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Chapter 19 "Hedgehog" from Rigged


Ross M. Miller
Miller Risk Advisors
August 16, 2004

[This chapter stands largely on its own, but new readers may find some context helpful. The narrator, known only as Doc, is a game theorist and retired poker champion who runs a secret research laboratory called Alaska for a multinational conglomerate called GFF. Alaska  is so secret that only person at corporate headquarters who has ever been there is Doc's boss, Roland, who is GFF's chief technology officer and personal golf coach to Mike Quinn, GFF's charismatic CEO. Doc has been launched on a mission by Roland to figure out why Kenneth Paine, a superstar mutual fund manager at The Lowell Group, has seen his fund tank right after GFF acquired The Lowell Group. Doc has good reason  to believe that Alaska's fate is intertwined with GFF's. Doc is assisted in this mission by Tara, a brilliant and beautiful astronomer who was messing with Doc's mind in the previous chapter, and by Randy and Zero, the obligatory male sidekicks. The "Joe" mentioned in passing is Joe Conway, head of GFF's pension fund. The chapter begins with Doc waking before dawn in the Admiral's Suite of a swanky hotel on Boston's waterfront.]

The hotel’s alarm clock bleated me awake. I was at first confused by my surroundings, but I soon remembered who I was and what I had to do. Tara floated in the back of my mind.

I showered, dressed, and packed. I wore a navy blue blazer, tattersall shirt (no tie), tan khakis, and cordovan loafers. Considering my resort destination, I might have been overdressed. I dismissed the thought of borrowing a shirt from Zero and instead went out into the living room to retrieve my computer. There was no sign of anyone, just a note written on hotel stationery centered neatly on the laptop. It read:

Numbers crunched away
Black hole, virus, or whatever
You can never tell

The note bore no sign of its author and required none. Before he came to Alaska, Randy’s notoriety included the authoring of a script that transformed e-mail messages into haiku.

I picked up the computer, placed the note in my pocket, and booted up the machine to check it out—not that I doubted that Zero had done his job. Once I had it running and logged into the hotel’s network, it seemed prudent to do some quick research into exactly who Muir Konin was. I did the standard Internet searches on both him and his hedge fund and all that I could turn up were directory listings.

I searched some proprietary databases and discovered that Muir had twenty-four patents to his name. All of them were at least twenty years old and most concerned new designs for the switches used in telecommunications networks. Muir’s institutional affiliation was listed as “Bell Telephone Laboratories, Incorporated (Murray Hill, NJ).” The more recent patents referenced papers Muir had published in various IEEE journals. Beyond that, he left no trace.

Lacking time to call down for coffee, I started a pot in the bathroom to provide the requisite jolt of joe. I stumbled back into the living room to forage for a pre-breakfast snack. Before succumbing to the temptation to break the seal on the cabinet to reveal a trove of overpriced treats, I discovered three chocolate donuts precisely arranged on a china plate.

The two top donuts touched each other as well as the pale blue circular border of the plate. (In mathematical terms, they were mutually tangent.) The bottom donut touched the top two and would have touched the border except that slightly more than a quarter of it had been neatly excised. Once upon a time, I had solved dozens of geometry problems that began with circles in a similar arrangement, though no self-respecting mathematician would be so inelegant as to remove an arc from the one of the inscribed circles. After a gulp of coffee, I got what could only be an astronomer’s idea of a math joke. Then, the phone rang and it was the front desk saying that a car had arrived for me. I gathered my things, took the bottom donut with me, and left the top two behind.

I am a night person by nature and rising before dawn is not my idea of a good time. The ride through the tunnel to the airport was a blur and I reached the gate as they were boarding the privileged passengers of whom I was now one. My fellow travelers were mostly retirees or their families, several bearing live lobsters and other New England gift items—apparently, Make Way for Ducklings never goes out of fashion.

All I could do was eat and make futile efforts to sleep during the flight. We touched down in Fort Myers ahead of schedule. The blazing Florida sun assaulted me on the short walk from the terminal to my awaiting car. Had I held my hand up to my face, I would not have been surprised to see bone. We drove past a profusion of palm trees and squat buildings. I noticed that the road that over the bridge to the island served as a hurricane escape route when traversed in the opposite direction.

My driver, Dmitri, took me to a sprawling Mediterranean-style house sandwiched between a golf course and a marina with a garage large enough for a dozen vehicles on its south side. Across from the garage, antennas and satellite dishes peppered the lawn. Dmitri, who had been an engineer back in the Moscow but now happily performed more menial tasks to escape the cold, would wait for me. That’s what I thought he said; he was still working on his English.

Outside the front door, a voice greeted me from above. “Good. You’ve made it. The door’s unlocked. Come on in.” It was and I did.

The main area of the house was completely open and the walls were covered with oil paintings straight up to the ceiling. The paintings, which flouted common decency, appeared to be all of the same hand, but I dared not venture close enough to them to determine whose. They were arranged haphazardly, appearing more inventoried than exhibited.

Before I had time to take in all the details, the voice said, “Go to the right and then down to the end of the hall.” Again, I did as I was told.

The hall was lined with bookshelves overflowing with books on every conceivable subject—from meteorology to paleobiology to pre-Socratic philosophy. Every few paces, I passed closed doors on either side of the hall.

The door at the end was open and I walked through it to find an enormous, perfectly cubic room measuring more than thirty feet on each side. The three far walls were covered with thirty-six plasma displays arranged in six-by-six arrays—making one hundred and eight displays altogether. The displays were top-of-the-line models that were larger and more expensive than any we had in Alaska. Above and below the three banks of displays were speakers spaced evenly around the room. Video cameras and shotgun mikes graced two of the corners. The center sixteen displays of each wall showed life-size images of trading floors while the twenty displays on the periphery had market data, graphs, and surveillance camera images in no particular order. The back wall of the room was covered with a patchwork of acoustic-foam baffles and air-conditioning vents.

In the center of the room was a large man—he must have weighed three hundred going on four hundred pounds—stretched out on a full-length chair that was suspended by thin steel cables from the ceiling.

My host turned to me with an oversize remote control in each hand. He had the look of someone not far removed from an albino. His hair was thin and white; his face sufficiently sunburned to make me uncomfortable looking at it. He was dressed in a maroon golf shirt, white Bermuda shorts, and Birkenstocks hold the socks. A daisy chain of eight car keys with fobs attached to all but one hung down from a belt loop.

Staying seated, he put down one remote and said, “Muir Konin. Welcome to my gallimaufry,” as he swept his right arm clockwise around the room before extending it to me.

I grasped his hand and said, “Nice setup you have here. It must be great for Sox games.”

“It’s alright, but even high-def broadcast video is severely limited. I have premium content shot to my specs.” Muir touched a screen on the right remote and instantly all the displays merged into a single image of a grassy plain dotted with trees. A dull roar came from the left side of the room. “Serengeti,” he rasped.

The sound grew louder and what first appeared as a collection of small fuzzy masses on the left and front walls became a herd of wildebeests stampeding straight toward us. We were soon surrounded and Muir laughed an inhuman laugh as he pressed the screen once again to return all the displays to how they were when I walked in on him. Muir’s glee made him seem like a twelve-year-old boy engulfed by a man who had recently passed the expiration date for middle age.

“I’ve looked through all your papers and patents and you’ve done some solid work,” Muir said while pressing another button that covered the displays in the front of the room with the front pages of everything that I had ever published. I was surprised to see papers that I had forgotten about and I assumed that everyone else had. There were reprints of my articles in anthologies that I only vaguely knew existed. “I especially liked this one,” he said as he zoomed in on one of my papers, “though I confess that I skipped over the proofs because the differential topology you used to demonstrate the existence of an equilibrium for the extensive-form game was Greek to me.”

“Thanks,” I said, “few people have taken the time to get into that paper.”

“I’d offer you a chair, but there aren’t any.” Obviously, no one sat in Muir’s chair save Muir. “Why don’t you let me take care of a few things and then we can go out back. My traders can use the time to catch up with me. If anything important happens, the system will let me know.”

While Muir worked, I familiarized myself with the surroundings. Muir’s trading room was impressive in the same ostentatious way that his house was. I saw nothing that required any ingenuity, just a flair for the extravagant. I wondered what kind of network controlled all this gadgetry and how large his electric bill was.

Muir spent most of his time alternately quizzing and berating a trader on the front screen. Both audio and video were surprisingly crisp. Although I noticed the black seams between the sixteen displays that made up the main front image, I suspected that Muir was no longer consciously aware of them. 

Muir dominated the conversation with questions: “Hey, Herb, what’s the deal with Palindrome? Still unwinding that Bund straddle? Was ist los? When will he learn not to take the other side of my vol bets?” Before Herb could answer one, Muir had already asked two more.

 When Muir was done, he pressed a button that lowered his chair so that he could extract himself from it. “Follow me,” he said waddling out the only door in the room, halfway down the hall, and through a door to stairs that led to the backyard. The sun blazed more brightly than at the airport and the view would have been better had I not recently escaped from wildebeests. The swimming pool was an elaborate affair—part lagoon, part optical illusion. We sat down on some surprisingly ordinary patio furniture. Muir offered me a drink and I took my usual spring water, which he brought me from somewhere inside the house. He drank what I hoped was lemonade. Whoever managed to keep all this in order stayed out of sight.

“Thank you,” I said when he handed me a water bottle. “Nice place you’ve got here.”

“I like it. The rest of the gang is on Park Avenue, but they come down to visit from time to time. And I have an office well inland on the off chance they evacuate the island.” Muir shifted his considerable weight in the chair and continued. “You’re my first visitor from GFF in some time. I warned Mike about Lowell and reiterated my view that the pieces of GFF are worth more than the whole, but he just wanted to squeeze in eighteen holes. What can I say? The guy’s an eight-hundred-pound gorilla. Now he’s got a big problem and I’ve got you.”

“So it would appear,” I said. I did not like the thought that I had been “gotten,” but it seemed best to let that remark slide.

“You bet your ass. I told Mike that the traditional investment management business had fleas he didn’t want to catch. If he had to get into the business, at least he picked the right firm. Most of the real talent fled that business eons ago and Ken Paine must be waiting for the last stagecoach out of Dodge. Add it all together and most funds waste or steal three percent off the top year in and year out. No one notices in a bull market, but in a bear market, people start to scream. The only thing keeping mutual funds in business is the government.”

“How’s that?”

“Defined contribution plans—401(k)s, 403(b)s, the various IRAs, and so on—limit people’s choices, supposedly in order to protect them. Maybe yes, maybe no, but they certainly protect the mutual funds by giving them a large captive audience.”

“But three percent is peanuts compared with what you charge.” “Peanuts” may not have been the best word to use with Muir. I could easily imagine him sporting an elephant’s head.

“I only get my cut if I make money, which I always have and always will. And net of fees, my investors still have done vastly better than they could with any mutual fund, including Ken’s. Furthermore, I know what I’m doin’ and I’ve been doin’ it for a while now. Lots of mutual funds are run by kids who haven’t gotten around to framing their diplomas.”

“But don’t some funds go belly up? What about the hedge fund those Nobel prizewinners ran?”

“You mean Long-Term Capital,” Muir said. “I must admit they were smart fellows, but they could only see as far as the numbers. I learned a lot from their mistakes—we all did. They’re the reason that I put a cap on the size of my fund and maintain large backup credit lines to fend off margin calls.”

“That’s interesting. So how does your operation work?”

“Basically what I’m doing—what any good hedge fund does—is to correct the mistakes that others make. For example, Long-Term Capital would find pairs of securities that their computer models showed were priced incorrectly relative to each other. They’d buy the cheaper one and sell the more expensive one short on the expectation of liquidating their position at a profit when the prices came back in line, which their models indicated had to happen eventually. Ironically, they didn’t have enough capital to ride the markets into the long term and were forced out when things temporarily went against them—with the price gap widening rather than narrowing. Too bad for them. Their brokers, the ones who forced them out of their positions, made out like bandits Of course, that’s exactly what they were.”

Muir emitted another horrific laugh before he continued, “I run a different kind of shop. Some people call my operation a macro hedge fund, but I don’t like labels. I pounce on the blunders that the big boys—governments, banks, multinationals—make and apply the pressure to force them to do the right thing.”

“How does that differ from what mutual funds do? It all seems to come down to buy low, sell high.”

“Oh, it differs alright. And we play by a different set of rules. In order to keep the SEC off our backs, we can only take money from wealthy individuals and institutions. Since they are supposed to be sophisticated investors—which in my experience is quite a stretch—we can buy and sell whatever we want in any market that we want. Mutual funds are limited in the investments they can make and in their ability to sell stocks short and trade most derivative securities. It’s like they’re playing golf with just a three iron when I have a full bag of clubs. It’s harder for them to get in trouble, but there’s a whole lot of things that they can’t do and they’re never going to be the big winner.”

“How do you know that you’re right?” I asked. This seemed like a good question to bounce off Muir’s ego.

“I’m not always right and there’s no need for me to be. With proper risk management, I just have to be right often enough. I’ve had years when I’ve been down fifty percent going into August, but ended the year making my clients eighty percent. As for when others are wrong, that’s a sense I’ve developed over time.”

“So how would you summarize what you do?” I asked, not expecting to get a straight answer—or any answer at all.

“It all comes down to one simple principle.”

“A secret formula?”

“No. It’s not a formula and it’s not secret. It’s simply that the world will ultimately do what the world’s going to do.”

“That seems obvious.”

“Is it? It’s not to most people. In fact, it’s a rather profound notion.”


“Yes,” Muir said. “Think about it. Americans like to drive big cars. I’m not sure anyone knows why, but that’s just the way people are. So, Congress invents the EPA and tries to regulate big cars out of existence. So what happens? People start driving trucks and vans. Over time, these trucks and vans mutate into SUVs and none of them are subject to the same regulations as cars. All that government did was to make it more expensive and less safe to get where we were going anyway. And this doesn’t just happen with cars, it happens with everything the government gets involved in. While some other hedge-fund managers are libertarians, I’m not willing to go that far. The government has the ability to accelerate the natural course of events and create a fairer, safer, saner world. It just seldom works out that way. And to the extent that governments foul things up, most of the damage is reversible. Eventually. Government isn’t necessarily evil, it’s just misguided.”

“So when the government goes off track, you put them back on track.”

“Precisely.” Muir smiled a self-satisfied smile. “I knew you’d understand. And I’m paid to do it. I’m happy to tell the feds what to do but, like Mike, they’d never listen to me. Worse yet, they’d probably use the opportunity to make my life miserable. But they’d never dare put me out of business.”

“Why is that?”

“Well, ignoring the fact that members of both parties have tons of money tied up in hedge funds themselves, it would be like cutting the brake lines to your car. It’s suicidal. Hitler and Stalin did similar things and look what happened to them. I don’t doubt that the day will come when the feds regulate us, but we’ll just find a way to work around it and pass all the extra costs on to our investors. As it is we’re all offshore, my fund is one of many run out of an office on Grand Cayman. We’ll just go further offshore as will our investors.”

“If the government and the other institutions that you make money from ever started to do the right thing consistently, then you’d be out of business, regulation or no regulation.”

“I will rejoice when that day comes,” Muir said, “but not even my grandchildren will live to see it. The world may be going wherever it’s going, but that doesn’t mean that there won’t always be people trying in vain to change its course or stop it.”

“I see. How did you get into this business?” I was happy to give Muir the opportunity to talk some more about himself.

“Like you, I used to be in research myself—you may have heard of the place—Bell Labs. Then, Judge Greene—may his soul, wherever it is, rest in peace—came along and broke up our parent, AT&T, and the lab along with it. After the break-up, they had psychologists poke around the place trying to figure out how to save it—how to keep the magic going—but what could they hope to accomplish? I used to work with guys who invented transistors and lasers. They’re gone, I’m gone, and last I heard those in my group who stayed were working on how phone companies should assign new area codes. Most of my friends bailed out for other technology jobs, but I got a call from a Wall Street headhunter—the pay was triple my old salary and I found the work fascinating. How could I refuse? I got downsized soon after the crash and used the severance to start my fund. It was still a daring thing to do back then.”

As he talked, Muir now rocked back and forth on his chair, which looked ready to give way beneath him. I had been polite long enough.

“As you are probably aware,” I said in my most serious voice, “a number of growth funds, including Ken’s, have been underperforming the market by a substantial margin these past few months. Do you have any idea why?”

“Do you?”

“No,” I said, “not really.” I was not about to tell Muir anything useful. “My group—they’re all very capable—has looked at the numbers and has yet to find anything. It’s like Ken’s fund is falling into an abyss.”

“I have no doubt that your people are capable and I’m not surprised that they didn’t find anything. Maybe you’re going about things the wrong way.”

“That thought has already occurred to me.”

“Good for you,” Muir said. “Now that computing power is so cheap and data is so plentiful, everyone and his brother can compute to their hearts’ content looking for new angles on the markets and how to make money off them. Now the funny thing is, you don’t even have to get things right to make money. If you can appear smart enough or have the right connections, the money will come flying in the door and you can do okay until the inevitable screw-up. Maybe not as okay as me, but still okay. When it comes to making money, I’m at the top of the list. In my experience, mathematical talent is vastly overrated.”

“I can’t argue with you there. It takes more than math.”

“That’s what my friends who are into poker tell me.”

“You don’t say.”

Muir sat up in his chair and said, “And your name has come up more than a few times. Not many people have sat down with you, but the ones who have say it’s quite an experience.”

“Well, I hope they treasure those moments. That part of my life is behind me. Permanently.”

“I guess then that I couldn’t interest you in some heads-up no-limit Texas hold’em. I just happen to have a fresh carton of cards inside.”

“No interest at all. Sorry to disappoint.”

“What if I told you that I know the root cause of Ken Paine’s problem?”

“Well then, that would mean my trip wasn’t a total waste of my time and GFF’s money. That is, if I could trust you.”

Muir scowled, but did not raise his voice. “Don’t you worry, my word is good. Ask Mike or Roland or Joe.”

I didn’t have to ask. It was obvious to me that he believed that he knew the source of Ken’s problem. Assuming that he valued GFF’s business, he had no choice but to tell me if I won. Still, I thought it was worth pressing him for details.

“Okay, let’s say you know. Why would you be willing to tell me? Aren’t hedge-fund managers are known for their obsessive secrecy?”

“To make things interesting,” Muir said. “There’s no way that you have enough spare change to play a meaningful money game against me, so this information makes a reasonable stake. I win, I keep it. You win, I share it with you.”

I had no doubt that Muir was trying to manipulate and seduce me for his own entertainment. I didn’t feel like playing along and then it dawned on me that I didn’t have to.

“Sorry,” I said. “No deal. It’s been fun visiting with you, but I must be on my way.” I stood up and walked in the direction of Dmitri and the car.

Muir didn’t get up, but he did call to me as I left, “What’s wrong with a little poker? It’s not like I want you to play a thousand hands.”

Copyright 2004 by Miller Risk Advisors. Permission granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to