short speech about the firm’s wonderful research and investment advice–buy this, sell that–and the slightly market-beating results it would have earned for you if you had followed its guidance during some arbitrary time frame.
This is worse than watching a late-night infomercial on cable.
Mortensen was followed by Meyer Friedland, a Noble Prize-winning economist, who spoke about marginal income tax rates and government deficits. A brilliant man he was, but not the ideal complement to Jasper’s sugar-laden dessert cake and decaf coffee.
Jasper caught a few more uninspiring presentations before heading back to his hotel for a one-on-one meeting with a business software company, SofTec, which had a small suite upstairs in the hotel, where its representatives met individually with investors like him. To attend a meeting like this, you generally had to be one of the host brokerage house’s better customers. Either that or they had a slot they needed to fill. Jasper’s fund was growing nicely, so he wanted to think it was for the former reason, but he knew it was probably more for the latter. Still, he was happy to take advantage of the opportunity.