The Prince of Risk

7

Marv Shank was waiting by the elevators when Astor arrived. “Hey, Bobby. Half day? I didn’t get the memo.”

Astor checked his watch. The time was eight-thirty, but Shank looked as if he’d been at work for hours. His shirt was untucked, his tie askew, his face moist with perspiration. Astor patted him on the shoulder. “I knew I could count on you not to bring up my father.”

“You hated the guy. What’s to bring up?” said Shank, hurrying to keep up. “Wanted to make sure I grabbed you before anyone else. Press conference at nine-fifteen from Shanghai. U.S. trade representative.”

“Know what he’s talking about?”

“Not a clue. That’s what makes me nervous.”

“Any change in the position?”

“Nada.”

“Then why are you so nervous?”

“It’s my job to be nervous.”

“If you didn’t get nervous,” said Astor, “we wouldn’t make any money.”

“But this time…”

Astor stopped and turned to face his friend. “This time what?”

“It’s a little rich for my taste.”

“Show a little faith. Have I been wrong on something this big before?”

Shank pulled open the glass door leading into the office. “The market,” he said, “doesn’t care about before.”

Astor walked inside. “Comstock Partners” was written in gold block lettering on a bleached maple divider behind the reception desk. He rapped his knuckles on the counter as he passed through the reception area. “Hello, ladies,” he said, addressing the receptionists, both young and male and hoping for a shot at the trading desk. “Bring me the usual. This time make sure it’s hot.”

“The usual” was a double espresso with a lemon rind on the side, some biscotti, and a shot of wheatgrass, in case he felt so inspired. In fact, the espresso was always piping hot, but he felt it his duty to keep the newbies on their toes. Lesson one: in this business, you couldn’t be careful enough.

Not breaking stride, Astor continued down a corridor housing administrative offices-accounting, legal, IT. “What about my fifty grand?”

“Check’s on your desk,” said Shank. “That was some dive. Your back okay?”

“Don’t remind me.”

“You could have heard that flop in the next county. Great party, though. I’m just sorry it had to end on a sour note.”

“I thought you weren’t going to bring that up.”

“It just slipped.” Shank took hold of Astor’s arm and stopped his progress, guiding him against a wall. Astor stood still, Shank’s compendious belly pressing against him. “Marv, what are you going to do? Give me a kiss?”

“Really, Bobby, you doing okay? We’re talking about your father here. You can talk to me.”

Astor looked Shank straight in the eye. “I’m fine, Marv. Really.”

“You’re sure?”

“Do you want me to pinkie swear?”

“Screw you,” said Shank, dismissing Astor with a shove down the hall. “Shows what I get for caring.”

“If you want a friend…” began Astor.

“Buy a dog,” the two men said in unison. Astor raised his hand and Shank high-fived him.

“Thought you were getting soft on me,” said Astor.

“Thought you had a heartbeat.”

“Never.”

The trading floor was a long open space, a floor-to-ceiling window that looked over Ground Zero and past Wall Street to the East River making up the outer wall. A desk ran the length of the room. Fourteen traders sat across from one another at uneven intervals. A host of flat-screen monitors demarcated each post. Workspaces varied from immaculate to chaotic. He counted three boxes of Pepcid, two containers of Tums, and a bottle of Maalox. Pro ball players got concussions. Traders got ulcers. If you weren’t playing injured, you weren’t playing hard enough.

Aware that the room had gone silent at his arrival, Astor stopped and addressed his team. “Okay, everyone, listen up. I know you’ve all heard about my father. I have no more idea what happened than any of you. If I find out anything, I’ll announce it over the hoot-and-holler. Your condolences are appreciated, but as most of you know, we had a falling-out a while back. Don’t expect me to hide in my office while I get over it. I’m going to be out here on the desk riding your ass like any other day. So get to work and make some money.”

Astor waited, but no one made a move. He clapped his hands. “That means now.”

The room came back to life.

Astor continued to his office. He had founded Comstock Partners fifteen years earlier, at the age of twenty-six. The firm’s name was a lie from the beginning. There were no partners. There was just Robert Astor, sole owner and principal investor. In the world of finance, Comstock was technically classified as a hedge fund. Hedge fund was one of those funny terms that meant everything and nothing all at once. Simply defined, a hedge fund was “a private partnership that invested in publicly traded securities or financial derivatives.” That meant he bought and sold stocks, bonds, commodities, currencies, and just about anything you could legally speculate on with a view toward making a profit. But that was only a beginning.

Most hedge funds had four things in common. First and most important was fee structure, since traders, Astor included, cared about only one thing, and that was making money. Comstock, like the majority of its competitors, used something called a “two and twenty model.” Comstock kept 20 percent-a full one-fifth-of all profits for itself. On top of the 20 percent, it charged a management fee of 2 percent on all funds invested with Comstock, win or lose. In this last regard, Astor was a gentleman. He charged the 2 percent only on the funds actually invested in his positions. Any money sitting in a bank got off scot-free. He even credited his investors the interest.

The other three things hedge funds had in common had to do with the way they invested the money entrusted to them. As the name implied, Astor often hedged his investments, meaning that if he bet that one stock might go up, he bet another might go down. The idea was to guard against swings in the market. Hedging might limit your returns, but it provided the investor with a margin of safety. It was never smart to put all your chips on red or black.

Next, Astor used something called “leverage” to jack up the value of his bets. Leveraging just meant borrowing to increase the size of your bet. Back in the day, an investor would buy stock “on margin,” which meant he used the value of the stock he had bought to double-down and buy some more. That was old school. These days an investor leveraged. Astor borrowed billions of dollars to amplify his bet on anything: stocks, bonds, oil, wheat, pork bellies, and especially currencies.

The last element was freedom. Hedge funds like Comstock operated in a nether region where regulation held little sway. When an investor signed a disclosure agreement and transferred his money into a hedge fund, he was giving Astor his trust to make money the best way he saw fit.

And that’s why Astor loved the business. Hedge funds were a license to bet-and to bet big-without Big Brother looking over your shoulder telling you what to do and how to do it, and, worse, demanding an outsized share of your profits when you won. God bless the U.S.A.

Astor continued to the end of the desk. Though it was summer, most of the traders wore fleecies and sweatshirts. Astor kept the room chilled to a brisk sixty-two degrees. He liked his boys and girls alert. Many of their sweatshirts bore names of alma maters. There were more Stony Brooks than Whartons. Astor couldn’t care less where someone had gone to college. (After all, he hadn’t managed to get a degree anywhere.) He cared about smarts. He’d cherry-picked the twelve men and two women who worked for him from the best firms in the world. He had two Brits, a few Indians, a gal from Shanghai, an Israeli, even a few Americans. They ran the gamut in personalities from extroverted jerks to introverted jerks. Talented traders were not renowned for their people skills. Or, as Alex had often commented, “It takes one to know one.”

Astor’s office occupied a corner of the building adjacent to the trading desk. The door stood open and he was greeted by a view south across Battery Park to the Statue of Liberty, Staten Island, and New Jersey.

New York City. The center of the universe.

Astor set down his satchel and dropped into his chair. An electronically tinted glass wall allowed him to look onto the floor. This morning the wall was opaque. His first order of business was a check of the markets. He spun to face the panoply of monitors that took up half his desk. Futures showed that the market would open strongly on the downside, a bit more than a 3 percent drop. European markets were mixed. Asian markets had closed down a percent. The fall in the U.S. market was a knee-jerk response, and the market would bounce back in a day or two.

Viewing the numbers, Astor experienced an immediate and visceral thrill. With $5 billion in the game, he wasn’t merely an observer but an integral, albeit tiny, part of a bigger, immensely powerful and efficient machine. A vast, seething highway of ever-changing, ever-evolving information. Some people got off on scaling granite cliffs or jumping out of airplanes. Astor got his thrills in this chair. It was a game of intellect and daring, with chance in the guise of unforeseen events always dangling above your shoulder. A Damocles sword fashioned of gold and greed. Sit down. Buckle up. And plug in. He’d been doing it for fifteen years, and it never got old.

Astor skipped past the futures to the one symbol that concerned him most.

The position.

“Six-thirty,” he said, looking over his shoulder at Shank, who hovered nearby. “No worries.”

“I still want to look at the press conference.”

Astor punched a button and a slim screen emerged from a credenza situated against the wall. “Bloomberg, right?”

Shank said, “Yes.”

Astor opened his drawer and began digging through the contents. There were small orange prescription bottles of Lipitor, Xanax, Imodium, Ambien. He settled for a box of Altoids and popped three into his mouth. Another screen showed his morning schedule.

At nine there was a meeting with Septimus Reventlow, who managed the Reventlow family office. Family office was the term used to describe money passed down from generation to generation and managed on behalf of the heirs. Think Rockefellers, Rothschilds, or even Astor’s namesake. When he’d first started in the business, family offices invariably involved “old money,” money earned fifty to a hundred years before by a long-dead tycoon. These days it was the opposite. Family offices handled the billions earned by private equity mavens, software billionaires, and Internet entrepreneurs, all of whom were still very much alive.

At ten he had a meeting with Pacific Ventures, a private equity firm that managed about $10 billion. Pacific Ventures’ main game was buying up companies, restructuring them (trimming the deadwood and invigorating what was left), and selling them for a profit several years down the road. It also invested in hedge funds like Comstock. Astor punched in the account and saw that as of this morning Pacific Ventures had just over $100 million invested in his Astor fund. Pacific Ventures was a good client.

Comstock operated four funds. Comstock Alpha was a long/short fund. This was the classical hedge fund, which didn’t seek to demolish the market return but was satisfied to beat the major indexes-the Dow, NASDAQ, and S &P-by a few percentage points.

The team that traded the Alpha fund lived life glued to their monitors. When the market got frothy on the upside or fell through the floor, they couldn’t afford to leave their desks for a moment, not even to use the john. People liked to joke that they kept a motorman’s caddy at the ready. As for the other thing, they’d fart it out. True on both counts. No one said a trading floor was a nice place to work.

Comstock Risk was an arb fund, and arb funds invested in two areas, company takeovers-both announced and rumored-and currency plays. It used leverage to double the bets, maybe triple them, but never more than that.

Comstock Newton was a quantitative fund. Frankly, Astor had no idea what its team did, except that they did it with lots of math and sophisticated algorithms that predicted whether stocks or gold or oil, or whatever you might want to bet on, would go up or down. Much of their work involved high-frequency trading, which meant buying and selling stocks hundreds of times an hour. Competition among high-frequency traders to see who got their orders in first had become so intense that the New York Stock Exchange even allowed firms to position their computers in the same building as the Exchange’s, a prisonlike facility in the wilds of New Jersey. Even a delay of a millionth of a second could mean significant losses.

Astor’s quant team didn’t work in Manhattan but in a locked-down bunker in Greenwich, Connecticut, where they could bang out code day and night. Rumor was that from time to time they threw geek orgies, which involved drinking the latest microbrew, gobbling Slim Jims, and formulating new and ever more sophisticated algorithms. All math, all the time.

Together, these three funds managed $2 billion. Quant was doing best this year, boasting a 27 percent return. The Risk fund was faring poorest, returning only 4 percent.

And then there was Comstock Astor, the fund that Astor managed himself. Comstock Astor was a macro fund, which meant that it bet on the bigger picture, specifically the direction of currencies. Since currencies didn’t move very much, the Astor fund relied on leverage to amplify its bets. Borrow enough and a 2 percent move up or down meant a 20 percent gain or loss. Keep borrowing and the gain could become 200 percent. Leverage was a drug. The more you used, the more you wanted to use. Making money…up your leverage and hit a home run. Losing money…borrow more and make your money back.

Traders were never wrong…until they were.

The Astor fund managed $3 billion on its own. As of this morning $1 billion was invested in “the position.”

Finally, at eleven o’clock, there was the weekly Monday review, when Astor’s managers met to discuss the status of their funds, what had gone up, what had gone down, to bitch about the market if things were going badly, and to brag if things were going well.

“Time for the conference to start,” said Shank.

Astor checked the screen. A news feed ran across the bottom: Press conference rescheduled to 0800 Chinese time. “Looks like we’re out of luck.”

“What?” Shank shuffled over and read the banner. “Oh eight hundred Chinese time, that’s nine tonight our time. I’ll have to catch that at-” Shank ended his words midsentence. “Holy crap.”

“What is it?”

Shank stood transfixed in front of the currency monitor. “The position.”

“What about it?”

“6.295,” said Shank. “6.292. The fucker is strengthening.”

Astor rolled his chair closer to the screen. “It can’t move that fast.”

“It” was the Chinese currency, officially named the renminbi but better known as the yuan. And the 6.292 referred to how many yuan it took to buy one American greenback. If the number went down, the yuan was said to be strengthening versus the dollar. Fewer yuan were needed to buy one dollar. (Conversely, the dollar was weakening.) If the number went up, the yuan was weakening. More yuan were needed to buy one dollar. (And conversely, the dollar was strengthening.)

Another screen broadcast the value of Comstock Astor’s investment in the position. One minute earlier, the digits had blazed a healthy black and showed a $50 million gain. The digits were red now. All nine of them.

“Are we down a hundred million?” said Astor.

“Looks like it,” said Shank.

Bobby Astor was betting that the yuan would weaken against the dollar. He was sure that soon it would require more yuan to purchase one dollar. He wanted the number to increase. He had bet $2 billion of his fund’s money that he was right.

And then, before Astor could say another word, before he could blink, the digits turned black again.

6.30.

“We’re back in the black.”

Shank looked at the screen as if it had bit him in the ass. “What just happened?”

“No idea,” said Astor. “But I’m guessing it has to do with why the trade representative rescheduled the press conference.”

“Jeez-ya think?” said Shank.

For the past ten years, China had been allowing the value of the yuan to appreciate versus the dollar. The movements were slow and steady, just 1 or 2 percent a year. Five years ago, it had taken seven yuan to buy one dollar. Today it was only six and a third. This “revaluing” or appreciation of the yuan made Chinese exports more expensive and U.S. imports cheaper. The United States liked this. China did not.

“You want to give your guy a ring?” asked Shank. “Ask him what he thinks.”

“No,” said Astor. “I don’t need to bother him with this. He’s busy.”

“He’s the expert on these things.”

“We’re good.” Astor called his assistant. “Barb,” he said when she answered. “Push my meetings to this afternoon.”

“Septimus Reventlow is already here. Reception just announced him.”

“Marv can take him.”

“Me?” said Shank. “What am I supposed to say?”

“Tell him we don’t need his money right now. We’re fully invested. If that bothers him, he’ll have an opportunity to withdraw his funds after the next accounting period. I think that’s September thirtieth.”

“He won’t like that.”

“I imagine he won’t.”

“Too late, anyway,” said Shank.

“Why’s that?” Astor looked out the window and saw a tall, narrow-shouldered man in a three-piece suit crossing the trading floor. Septimus Reventlow spotted him and lifted a hand in greeting.

Shank shot Astor a look. “Hot money’s here.”