The Fear Index - a review of Robert Harris' work on quant funds
Robert Harris’ The Fear Index is excellent light reading for fundamental stockpickers convinced by the superiority of their strategy compared to the dark world of quantitative finance.
Robert Harris’ The Fear Index is excellent light reading for fundamental stockpickers convinced by the superiority of their strategy compared to the dark world of quantitative finance.
No matter what your level of financial expertise, The Fear Index will have you gripped.
The latest novel from Robert Harris, renowned for his alternative historical novel Fatherland, once again reinterprets past events to weave a dynamic thriller.
The book documents a day in the life of an outrageously successful American physicist turned hedge fund manager, Professor Alexander Hoffman.
He has been running Geneva-based Hoffman Investment Technologies alongside suave ex-banker Hugo Quarry for several years.
The duo are about to trigger another $1bn of investment with a new self-learning algorithm, Vixal 4.
The algorithm uses the S&P 500 Volatility Index - commonly nicknamed "The Fear Index" - as a source of historical data.
It is designed to correlate market fluctuations with fear related words ("terror", "dread", "anthrax" or "nuclear", for example) on the internet, which somehow enables it to make a number of uncanny market predictions with unmatchable returns.
The novel's publication could not have been more appropriately timed. In August Olli Rehn, European Commissioner for economic and monetary affairs, declared that markets were being driven by "fear and greed".
Economic historian Niall Ferguson recently said that highly optimised communication networks, driven by emotion, are triggering ever greater volatility levels.
Larry Fink, chief executive of BlackRock, highlighted the impact of fear in a recent speech.
"Fear" and "greed" have become two of the biggest buzz words of 2011 as financial commentators struggle to understand investor behaviour in extraordinarily volatile market conditions.
While Fink blames fear on fickle politicians, Harris has chosen a more clichéd culprit often targeted in modern culture: fear of the machine.
The notion of scientific innovation spawning rampant and uncontrollable devices has fixated writers and filmmakers for decades.
Hoffman's algorithm is no exception to the rule. The more the algorithm learns, the more manipulative and dangerous it becomes.
Vixal 4 is in fact a shameless parody of the monster in Mary Shelley's Frankenstein. The opening paragraph of The Fear Index is an extract from Frankenstein, an early suggestion about what lies ahead for the hedge fund manager and his diabolical creation.
Just as Frankenstein was written as a warning against rapid advances in science and technology at the turn of the century, Harris seems troubled by recent developments in quantitative finance.
The man v. machine idea is not new, but Harris treats it in a refreshing manner. There are no sci-fi robots akin to those in Hollywood film franchises, but Harris painstakingly describes the subtle details - the tapping of keyboards in an otherwise silent trading floor, a gleaming but sterile office space, and the host of enigmatic companies occupying its neighbouring floors.
In a remarkable feat of historical rewriting, Harris' plot culminates with Vixal 4 taking increasingly reckless bets on market movements.
Merging fiction with reality, these transpire to be the source of the sudden price volatility that took place on 6 May 2010, commonly referred to as the Flash Crash.
The novel is riveting, but there are a few too many easy digs at the rich. Hoffman's wife (the loyal, loving artist and the most positively portrayed character in the novel) concludes that his use of his mathematical brilliance to create money is wicked and madness - not that this stopped her from moving into their $6m mansion a few weeks earlier.
Perhaps Harris is pandering to the current anti-banker and anti-hedge fund mood. The investors Quarry is desperate to squeeze billions from are an excellent case in point; a money-hungry, repellent bunch.
They include a glamorous, talon-wielding daughter of the "Azakhstan" president, a dour pair of ageing millionaire French siblings, and an irritatingly jargon-obsessed US fund manager.
These caricatures are meant to be humorous and Harris' novel should be taken with a pinch of salt. He says as much in his acknowledgements. However, a seed of doubt about the fictionality of these figures and their surroundings is sown in Harris' acknowledgements.
Harris has done his research, having interviewed the likes of Philippe Jabre of Jabre Capital Partners, Andre Stern of Oxford Asset Management and the algorithmic team at BlueCrest.
Maybe there is a little more fact than fiction in the novel than fund managers would like to believe.
The Fear Index by Robert Harris is published by Hutchinson.
