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Irrelevancies
May. 2nd, 2006 07:53 amBack in the long long distant past during my brief tenure at City Index, before not-very-nice-man-at-all, but very-rich-man, Michael Spencer bought it, we used to hedge our Wall Street exposure (i.e., the NYSE) the only way we could, on S&P 500 futures. Although strongly correlated, they weren't exactly so. Every morning, the boss would either moan about "the relationship going against us" or would be quiet about it (in which case the relationship had worked in our favour). Now, he really did care about this, which, when you think about it, was a colossal waste of worrying power for a very well-paid man.
There could be rational reasons for worrying about it, of course. Maybe our bankroll was too small, meaning that we couldn't cope with random vicissitudes. These were long before the days of modern capital adequacy assessment models, risk profiles and the like. Perhaps it was just a case of us not having enough money in the bank.
But, I don't think so. What I think we had was a CEO who got upset when, to use a poker analogy, an opponent sucked out with a five-outer. It was pointless. If something is not absolutely correlated, then you know, in advance, that some days you will be lucky, some days you won't, but that it will roughly even out in the end (assuming that there was no massive structural difference between the two, which, in this case, there wasn't).
Then Spencer came in and, apart from trying to sack anyone under the age of 30 (apart from himself, of course; that man is Logan's Run crossed with the Chinese leadership) also asked whether we were behind or in front on our hedging. The guys in the suits said that we were behind, of course. In gambling, you hedge to lose. Spencer didn't see it like that. "Stop hedging", he said, quite sensibly, since he reckoned that ICAP (much smaller then than it is now) could easily cover any irritating bits of volatility that cropped up.
City Index is still around, although the sports traders are long-gone, the financial controller and chief trader decamped to other operations, the boss "retired", and certain scandals surrounded the remaining players when the "plumber" was entertained for a weekend on a yacht. City Index recently made an offer for Financial Spreads, which was turned down, possibly because the chief trader there now was once at City Index, and he may not want to return to the Michael Spencer fold (who, in their right mind, would?). I reckon that Spencer either wants to make City Index big or to get rid of it, which could well lead to an IG bid.
Anyway, my initial point was that there are an awfully large number of very highly-paid people in publicly listed businesses who seem to be "fooled by randomness", worrying about things which, really, they shouldn't be worrying about at all. However, of greater concern is that they are not worrying about things which they should be worrying about. It's all to do with timescale, and whether something is a matter of concern to a CEO (or analyst) is not so much related to how significant it is, but in what timescale it is operating. For governments, that timescale is the period between elections. For CEOs, it now appears to be twelve weeks. The problem is, most things which happen to a three-month timescale are, in the grand scheme of things, random irrelevancies. Worrying about them is a waste of their time and investors' money.
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There could be rational reasons for worrying about it, of course. Maybe our bankroll was too small, meaning that we couldn't cope with random vicissitudes. These were long before the days of modern capital adequacy assessment models, risk profiles and the like. Perhaps it was just a case of us not having enough money in the bank.
But, I don't think so. What I think we had was a CEO who got upset when, to use a poker analogy, an opponent sucked out with a five-outer. It was pointless. If something is not absolutely correlated, then you know, in advance, that some days you will be lucky, some days you won't, but that it will roughly even out in the end (assuming that there was no massive structural difference between the two, which, in this case, there wasn't).
Then Spencer came in and, apart from trying to sack anyone under the age of 30 (apart from himself, of course; that man is Logan's Run crossed with the Chinese leadership) also asked whether we were behind or in front on our hedging. The guys in the suits said that we were behind, of course. In gambling, you hedge to lose. Spencer didn't see it like that. "Stop hedging", he said, quite sensibly, since he reckoned that ICAP (much smaller then than it is now) could easily cover any irritating bits of volatility that cropped up.
City Index is still around, although the sports traders are long-gone, the financial controller and chief trader decamped to other operations, the boss "retired", and certain scandals surrounded the remaining players when the "plumber" was entertained for a weekend on a yacht. City Index recently made an offer for Financial Spreads, which was turned down, possibly because the chief trader there now was once at City Index, and he may not want to return to the Michael Spencer fold (who, in their right mind, would?). I reckon that Spencer either wants to make City Index big or to get rid of it, which could well lead to an IG bid.
Anyway, my initial point was that there are an awfully large number of very highly-paid people in publicly listed businesses who seem to be "fooled by randomness", worrying about things which, really, they shouldn't be worrying about at all. However, of greater concern is that they are not worrying about things which they should be worrying about. It's all to do with timescale, and whether something is a matter of concern to a CEO (or analyst) is not so much related to how significant it is, but in what timescale it is operating. For governments, that timescale is the period between elections. For CEOs, it now appears to be twelve weeks. The problem is, most things which happen to a three-month timescale are, in the grand scheme of things, random irrelevancies. Worrying about them is a waste of their time and investors' money.
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