In an interview we did back in May, a very well-connected, extraordinarily math fluent person dropped this beguiling gem:
A "Long Island-based hedge fund" had purchased an IBM Blue Gene supercomputer, and was using it to build a trading system. Cool!
Unfortunately, our attempts to find out exactly which "Long Island-based hedge fund" this is, have thus far failed. After much hand-wringing, we've decided to expose our incomplete reporting process on this one in order to perhaps crowd-source a winning confirmation, sorta like Seymour Hersh does when he gives speeches on tantalizing nuggets regarding U.S. foreign policy. Our reporting led us to focus on two potential funds that could, or could not be our Blue Gene owner, as ridiculous as that sounds, meaning we give you that, blog or not, that non-statement is near meaningless, lacking as it does, confirmation, denial or clarification in any way. But we're stuck.
Our best estimated guesses are: FQS Capital or Renaissance Technologies.
But again, let us emphasize that it's quite possible that neither of these funds owns a Blue Gene. Because neither will speak to us about the matter.
We know Renaissance Technologies, the well-known hedge fund based in East Setauket, N.Y., famous for its consistent, outsized returns - the first fit-the-bill fund that came to our mind - owns a Sun system, which is not necessarily a disqualification. A call that ended up being routed to an attorney for RenTec resulted in said attorney, audibly annoyed, grousing "Why are you calling me?" followed quickly by "No comment" and a scratchy click, which was him hanging up on me, after we asked him whether "RenTec" as they're sometimes known, had purchased a Blue Gene to help build a new, or improve an old, trading system.
Another source aware of the IBM Blue Gene's sale to a Long Island-based hedge fund said "all trails" lead to FQS Capital, the fund of funds founded by RenTec alum and math genius Robert J. Frey, located on the North Shore a little over two miles east down the scenic 25A, in Port Jefferson, N.Y. But this source could in no way offer any information that would confirm said trails' end is FQS; Frey stopped returning our calls and emails, including two inquiring directly about FQS and Blue Gene, so: Heck if we know. We simply have no more time to chase this one, so feel free to crowd-source a clincher.
While FQS is "headquartered" in the Cayman Islands, like most hedge funds, and its operational hub is in London, according to the firm's Web site, its founder's home is nearby the fund's Port Jefferson office. Both the Freys and RenTec founder James Simons and his wife are well-respected area philanthropists who have donated millions to local institutions; an example in the Frey's case is Mather Hospital; in the Simons' it's Stony Brook University, which, you guessed it, owns a Blue Gene supercomputer housed at Brookhaven National Laboratory in Upton, N.Y. Simons is the former chair of Stony Brook's math department; Frey is the director of Stony Brook's quantitative finance program and he still teaches there. Simons led a group of Renaissance partners and lab directors that gave $13 million to Brookhaven to save the lab's Relativistic Heavy Ion Collider from becoming a victim of a 2006 budget shortfall.
Note it's possible that, instead of owning a Blue Gene, FQS or Renaissance and Stony Brook could have deals which allow FQS or Renaissance to rent cycles on Stony Brook's "New York Blue" supercomputer - it's a growing trend for universities to structure similar arrangements; the schools view such deals as alternative methods for monetizing their resources, thereby increasing funding. Or - again that dreaded bugger of the unconfirmed - perhaps neither [or either] fund does this with Stony Brook's "Blue."
(An aside: It's important to add that such University-supercomputer rental arrangements pose ethical dilemmas for schools, including promoting money-making to maths and physics students who might otherwise be focused on solving what can be argued are the bigger or more worthwhile problems of humanity, such as eradicating cancer or building a workable energy infrastructure. Schools can also be easily criticized for allowing their big machines to be used for what some would deem rather basal purposes of bashing the big capital markets pinata until the sweet lucre falls out. Yet the universities counter that some of these agreements include intellectual property sharing that occurs between the schools and the private sector firms, which need not be and are not always financial companies; and that any private sector funds resulting from supercomputer rental can help pay for other math or scientific research aimed at achieving benefits that go more society-wide than say, a get-richer-quicker scheme.)
Know this: There are very few high-profile funds out on "the island" with enough lucre to buy a Blue Gene, which costs $1.5 million per rack or so, per server in the system cluster, making this certainly a multi-million dollar affair that could easily creep toward the $10 million neighborhood - after all: who could buy just one? So it's a fairly reasoned process of elimination, ultimately hampered by it's resolute lack of irrefutable proof, to narrow the field to these two high-profile, well-backed funds (although RenTec has exponentially more cash than FQS, that's also meaningless, as spending a few million to grow FQS' pot of $350 million in assets under management seems a ratio that's plausible). So:
Fuckles. We just dah-burned don't know.
But if we knew how old this jpg-based (smart!) road (or home) show courtesy of Zero Hedge was, we might,...might be able to eliminate RenTec as the Blue Gene owner, as it posits RenTec as a Sun shop. I say only "might" because maybe RenTec wanted to replace this Sun system, or perhaps more likely (as supercomputer replacement seems complicated, does it not?) the idea was to buy another newer system and run two (at least) supercomputers for other, or some mix, of funds or strategies? It's usually a mixed bag for big firms, although perhaps the 'once a Sun shop, always a Sun shop' reasoning applies here, if RenTec's nearly unparalleled performance is in any way attributed to its SunFire hardware?
FQS could just as likely be our huckleberry. Heck, maybe it's Billy Joel, trying to crack the top ten again by massively parallelizing a new hit through some hedge fund front company (that would be pretty cool, actually). But who knows?
Blue Gene could perhaps be the technology that a firm like FQS, a fund of funds, applies to optimize intelligence on performance (or some other metric) of the hedge or other funds in which it invests or is considering investing, in order to garner “actionable” data to both allocate, and do trading, sort of speak. (A fund of funds is simply a hedge fund that invests in other investment vehicles, such as other hedge funds, private equity, venture capital, or a hedge fund that is a portfolio of other such funds or investments.)
We've read with fascination Frey's explanation in the Financial Times and elsewhere of FQS' “more quantitative approach to strategy allocation,” which to us implies needing in-depth data on a lot, if not most, or all, of the hedge-type funds out there, to truly make “multi-strategy” worth its name. Maybe I’m wrong, and we loathe speculation, but we've been forced into it. We really wanted to discuss the aforementioned with this fella, and whether high-performance computing is playing more of a role in fund of funds strategies – the latter something that may not be immediately obvious, but that which conceivably could provide novel ways of garnering attractive returns on fund of funds - or "FoF" investment.
Alas, no one we reached out to is talking definitively on these matters.
Background: Why supercomputers? Hedge funds and other financial firms generally use supercomputers to scour data in milliseconds for real-time trading, and/or to analyze massive reams of historical data, in the latter case, to come up with strategies that they hope will make them money when they apply them to trading later, or in the future. Critics claim such supercomputers enable firms using them an unfair advantage over the average investor, who can't afford or even get access to such powerful number crunching and lightning fast capabilities. Some firms deploy them in strategies based on rapidly trading in and out of stocks to make money on small up- or down-ticks in the equities, which can be in decimals or sub-penny ranges.
Opponents say using supercomputers to conduct such high-speed trading essentially equates with allowing one set of privileged, wealthy investors to peck away at what essentially is the larger public's nest egg, or rapidly hitting a piñata of money funded in no small part by average investors who are barred by regulators from such hitting-the-piñata-trading, with sticks that move faster than the eye or brain can perceive, sticks which are reserved for wielding by the privileged few. Because who in your neighborhood can buy a massively parallel supercomputer (the stick)? Depends on the neighborhood I guess. But remember, these critics have emphasized, you're the bag getting hit by the sticks; it's your money falling out the holes.
Supporters argue that such firms and systems supply the market with more liquidity, meaning they buttress the overall system by creating more trading, and hence increase the market's overall depth and size than would be possible in their absence. No conclusive proof has emanated from the debate about whether hedge funds promote economic growth through such trading. As to whether their alternative viewpoints are enough to lead to more accurate and efficient markets: The "efficient markets" hypothesis was proven deeply flawed in real world testing by the mortgage disaster: There were too few firms taking alternative, meaning negative, views on the overblown mortgage market, resulting in a Great Recession that nearly cratered Wall Street and the economy with it. But those too few firms? Those contrarians made a shitload of money. And inefficiencies, fair or not, equal "alpha" in this game. That's Street talk for big fat piles of lucre.
(We dare anyone to prove the efficient markets hypothesis works, under any plausible, real world market structure that policymakers could conceivably spit out under industry-regulatory political realities as anything more than a delusive talking point for certain wealth management strategists to employ, aimed at tricking others and themselves into rationalizing their existence as beneficial to the whole or most, rather than the few. Beware of too elegant explanations, although they're not always wrong. We're certain no one with any knowledge ever said and believed it that the market's egalitarian.)
Note that some market-making banks and brokers and high-speed traders, acting to protect their interests against what seemed very odd trading activity, took liquidity away - stopped or slowed buying and selling and/or accepting bids and offers (prices) on stocks - from the market during the so-called "Flash Crash" of May 6, 2010, when a big sell-off of derivatives contracts linked to blue chip stocks contributed to the biggest one-day point decline in the Dow Jones Industrial Average's history. Everyone in this debacle is blaming everyone else for the problem. Fact is, the banks and traders lobbied the regulators for years to basically get the system we've got, which is extremely fractured - there is no fair access or single, level playing field - and is so obviously less than close to failsafe or sufficiently backstopped. Again, as always, it takes leadership to admit the problem, which neither the regulators, the industry nor its analysts have shown they possess one iota of yet in this debacle. Instead, finger-pointing and it's resulting cousin - confusion - reins. But it becomes immediately clear to anyone that steps back for a moment to take a reasoned look at facts of the situation, that rules that the industry asked for and the regulators either enacted or snuffed, have worked to solidify brokers as advantaged gatekeepers in trading equities and their derivatives, and have empowered high-speed traders. So the arch defensiveness of these brokers and traders is understandable, if not admirable: They have a hard road to hoe to prove their privileged positions are worth protecting. In the meantime, they might do themselves and everyone else a favor by admitting they are one class of ax wielders creating the potholes in our pockmarked road toward what could be a sufficiently workable - and fairer - trading system, versus blaming wholesale the regulators for whom such criticism should actually be shared: You get what you ask for, (and they did); 'least with this gang you do.
Is any of this "fair?"
One bit of proof - although its accuracy is ample and uncontested - that our tagline paraphrased as 'the market is not free nor fair, the vig is steep and you're an outgunned mark for bigger monied profit-takers' is true? The law.
Allegedly to protect the public from fraud, the SEC enforces rules that say that investors with less than $1 million in net worth (and this metric cannot include any owned residences), or those making less than $200,000 per year (or $300,000 jointly) over the last two consecutive years, are by law prohibited from access to professional money management aimed at garnering big returns. One also needs $5 million or more in 'investable' assets to join a fund that has more than 100 investors. The government essentially is saying that if you don't have a lot of money, you need protecting, from potentially making a lot of money. Put another way: You're not smart enough to understand the risks inherent in "complicated" hedge funds, private equity and venture capital investing, nor the risks undertaken by these funds' managers. So you get no chance to chase their whiz-kid strategies and hence, at least in some cases, their outsized returns: Simons' flagship fund, for instance, has returned nearly 45 percent annually in net returns since its inception in 1988.
This is problematic, because it's patently unfair. It can work to create, or some would say, solidify, an uber-aristocracy, because it engenders a situation where the rich are given an avenue to get richer from which average persons are barred, in the same system average persons help fund or pay for. This sounds like a critique on capitalism. This is NOT a critique on capitalism: We like and support capitalism. And we think that if you're smart and able, you ought to have the freedom to go out there and be successful, and if that means making money in the markets: go for it. This is just a critique on how our capital markets are run. This is a critique on the claim that the markets involved are free, or as fair as they should be, and by that, we mean that it's our wager that if our market system were put on trial in the civil courts, a jury of reasonable citizens would with a reasonable degree of certainty declare the market insufficiently fair by a reasonable degree. We point you to blogger and software consultant Jeffry R. Fisher's definition of "fair market capitalism" using the analogy of a race versus a fight. In a race, everyone moves forward albeit in varying levels of achievement in how quickly they cross the finish line. Lanes are clearly marked so it's obvious when they're crossed. And proceed from the construct there are NO performance-enhancing drugs involved. Each has a fair chance of winning, the finish can often be close and few will ever completely fail, meaning stop short of the finish line. In a fight, one person's achievement is the other's downfall. So typically, whoever's got the biggest guns, wins. The market right now resembles the fight, in which only the wealthy get the space-age firepower with which to go into battle at the expense of the less armed. (We have no idea if Fisher's analogy is original but it's a good one regardless and kudos to promoting it.) Further, this is a critique that the "free, open and fair" odious miasma that some regulators and industry mouthpieces seem always to so unctuously spit and plague us with is bullshit.
To better understand this, please read below a set of provocative questions we posed to the SEC in 2006 when it was proposing to increase the level of minimum assets required to participate in hedge fund investing to $2.5 million. The SEC might have helped itself if it were to have proposed instead to somehow segregate or wall off investments of average investors from wealthy hedge fund strategies that can and have harmed the average investor, though short of banning certain strategies, we've no idea how that could be done. Yet that is the same idea behind the major investment firms - including hedge funds - demands that the big Wall Street banks segregate or protect their assets in separate accounts walled off from the banks' everyday activities to protect these firms' assets from potentially being mired in any folly in which those daily activities could snare the particular bank involved. Such demands have risen after firms found some of their investment or "margin" trading accounts frozen at Lehman Brothers when it went bankrupt Sept. 15, 2008; some are still locked up, including in Lehman's London offices. Anyway, the SEC proposal to raise the minimum net worth required to invest in hedge funds went nowhere, but it made clearer to us that the market structure increasingly threatens to further institutionalize what seems to critics a caste system pitting the have-more-than-we-know-what-to-do-withs, against the have-barely-enoughs.
From my 2006 email:
1.) Why is it that the SEC’s solution for mitigating the risks posed by hedge funds is to bar those that are less-well-off from being able to participate and potentially benefit from the outsized returns and gains that hedge funds can enable? The SEC’s idea is to wall off these lucrative investment vehicles only to those who already have big wallets and/or assets. But by making for certain that it is only wealthy people that are allowed to seek outsize returns by engaging in hedge fund risk, how is the SEC really bolstering a truly fair and free market?
Thanks, appreciate your quick response."
We never received an email back, and although the SEC spokesperson we deal with generally will call us, versus email, it's to the best of our recollection that no such call was ever received. The "market timing" we cited refers to a 2003 scandal involving certain mutual funds allowing select hedge fund clients to trade rapidly in and out of the funds, a practice these funds publicly said they prohibited and regardless was a trading strategy unavailable to general fund holders. This type of market timing can bring incremental profits for those employing the strategy, but can also come at the expense - in millions of dollars of losses - to general fund investors. What you don't know can hurt you. It did here. It will always.
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