Home > finance, hedge funds > Working with Larry Summers (part 2)

Working with Larry Summers (part 2)

June 24, 2011

This is the second part of a description of my experiences working at D.E. Shaw, which was started here and continues here.

I want to describe the culture of working at D.E. Shaw during the credit crisis, so from June 2007 to June 2009, because I think it’s emblematic of something that most news articles and books written about hedge funds really miss out on when they fixate on the average I.Q. of the people working there, which is in the end a distraction and nothing more, or the bizarre or quirky personalities that exist there, which is only idiosyncratic and doesn’t explain anything deeply.

I promised myself I’d put focus on the following phrase, which struck me down when I first heard it used and still makes me shake my head, namely the concept of “dumb money.”  The phrase was tossed around constantly and cleverly, and really, to understand what it means inside the context of the hedge fund culture, is to understand the culture.  So I’ll try to explain it.  First a bit of context.

Most of the quants at D.E. Shaw were immigrant men.  In fact I was the only woman quant when I joined, and there were quite a few quants, maybe 50, and I was also one of the only Americans.  What nearly all these men had in common was a kind of constant, nervous hunger, almost like a daily fear that they wouldn’t have enough to eat.  At first I thought of them as having a serious chip on their shoulder, like they were the kind of guy that didn’t make the football team in high school and were still trying to get over that.  And I still think there’s an element of something as simple as that, but it goes deeper.  One of my colleagues from Eastern Europe said to me once, “Cathy, my grandparents were coal miners.  I don’t want my kids to be coal miners.  I don’t want my grandchildren to be coal miners.  I don’t want anybody in my family to ever be a coal miner again.”   So, what, you’re going to amass enough money so that no descendent of yours ever needs to get a job?  Something like that.

But here’s the thing, that fear was real to him.  It was that earnest, heartfelt anxiety that convinced me that I was really different from these guys.  The difference was that, firstly, they were acting as if a famine was imminent, and they’d need to scrounge up food or starve to death, and secondly, that only their nuclear family was worth saving.  This is where I really lost them.  I mean, I get the idea of acts of desperation to survive, but I don’t get how you choose who to save and who to let die.  However, it was this kind of us-against-them mentality that prevailed and informed the approach to making money.

Once you understand the mentality, it’s easier to understand the “dumb money” phrase.  It simply means, we are smarter than those idiots, let’s use our intelligence to anticipate dumb peoples’ trades and take their money.  It is our right as intelligent, imminently starving people to do this.  Chasing dumb money can take various forms, but is generally aimed at anticipating lazy fund managers:  if you know that they always wait until Friday afternoon to balance their books, or that they wait until the end of the month, or that they are required to buy certain kinds of things, you can anticipate their trades, make them yourself a bit before they do, thereby forcing them to pay more, and getting a nice little profit for yourself.  In short this works in general, since statistically speaking the anticipated trade wasn’t driving up the intrinsic value of the underlying, but rather was being affected by trade impact for a short amount of time.  If we can anticipate big trades by lots of dumb money, then the short-term market impact will be large enough and last long enough to buy in beforehand and sell at the top, while it still lasts, assuming there’s sufficient liquidity.  The subtext of taking dumb money, going back to the football team issue, is: if we don’t somebody else will, and then we will feel like fools for not doing it ourselves.

To tell you the truth, I was completely naive when I went to work there.  I had kind of accepted the job because I wanted to be a business woman, wanted a brisk pace after the agonizing slowness of academics, and I had really no moral judgment on the concept of a hedge fund; I thought it was morally neutral, at worst a scavenger on the financial system, like a market maker or someone who provides insurance for something.  Well I’ve decided it’s more like a leech.

Getting to the part about actually working with Larry Summers.  I did work on a couple of his ideas, although in order not to get sued I can’t be detailed about what his ideas were.  And I had various meetings with him and a bunch of managing directors.  One thing I remember about these meetings was the eery way the managing directors seemed intimidated by him, even though behind his back they kind of scoffed at the possibility that he could actually offer good modeling ideas.  It was basically a publicity stunt, or at least rumored to be, to have him work there.  It was after he had gotten pushed out of the Presidency at Harvard for talking out of his ass about women in math, and yes it was a bit surreal to be the only woman quant in the place, and to be working on his project considering that.  Since I am pretty much never intimidated for some reason, I had no problem.  He kept on grilling me about various things to try and I kept explaining what I’d done and how I’d already thought of that.  It was fine, pretty combative and pushy, but actually kind of fun.  I really have nothing to say about him treating me differently because I was a woman.

But when I think about that last project I was working on, I still get kind of sick to my stomach.  It was essentially, and I need to be vague here, a way of collecting dumb money from pension funds.  There’s no real way to make that moral, or even morally neutral.  There’s no way to see that as scavenging on the marketplace.  Nope, that’s just plain chasing after dumb money, and I needed to quit.  I still don’t know if that model went into production.

Categories: finance, hedge funds
  1. June 26, 2011 at 8:12 pm

    I can’t find part 1.

  2. June 26, 2011 at 8:44 pm

    Hi, I added a link to the first part at the beginning of this post. Thanks!

  3. June 26, 2011 at 10:02 pm

    Thank you.

    Finance is not an interest of mine, but I’m enjoying your writing. I’ll keep reading, and maybe I’ll know more of what we’re all up against.

  4. alex
    June 28, 2011 at 12:48 pm

    very interesting. I think those of us who don’t really want to spend our lives thinking about markets because we’re busy teaching math, coding software, writing poetry, or raising kids or whatever are fodder for people who want to take our money. maybe grandma was right and its time to start putting our money in the mattress? :) i love your blog. thanks Sue, for sending me the link.
    – alex m.

  5. Leila
    June 30, 2011 at 5:41 pm

    Hey Cathy! Your writing is brilliant, your blog is hilarious, and this particularly post is just…mind-boggling.

    Have you ever thought of writing a financial thriller? Just take everything you’ve done and change the names…

    I’ve never read anything about finance like what I just read on your blog. “Dumb money” – WTF?????!!!!!!!??????!!!!!! (She encounters the real world with a bump.)

    Bravo for mathbabe. xxxxxxxxx

    • June 30, 2011 at 6:42 pm

      Leila! Great to hear from you! And thanks for the encouragement. I will write more I promise.

  6. July 8, 2011 at 6:17 pm

    ” It was essentially, and I need to be vague here, a way of collecting dumb money from pension funds. There’s no real way to make that moral, or even morally neutral. ”

    Gosh, you must have a really hard time with the morality of Department Stores then. Charging idiot pension fund managers who can’t be bothered to learn about VWAP more for liquidity is pretty much the moral equivalent of charging idiot consumers more for items they could buy more cheaply on Amazon if they knew about the internets. If you want to impugn someone’s morality: how about blaming the douchebags at the pension funds who are making bank, despite their managerial incompetence? I mean, if you *really* thought charging for liquidity was evil, perhaps you’d go become an algo trader and fight evil liquidity peddlers.

  7. Sara plymouth
    January 1, 2012 at 6:19 am

    So, why did you leave DeShaw ? Was it your decision or was it Deshaw’s decision ? Did you ever truly feel compatible with the company ?

    • January 1, 2012 at 7:49 am

      It was my decision. I wanted to be part of the solution, not part of the problem. I never felt like more than a guest. But I came to feel that nobody ever felt like more than a guest.

  8. January 9, 2012 at 1:23 pm

    Just finished listening to the CBC piece with you.
    I was powerfully impressed.
    My colleagues and I are involved in the Joint Review Panel, a judicial process considering the environmental impacts of the proposed Enbridge Northern Gateway pipeline.
    Statistics are being (ab)used in the same way as they have been in the financial industry…..with the same inevitable future disastrous results.
    Could use some of the same kind of help from a skilled quant that you lent to the occupy movement as it has fallen to us to critique a statistical model model that says basically that a spill is so improbable we don’t have to worry about it.
    Any ideas?

  1. July 3, 2011 at 2:03 pm
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