Morning Coffee: Hedge fund manager nearly blew up his firm, but knows how to keep a secret. The job interview that cost more than a billion dollars

DE Shaw is famous for doing things a little bit differently compared to its competitors in the multistrategy hedge fund space.  Although its funds have historically had something of a quantitative bias, DE Shaw doesn't just hire mathematicians and physicists; there are always a few spaces occupied by poets, philosophy graduates and even Broadway actors.  Not only that, but unlike most pod shops, losing 30% doesn’t necessarily get you fired – you can even end up being promoted to head of risk.

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Max Stone actually did that – he ran discretionary macro trading when the fund lost a huge amount in the 1998 Russian default -  but it was decided that the decision to build up the exposure was collectively taken, and so it wouldn’t be fair to blame him alone. 

That decision was actually quite typical of DE Shaw's management style – even before its founder stepped back in 2001 to concentrate on biomedical research, it was always quite a collegiate place, with a culture of executives “stress testing” one another’s bets. Part of the point of recruiting people with quirky educational backgrounds seems to have been a desire to avoid the kind of intellectual monoculture that leads to groupthink and blind spots.  And even to this day, if an idea survives this kind of internal debate, DE Shaw is not scared of putting billions into a single trade.

Which, in turn, goes to explain one of the other cultural quirks and idiosyncrasies of DE Shaw – its extreme degree of secretiveness, even by the standards of hedge funds. You have to sign an NDA just to interview there, and another, stricter one if you get an offer.  Clients are not encouraged to ask too many questions; with some justification, the company seems to think that its long term track record of investment returns ought to be all the answers that anyone needs.

That does seem to put a bit of strain on the client relationships.  At present, DE Shaw is asking its investors to pay up for the cost of installing AI compute, while also increasing its lockup period to up to four years.  And they are opening an internal fund for their best ideas, which employees will get preferential access to. 

The internal fund looks like a defensive move aimed at helping to keep DE Shaw competitive for top talent with other legendary trading operations like RenTech, but that also underlines a problem of longevity.  They need to recruit tomorrow’s star quants (and poets, philosophers, etc) because the original generation are getting old (or rather, getting rich – Stone is only in his 50s) and retiring.  One consultant has already downgraded Shaw from “best in industry “ to merely “above average”.

So, the challenge is to maintain the quirky, secretive and collegiate culture of the fund for a new generation.  Let’s hope that they manage it; it’s good for the industry for some places to be a bit weird.

Elsewhere, the new public statement from Binance about the multi-billion dollar hacking attack might contain some bad news for bankers, and particularly for techies working at financial institutions.  According to the company, part of the preparation for the hack involved a particularly clever and sophisticated piece of “social engineering”.

An unfortunate Binance employee only known as “Engineer B” was approached on “a legitimate job-hunting platform” by someone who seemed credible in offering him a job.  After first- and second-round video interviews, the candidate was given an “exercise” which involved downloading some files onto his computer.  These files apparently included a bunch of malicious code, which later executed “a series of unauthorised activities”.

It’s bad enough that everyone now has to be suspicious that every recruiter might be a global master criminal.  But also – banks now have a security reason to want to prevent their employees from interviewing anywhere else, as well as all of the normal reasons.  We can expect tougher controls on the use of work laptops, and stricter policies on communication with recruiters.  It’s not just Binance who were the victims here. 

Meanwhile …

Rich Handler has been in India, talking about launching an asset management venture and about hiring more staff.  He’s also potentially there to steady the ship and show the employees some love after the departure of veteran country head Aashish Agarwal. (Bloomberg)

Merging UBS with Morgan Stanley has a certain kind of logic to it – expanding wealth management franchises, significant overlap and cost synergies, reuniting Ted Pick with Colm Kelleher.  But it’s also got a lot of problems – overlapping clients and negative revenue synergies, the biggest integration problems in history and, quite possibly, opening up old wounds for Ted and Colm. (Breakingviews)

The thing about trade secrets being secret is that it’s often quite difficult to know how important they are, and whether they’re worth keeping secret in the first place. Richard Ho, formerly of trading firm Headland Technologies, is on trial for allegedly misappropriating the code for some algorithmic strategies.  But, while Headland claims they spent as much as $1bn on developing those strategies, Ho’s defence team seem to be saying that they’re actually commonly known concepts of no economic significance. The case continues. (Bloomberg)

BNP Paribas is “creating an integrated Investment Banking platform bringing together Sectors, M&A, Debt Markets ⁠and Equity Capital Markets”, in the hope that this will bring the banking side of its Corporate and Investment Banking division closer to the success of its equities trading operation. (Reuters)

All the fund managers and bankers who thought they were being clever by leaving London for tax breaks in Milan are now feeling a bit “Hotel California”, as the Meloni government proposes a 26% “exit tax” on expatriates who accrued profits under a favourable tax regime if they later leave. (FT)

“The same qualities that we saw in you will no doubt serve you well at other firms who will be lucky to have you”.  The plight of high flying law graduates who thought they had a prestigious associate job at Weil Gotschal and then very suddenly didn’t. (WSJ)

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