The Story So Far: We are introduced to veteran fund manager Morty Kai, and his protege Esther, who reluctantly joins the king's investment contest. Despite competing with many money managers with much more developed resumes and reputations, Esther wins the contest, and becomes the new head of the king's Investment Committee. Morty Kai foils an insider trading scandal before it can get off the ground, saving the king a substantial amount of money in the process.
As most major markets continued to trade aimlessly in those months, with trading volumes still well below their long-term averages, a money manager by the name of Haman started to grab some headlines. No one seemed to know how he was doing it, but Haman had delivered consistently high returns for his investors, with performance variability that would make a municipal bond fund manager proud. In a very uncertain market environment, Haman’s various hedge funds were the closest thing you could get to a sure thing. Investors practically tripped over each other in their zeal to invest with Haman, who could raise nearly $5 billion within days of announcing a new fund. Haman also had a flair for marketing, appearing on all of the financial news shows in his trademark three-cornered hat. Flamboyant and successful, Haman soon became a household name, a true investing “rock star.”
Haman became so big that other money managers attempted to imitate him. Countless hedge funds were opened, attempting to mimic Haman’s investing “style” (although no one seemed capable of accurately and completely describing that style). CEOs of asset management firms referred to their companies as “Haman shops,” and their style of investing as “Hamanesque.” It was all getting a bit ridiculous, but Haman was reveling in it.
Of course, not everyone was willing to bow to Haman, and to worship at his altar. Morty Kai, who had seen plenty of hot fund managers suddenly turn cold, then practically disappear from sight, did not buy into the Haman hype. In fact, these two men had something of a shared history. Many years earlier, when they were young portfolio managers, Morty Kai and Haman found themselves on the opposite ends of a major trade. Haman had shorted water futures in a certain municipality, believing that a recent price rise had left the commodity overbought. Morty Kai, on the other hand, sensing that the market was still in the very early stages of what would prove to be a significant, demand-driven price rise, was on the long side of the market. For weeks, the battle raged, as each side continued to add to its position as the market for water futures struggled for direction. Finally, the market broke through its upside resistance, and didn’t pause to catch its breath until it had appreciated another 40%. Morty Kai made an enormous profit, while Haman was caught in a classic short squeeze, decimating his portfolio. The ensuing margin calls made Haman close out his fund, and practically hide from his enraged investors, who, in retrospect, took the position that he had been altogether too reckless with their money. This ushered in the “lean years” for Haman, who was forced to toil in relative obscurity as a junior chemicals industry analyst for a third-tier investment firm. Having been a first-hand witness to Haman’s folly, Morty Kai would forever view Haman as an impulsive and reckless - albeit sometimes lucky - money manager.
Technically, Haman should not have been concerned about Morty Kai’s opinion at this stage of his career, but the lack of respect that Morty Kai displayed towards him just gnawed at him, like when your favorite team loses a close game due to a bad officiating decision. He just couldn’t let it go. Haman was sickened by Morty Kai’s folksy investment style, and all of his blather about things like P/E ratios, operating cash flow, expanding versus contracting margins, balance sheet ratios, blah, blah, blah. Did he really still believe all of that old-fashioned stuff? Hadn’t he heard about the new paradigm? Why, nowadays, an urgent message could travel from one end of the kingdom to the other in less than six months. If you didn’t adjust your methodologies to deal with this rapid pace of information flow, you were toast. The old valuation methodologies just weren’t valid anymore. Morty Kai’s thinking was quaint, and definitely still in favor with the tweed-and-bowtie wearing set, but in the real world? It was simply outdated. “Follow the Cash?” What did that even mean? Morty Kai was a relic. A dinosaur. “Morty Kai = Loser,” Haman tweeted one day. Surely, his 250,000 Twitter followers agreed.
Eventually, Haman realized that he was spending way too much time worrying about Morty Kai’s opinion. It wouldn’t be sufficient to simply trash him in the media. Haman wanted to decimate the various hedge funds under Morty Kai’s control, and put Morty Kai out of business for good. By the time Haman was done with him, Morty Kai would be considered toxic in the investment industry, and would be relegated to serving as a part-time professor at some small-town college, teaching Portfolio Analysis & Theory to a bunch of architecture majors. Haman would find out about Morty Kai’s largest positions, and then simply take the opposite position, doing so in such size that he would eventually move the market decidedly against Morty Kai, leading to a significant drawdown for his funds. For example, if Morty Kai had a significantly large long position in galbanum futures, Haman would short it in even larger volumes, pushing the price down.
Unfortunately for Haman, Morty Kai was a relatively conservative investor, who was practically allergic to leverage, and always highly diversified, with a focus on a low correlation among his major holdings. Taking him down would require some well-executed market manipulation. While Haman was willing and able to carry out such a campaign, Morty Kai had a decent amount of assets under management, and wouldn’t cave easily. To carry out his plan, Haman needed to put a lot more money into play. It would require the type of assets under management (AUM) that only someone like King Ahasueres could provide.
At the time, Haman already had more of the king’s assets under management than did any other money manager. The king was a classic front-runner, always seeking to increase his exposure to the hottest money manager. Haman was already the Flavor of the Month among the custodians of the royal portfolio, as King Ahasueres had already raised his profile above that of all of the other money managers in his employ. Still, this was not enough for Haman. To destroy Morty Kai and “his type,” Haman would need to control all of the king’s liquid assets. (Note that Haman never told people what he meant by “Morty Kai’s type,” perhaps wishing to remain politically correct. He didn’t want to jeopardize his frequent guest appearances on the financial networks, which were good for business. However, perhaps we can assume that Haman wished to eradicate all of the “value” investors).
Winning the king over would be reasonably easy, but would require doing a bit of homework. First, Haman constructed a model Morty Kai portfolio, based largely upon public filings, which indicated the funds’ largest holdings. He filled in the blanks in the mock portfolio by drawing lots and throwing darts at a dartboard. Then, with the help of a quantitatively-inclined intern, Haman performed a Monte Carlo simulation, which showed that Morty Kai’s model portfolio would underperform its benchmarks over the next six months (as indicated above, the king was a big fan of semi-annual performance evaluation) in more than 70% of the simulations. He took his “findings” and incorporated them into a few brightly-colored charts (Haman chuckled as he did this, wondering whether or not Morty Kai even knew how to use PowerPoint), scheduled a meeting with the king, and left his office holding his laptop and a large attaché case.
Haman’s briefcase held the key to obtaining access to the entirety of the king’s assets. The king had always managed his business on a pay-to-play basis, and Haman had brought along 10,000 talents of silver to cement his argument. This was considered a tremendous amount of money in those days. It was enough money to rent a three-bedroom cottage in the Hamptons (with direct beach access!) for two summers, with enough left over for fractional ownership in a private Gulfstream 4 jet for a year.
At the meeting with the king, Haman got right to the point. “Your majesty, I need to alert you to a risk factor, which could lead to the systemic failure of the kingdom’s entire financial ecosystem.” Having thus grabbed the king’s attention, he proceeded with his presentation. “There’s a certain group of money managers out there, scattered throughout the finance industry, whose investment methodologies are different from the mainstream. If allowed to continue, their activities could lead to a market meltdown, which would require significant government intervention, perhaps necessitating the injection of enormous amounts of liquidity from the king’s own treasury.” Haman paused for effect. “Do you mean that my treasury department would be forced to buy the sovereign debt of each of the 127 nations in the kingdom, just to keep interest rates artificially low, thereby propping up asset values?” asked the king. Haman simply nodded, then went in for the kill. “In fact, your Highness, some of these very money managers to whom I’m referring are currently managing significant portions of the king’s own portfolio!” The king was taken aback, and began to panic. “Haman, this is terrible. We must stop them! Is there anything we can do? What do you suggest?” “Well,” Haman answered, “The first thing we can do is to make sure to clean up the roster of the royal portfolio managers. I recommend that from this day forward, management of the king’s entire portfolio be outsourced to my firm, Amalek Capital. We will be solely responsible for settling upon an asset allocation strategy and for choosing the sub-managers.” The king nodded in apparent agreement, so Haman continued. He lifted his heavy attaché case onto the conference room table, and popped it open, revealing its shiny contents. “Of course, I have long subscribed to the king’s position that an effective manager needs to have some ‘skin in the game.’ As you can see, I’m very committed to the notion of mutual value creation.” The king smiled broadly. “Yes, Haman, I can see that your incentive program is properly designed to align the interests of the fund manager with those of his client. Very well done. You are now my sole money manager.”
Having accomplished that part of his plan, Haman now went for the coup de grace. “In addition, your Highness, I’m going to need you to pass a decree, or as we call it, a ‘regulatory directive.’ In order to prevent continued unfettered speculation in the kingdom’s various financial markets, beginning on the 13th day of the month of Adar (allowing for a soft phase-in period for the new regulations), each and every hedge fund in the kingdom will have to be registered with the Persian Exchange Commission, and their entire portfolios will need to be marked-to-market on a daily basis.” The king was all too happy to comply with this request for a royal regulatory directive. After all, it would make it clear to everyone that King Ahasueres was cleaning up the markets, once again making them safe for the little guy. It was time to level the playing field, and shut down the casino. “Haman, that is a brilliant idea. We will put this directive in place right away. In fact, to save time, because you are the driving force behind it anyway, let your firm’s outside counsel draft something, and I’ll just rubber-stamp it. We’ll then e-mail it to every Registered Investment Manager, and follow-up with a hard copy via horse mail in the coming weeks.”
“By the way,” added the king, “Feel free to take back your briefcase. The anticipated excess return on my portfolio, once we’ve removed these troublesome managers, will amount to many multiples of your generous…processing fee.” Haman was pleased. This had been an enormously successful meeting. “Your Highness, what do you say we grab a couple of beers at O’Lunney’s Pub down the block? They have Guiness on tap, and there’s a bartender there who serves it up with a head so thick you can float a gold coin on it.” So the king and Haman went to drink, while for many money managers, the world would never be the same.
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