2nd Installment

Less than 800 meters away from the cathedralat the bottom of the hill on Quai General Guisan, Brian Jacobsen gazed out his window on the fourth floor of the Hotel Metropole as the first signs of spring appeared across the street on the promenade around Lake Geneva. The morning fog was burning off and shafts of sunlight slanted down across the lake. You could see the houses of the wealthy perched on the lower levels of the mountains rising on both sides of the lake, looking down on the busy city and its scramble of deals 


 It was nearly lunch time. Young mothers listening to American hip-hop music on headphones were pushing babies in strollers. A light breeze kicked up a few white caps on the lake. Two smiling roller bladers were weaving through the crowd, swinging their tattooed arms in rhyme. A long-haired juggler, thin as a hermit, who had recently dropped out of law school in Paris was juggling three short swords and hoping for a busload of rich tourists from Shanghai And, out on the lake, the first sail boats of the season were bouncing over the waves 


To his left he could see the rushing torrent of the Rhone, pouring out of the lake from its headwaters in the mountains far to the north on its journey toward France and down to the Mediterranean. In 52 B.C., Julius Caesar destroyed the bridge over the Rhone in order to help keep the Helvetii tribe out of the Roman province of Gaul. Caesar probably had walked very near the spot where Brian was now standing.  


Across the Atlantic, the city where Brian now lived, Atlanta, Georgia, was occupied only by Native American tribes until 1836. White people, mostly English and Scotch settlers, arrived on the coast and started extending railroad tracks up from Savannah.  They drove the Indians up into the mountains of north Georgia. Aided significantly by its slave-based economy, Atlanta built itself up quickly.  But in 1864 the city was burned to the ground by General William Tecumseh Sherman, which meant that in 2007 any building or institution more than 100 years old was regarded as “historical.” Geneva had been a crossroads of world civilizations for two thousand years. Looking out his window, Brian could feel the weight of the city’s history.    


Brian stood at the window, astonished at his current circumstance. “What am I doing here? How did this happen? A poor minister’s sonan English major, who, as a result of some unlikely twists and turns, was about to speak to some of the most sophisticated financiers in the world about the world economy and the stock market.  


This should not be happening. I should have ended up in a crumbling high school on the poor side of Atlanta trying to make bored twelfth graders, some of them the descendants of slaves, interested in The Old Man and The Sea.  I couldn’t have made this up in a thousand years. Perhaps this was a dream, or maybe he had taken a wrong turn in Geneva and blundered into one of Borges’ alternate futures. 


But, as near as he could tell, it was really happening.  In a few minutes, Phillippe, his Swiss sales representative, would arrive to take him downstairs to the ballroom where 60 prospective clients of Brian’s fledgling fund, Lascaux Capital, would settle in for an elegant lunch of feuillantine de queues d’ecrivesseschampignons du moment, bisque mousseusecontre-filet boeuf roti,  and an excellent Medoc grown in the foothills around Geneva.   


There was a knock at the door. “It’s time, Brian!” Phillippe called. Brian had a last look at the Jet D’Eau out on the lake sending its spray 460 feet into the morning sky, took a deep breath, adjusted his tie, and headed down to the ballroom. It was April, 2007. The S&P 500 Index stood at 1494, up a staggering 78% from its last major low in 2002.  Some strange things were about to happen, not involving zombies, vampires, or aliens, but possibly some Presbyterians and a few fervent apostles of the free market. 




“Ladies and gentlemen, as you examine this chart of the American stock market since 1926, you are looking at the greatest engine for wealth-generation ever created.  And as you can see, I have superimposed a chart of United States GDP, showing that the trajectory of the market has essentially reflected the tremendous expansion of the American economy over the past 100 years. 


“Its easy to lose track of the big picture, especially for investment professionals like us who must report results to our clients and shareholders every quarter. We are living in a world where memories are short.  The news media, market commentators, and most of our clients seem to be focused on results for the last quarter or, at the most, for the last year. And, as you know all too well, we take our share of abuse from those who don’t understand the role of the financial sector in efficiently assembling funds from investors and transmitting them to risk-takers who drive the global economy by creating growth. 


Brian paused, took a sip of water, and cast a close look at his audience. There were a few smiles and nods. He had made many similar presentations, but it was always a good idea to observe the faces in the crowd at these luncheons.  If anyone looked as if they might be working themselves up to be confrontational in the Q&A, he could try to avoid calling on that person. This audience was dominated by older, traditional money managers who worked for banks, mutual funds, pension funds, and several of the particularly Swiss variety of private banks who managed (discreetly) money for wealthy families and individuals from all over the world.  These traditional managers were almost exclusively well-educated, distinguished-looking white males over 50, slightly older than Brian, most of whom were taking advantage of the wine at lunch. Dark, beautifully tailored  suits, impeccable ties, and expensive shoes. Here in Geneva, French was their first language, but nearly all of them spoke excellent English and German, and enough Italian to get along when they vacationed in Lugano or Lake Como 



A few Americans, usually hired for their contacts with American companies, could be identified by their slightly less than impeccable look, shoes that could use a shine, and some even without ties. Most of them struggled with one other language besides English, usually mediocre French or German. Brian had taken six years of German, but his financial vocabulary was armselig (pathetic). Anyway, the German was not going to help him much here, twelve miles from the French border.  He concluded that, so far, his audience was with him. 


Brian also noticed a scattering of younger faces, some Asian and south Asian, and a few women. These were generally industry analysts and assistant portfolio managers, people who were more skilled in quantitative methods and who were starting to be hired as the old guard grudgingly admitted that deep quantitative analysis, oceans of new data, and the new algorithm-based portfolio models could provide certain advantages over the more traditional approach to investing. Brian’s eye was caught by a stunning young blonde woman with high cheekbones, a blue short-sleeved sheath dress, and spike heels. Nearly everyone at a luncheon at the Hotel Metropole will be stylishly dressed, but you will find very few portfolio managers who look like they could be actresses. The woman returned Brian’s gaze as if she were waiting for it. Can’t be distracted now. On with the presentation. 


“Some say we are greedy and don’t deserve the money we make. I’m not here to take up your time defending our levels of compensation, but we know that the global market today is an extremely complex phenomenon.  The reality is that it requires knowledge not only of economics and finance, but also politics, world history, and increasingly, it requires us to be familiar with technology, energy, health care, biotech, infrastructure, defense, and many other industry sectors and niches within those sectors.  It requires discipline, self-control in the face of turbulent events.  And it requires the ability to make reasoned judgments about the risk/reward balance of the investment positions we take for our clients. These are very specialized and highly selective skill sets that, frankly, not many individuals possess. 


With that introduction, let me give you an idea of what we do at Lascaux Capital and how we use quantitative models to generate high returns for our clients. After the presentation, I will answer questions and Phillippe can tell you about the mechanics of investing in our fund. 


Brian was 55, an ex-high school second baseman and  basketball point guardmarried with two teenaged childrenHe had a bachelor’s degree in literature from a small liberal arts college in Pennsylvania and an MBA in finance from Emory University in Atlanta. He still played ball in a church league and could still hit a few outside jumpers on Tuesday nights. His left knee was starting to give him trouble, though. He wore an elastic knee support and tried not to think about it, even though it was starting to restrict his cross-over dribble move His knee always seemed to protest against a sudden change of direction. 


His fund, Lascaux Capital, was in its third year. It was clinging to life, managing $7 million in client assets, tiny for a hedge fund, but it had posted a 16% return (after fees) for clients in 2006, slightly better than the market’s 13.6% gain. In the fund’s first year, 2005, it had returned only 6%, but that was double the market’s 3% increase. The fees on that amount of assets were barely enough to cover expenses for an office, a prime broker, custody and trading costs, legal fees, large specialized data feeds, travel and marketing expenses, and relatively small salaries for Brian and his staff of three (one sales manager and two young finance majors who maintained the models 


Brian had lumped himself in with his audience in his comment about compensation, but in reality he was nowhere near their level on the pay scale. Brian knew that his three employees would not stick around much longer unless he could raise their pay. And he was feeling pressured at home to bring in more money. He was a competitive person. He did not like to lose. 


Brian’s job on this trip was to bring in more capital. To do that, he had to persuade these potential clients that the first two years’ results were not a fluke, that his model really had the potential to generate better returns than the market over a sustained period of years, and that they could trust him. His investment strategy required a great deal of number-crunching, which meant paying for sophisticated data feeds and enough people to run and maintain his models and make the trades. At the current level of assets, the fund was hovering on the borderline of sustainability. One bad year could make it impossible to go on. More capital was critical to the fund’s survival.  


There was a problem.  The money managers in the room attended a lunch like this every day of the week in Geneva, and sometimes a dinner presentation on the same day. They sat back, sipped the free wine, and watched a parade of high-powered analysts and fund managers, mostly American but sometimes British, explain how they had unlocked the secret to consistently beating the market. Or, at the very least, how their expertise gave them an edge on getting returns better than the market. To these managers, even a percentage point or two would make a difference to their bosses and clients, who were constantly comparing the performance of various managers. On days when they attended a lunch and a dinner, some of them occasionally fell asleep in their soup and had to be gently rescued from drowning by a waiter with experience at these events. 


The Metropole had recently (and grudgingly) banned smoking, a source of great consternation for Phillippe, a good-looking Swiss chain smoker (and drinker) of epic proportions. Philippe made his money by advising clients on short-term trades, based largely on stock price patterns, but sometimes on rumors that he picked up from his hundreds of contacts in Europe and the America. He was easily bored when nothing was happening. The cocktail reception, the meal, and the presentation had lasted over two hours so far, a much longer period than Phillippe was used to without a cigarette. In spite of all that, Brian liked Philippe, who was sitting at the head table looking increasingly desperate for a smoke. Phillippe was not a Lascaux employee;  he was a sales consultant who would get a commission on any funds that came in to the fund from Europe. 



After the presentation, there were a few questions about the concepts behind his investment strategy, some questions about the general market environment in the U.S., and, since Brian had once worked at the Federal Reserve Bank some questions about monetary policy.  A white-haired man with an expensive Hermes tie raised his hand and spoke with a heavy French accent:  ‘I am just curious. Why zee name Lascaux?” 


Brian smiled. “I’m glad you asked. I have always been fascinated with the ancient cave paintings, and as you know, Lascaux is one of the oldest and most beautiful caves. Many experts have proposed theories about what the paintings mean, why they are there, but of course, no one knows for sure. So, these are obviously man-made structures, there are even some dots and slashes that appear to be in a pattern, and we have a powerful urge to find patterns there, to, in a sense, ‘unlock the secret’ to the cave paintings. We think we are so smart, surely we can figure out the meaning. 


“ So, without being too pretentious, I hope, the market remains a mysterious puzzle, even to experts. We just thought the name Lascaux was an appropriate way to suggest that our models are a way to analyze or break down the inner structure of the market, and, we hope, to reveal patterns that might not be so obvious to the naked eye. Let me hasten to add that, of course, we do not pretend that we actually have “solved” the market in any way. But we do think our approach helps to identify some underlying patterns and also to maintain discipline. As you all know, virtually all great investors have said that getting emotionally involved is the greatest danger in the investment business. You can’t afford to fall in love with a stock or to panic when everyone else panics. 


As usual in Europe, there were a few questions about American politics, which the Swiss found bewildering. The 2008 election was coming up. Brian was well-prepared for this line of questioning, and gave his usual non-partisan answer pointing out that, despite what many American clients assumedthe market’s performance under the two different parties was nearly identical since the Depression. No one asked any specific questions about how to invest in the fund, but that was not unusual in the public Q&A session. Phillippe stood up and thanked everyone for coming and said that Brian and he would be available after lunch to answer any other questions about the fund. 


Brian returned to his seat at the head table and took a sip of wine as the crowd slowly filed out. He looked up to find the blonde woman standing in front of him. Her hair was pulled back with a simple silver clasp, but he could see that it was long. Unusual for women in the financial industry. 


“I enjoyed your presentation, she said in a light Russian accent. “Maria Kuruskova I’m the portfolio manager for Tula Capital.”  


Brian took another sip of wine. “Thank you very much. I appreciate that. I’m afraid I’m not familiar with Tula Capital.” 


Her smile washed over Brian like a warm waveHe felt vaguely as if he were entering a scene from a movie.  The rest of the room and the people in it went out of focus. He looked into her blue eyes and, for a moment, he thought that his knees might actually buckle, like they do as a well-thrown curve ball approaches“Of course. We are a relatively new fund, but we are looking to add strategies for diversification. I would like to hear more about your strategy. I wonder, would it be possible to have dinner tonight so we could discuss with more privacy?” 


Brian put down his glass. “I’m not going up to Zurich until tomorrow, so that would be great. Should I ask Phillippe to come along?” 


Maria shook her head slightly. “That won’t be necessary. Right now I would just like to hear about the strategy.  But perhaps you could bring the papers, you know, just in case?” She smiled again.  She seemed perfectly professional and elegant, but few clients were this aggressive. Most of them left it to the sell side to do all the pursuit.   


“The Brasserie Lipp? You know it? Eight o’clock? I’ll make the reservation. See you then!” Another smile that caused Brian’s head to feel slightly woozy. She walked away and a young Swiss analyst stepped up with a question about the data. Brian didn’t hear a word he said. In the ballroom, heads turned as if a minor earthquake had occurred as the blue dress snaked through the crowd and out into the lobby. If anyone had been in danger of falling asleep in their soup, they were fully awake now. 


Phillippe had not been able to stand it any longer and had gone out to the courtyard for a smoke. When he came back in, the last guest was departing, and Brian told him about the Russian woman. 


“No, I have never heard of her or this fund,” he said. “That is a little strange. Especially since she is so , what is your word… gorgeous? She has not attended any of our other luncheons.  And I know just about everyone in the business in Geneva.” 


‘Yes, I’m sure you do. And yes, that is the right word. ” Brian said. “Well, she seems interested.” 


“I will try to find out something about them this afternoon. Now we have to go over to our next appointment.  It’s on the other side of the river.”