Short Interest

Chapter OneBorrow

You want to know what I did for a living?

I found people who were going to have to sell.

Not people who wanted to sell. People who were going to have to, on a date, at a price they would not choose, because something in their structure had already decided it for them and they had not yet worked out that the decision was made.

Then I got there first.

That is the job. It has a respectable name, special situations, and it lives in a corner office at Kestrel Partners in St James’s, and there were four of us doing it and I was the best one, and I was thirty-four years old and I had never once had to explain to my mother what I actually did because the explanation stops the conversation.

Here is the honest version. A hedge fund is a promise with a lock on it. Investors give you money and cannot take it back whenever they like; they give notice, and the notice windows are quarterly, and the fund holds things it cannot sell in a hurry. That mismatch is the whole business model. It is why the returns exist.

It is also a fault line, and it runs under every fund in London, and most of the time nothing happens.

But if enough investors give notice in the same quarter, the fund has to raise cash by a date, and it will raise it by selling whatever can actually be sold, which is never the bad stuff. It is the good stuff. The liquid stuff. The positions somebody like me can see.

So it sells the things it likes into a market where I am waiting, and I take the other side, and I have not done anything to it at all. I have simply arrived at a place it was always going to be, slightly earlier.

I want that on record before we go any further, because everybody assumes what I did was predatory and the accurate word is worse. It was patient.

I should say where I came from, because it turns out to be the whole reason I was good at it.

My father sold agricultural machinery in Shropshire for thirty-one years, which sounds like nothing and is in fact the closest training available to what I did. A combine harvester is a hundred and eighty thousand pounds and a farm buys one every eleven years, and my father’s entire professional skill was knowing which farms were about to be forced.

Not persuading anybody. He never persuaded anybody in his life. He knew whose son was going, and whose ground had been wet two seasons running, and who had borrowed against the barn, and he arrived at those farms in the third week of a bad August with a cup of tea and no pitch at all, and he was the kindest man I have ever known and he was doing exactly what I do.

I understood that at about twenty-six and it took another four years to stop it bothering me.

I met Tomas Ek at a client evening at the Wallace Collection in the spring of my second year at Kestrel.

He was prime brokerage at Marchmont, which needs explaining. When a fund like mine wants to bet against a share, it does not own the share; it borrows one, sells it, and buys it back later. The lending, the financing, the settlement, the whole plumbing of it, is done by a prime broker, and the prime broker is a bank, and Marchmont was the biggest in Europe.

Tomas ran coverage for about forty funds, of which Kestrel was one.

He was Swedish, thirty-eight, six foot four, and he had the specific quality that the very best salespeople in that industry have, which is that he was not selling. He asked questions. He remembered the answers a year later. He told me, at the Wallace Collection, that the sword in the case behind me was a fake and had been catalogued as a fake since 1900 and that nobody ever reads the small card, and then he asked me what I thought the borrow market was telling us about a European retailer, and I told him, and he disagreed, and we were still arguing at eleven o’clock.

Three years of that. Client evenings, results dinners, the Kestrel Christmas thing, a conference in Zurich where we both skipped the afternoon. Perhaps forty occasions in three years, all of them work, all of them with other people in the room.

I never asked him for anything.

That is the part that matters and I want to place it exactly. Tomas sat on the other side of a wall. Marchmont cleared for Kestrel and it cleared for two hundred other funds, and everything he knew about any of them was information he was legally and absolutely forbidden to give me. Not discouraged. Forbidden, with a criminal statute behind it, and a compliance function whose entire purpose was to make sure it never happened.

In three years I did not once go near it. Not because I am admirable. Because it never occurred to me that I would need to.

There is a thing that happens in that industry that nobody has a name for, and I have thought about it for years, and the closest I can get is that we were each other’s only unpaid conversation.

Everyone else in my life wanted something specific from me at a specific price. Kestrel wanted returns. Investors wanted access. The four other people on my desk wanted my seat. And every single person Tomas spoke to in a working week wanted his balance sheet, his financing rate, or his silence.

Forty dinners in three years and neither of us ever came away with anything we could put in a file. That is a very unusual asset in London and I did not know I had it until I nearly spent it.

Then in the August the borrow started getting expensive.

That is the tell, and it is the only one my job really has. When it becomes costly to borrow a share, it means a great many people want to borrow it, and a great many people wanting to borrow a share means a great many people are betting against it, or, more interestingly, that somebody very large is about to be forced to let go of a great deal of it.

Cortex was expensive. Everything downstream of Cortex was expensive. And a small cluster of mid-cap European industrials that had nothing whatever to do with semiconductors was expensive, which made no sense at all unless one holder held all of them, and was in trouble, and everybody’s plumbing had noticed before anybody’s analysts had.

Let me show you the work, because the work is the only defence I have and I would like it seen.

Borrow cost is published. Not well, and not everywhere, but a fund of our size pays four vendors for it and between them you can see, to a day, what it costs to borrow almost any listed share in Europe.

The Cortex complex getting expensive told you nothing. Everybody in London was short something in that complex by the August, and an expensive borrow in a crowded name is noise.

What was not noise was Hallenberg.

Hallenberg is a Swedish maker of industrial bearings, four hundred million euros, eleven analysts covering it, and nothing whatever to do with semiconductors. Its borrow went from eleven basis points to two hundred and forty over nine trading days on no news at all.

That is not a bet against Hallenberg. Nobody bets against a bearings company in a quiet August. That is somebody’s inventory being moved, and there are only two reasons inventory moves like that: a fund is being unwound, or a fund is preparing to be.

I ran the same screen across four hundred European mid-caps and got eleven names, and every one of them was the kind of position you take when you have a view about industrial supply chains, and every one of them was liquid enough to sell in a hurry.

Eleven names. One holder. Nine days.

I did not have the holder.

And I sat in my flat on a Sunday in September with the list on the table and understood, with real clarity, that there was one man in London who knew exactly whose book that was, that I had his number in my phone, that I had never asked him for anything in three years, and that this was precisely what made the asking possible.

Chapter TwoThe Wall

I should explain the wall, since the whole industry relies on your not picturing it correctly.

It is not a metaphor about discretion. It is a physical and electronic architecture. Different floors. Separate systems. Access logs. In a bank like Marchmont, the people who know what a client is holding and the people who talk to other clients are, by design, not able to reach each other, and every message between them goes through a monitored channel, and there is a compliance team whose job it is to read them.

When somebody is deliberately given information from the other side, there is a phrase for it. They are brought over the wall. It is a formal act. It is documented, and the person who is brought over is restricted from trading, and everybody involved signs something.

What Tomas could have done for me was not that. That has paperwork. What he could have done was say one sentence in a bar with nothing written down anywhere, and there is a word for that too, and the word carries a custodial sentence.

I did not ask him.

I want to be honest about the size of that, because it sounds like a virtue and it was mostly cowardice with good timing. I thought about asking him for eleven days. I drafted the sentence. I got as far as working out that the safest version was not a question at all, it was a statement he could decline to correct, which is the oldest trick in the industry and the one compliance departments are worst at catching.

I had it ready. I took it to dinner with me.

He got there before me, which he always did, at a Portuguese place off Charlotte Street he had found and would not stop talking about.

And about forty minutes in, before I had done anything at all, he put his glass down and said, “Nell. Ask me.”

I did not say anything.

“You have had a list for two weeks,” he said. “You have been in my diary twice this month and you have never in three years been in my diary twice in a month. You are working on something that has a holder in it and you cannot see the holder, and I have watched you not ask me for nine days, and I would like it to stop, because it is very tiring to watch.”

“Tomas.”

“Ask me.” He was not smiling. “I have thought about it properly and I am not being romantic. If you ask, I will tell you, and you should know that before you decide.”

“Why?”

“Because you have never asked.”

I want to describe what that did, because it was not flattering and it should have been.

What I felt first was exposure. Not warmth. He had been keeping a count, for three years, of a thing I had believed was invisible even to me, and the count was accurate, and there is no version of being seen that closely which does not first feel like being caught.

He turned the glass. “Three years. Forty dinners. Everyone else asks. Not directly, they do the statement thing, and they think I don’t hear it, and I have heard it perhaps four hundred times. You have never once done it, and I know exactly what your job is, and it has taken me about two of those three years to understand that this is not because you are honest. It is because you did not want to spend the thing between us.”

That was, I think, the moment.

Not the flat, later. That.

“If you tell me,” I said, “you go to prison. Not lose your job. Prison, in a room, with a date on it.”

“Yes.”

“And I get paid.”

“Yes.”

“So the arrangement is that you have the whole downside and I have the whole upside, and we call it a favour between friends.” I heard my voice do something unpleasant. “That’s not a gift, Tomas, it’s a wager where I hold your stake.”

“I know what it is.”

“Then why offer?”

And he said, very simply, “Because I wanted you to know that I would,” and then, “and because I have wanted, for a long time, to give you something you couldn’t get anywhere else, and this is the only thing I have that qualifies.”

I did not answer for a while.

“Then it’s the wrong thing,” I said.

“Yes.” He let a breath out. “I have known that since about Tuesday. I still had to say it out loud.”

“There is a third option,” he said, “which neither of us has said, and I am going to say it because I am forty next year and I have run out of patience with rooms where the real thing is the one nobody names.”

“Tomas.”

“You could stop hunting funds.” He said it perfectly evenly. “You are the best analyst I cover. There are eleven places in this city that would take you tomorrow to do something that does not end with a building emptying out. And then there is no wall, and there is no favour, and there is nothing between us at all except that neither of us would ever again be as good at our jobs as we are now.”

“That’s not a third option. That’s the same wager with my stake in it.”

“Yes,” he said. “I noticed that about four seconds after I said it. I withdraw it and I am not sorry I tried.”

We finished the wine. We talked about a European retailer for an hour and a quarter and both of us knew exactly what we were doing. And at the end of it, on Charlotte Street, in September, he did not kiss me and I did not let him, and we stood about two feet apart for what was probably eleven seconds.

“Get the holder yourself,” he said.

“I will.”

“I know.” He put his hands in his pockets. “And when you do, I want to know that I could not have helped, so that neither of us has to wonder afterwards which part of this was the trade.”

The six days after Charlotte Street were the hardest work I have ever done, and I did every hour of it in a state I can only describe as furious.

Because he was right that I could get it, and he was right that I would, and he had handed me back my own trade with a condition attached that I had not asked for and could not refuse, which is a thing I had spent eleven years doing to other people and had never once had done to me.

I got it in six days without him.

There was nothing clever in it. Redemption windows are quarterly and disclosure documents are dull, and a fund’s investor letters get forwarded by investors to consultants and by consultants to other people until they end up, eventually, in the hands of somebody who is paid to read them properly.

Rogue Capital. Notice window closing at five o’clock on a Friday. A book that had been rebuilt after a write-down two years earlier and was still, whatever anybody said about it, concentrated. Eleven names, one holder, and a date.

I took it to the investment committee on the Monday.

That is a room of five people at Kestrel and it runs for four hours every Monday and it is the most honest room I have ever been in. Nobody is polite. You put a thesis up and four people who are paid to disagree take it apart, and if it survives you get size, and if it does not you have lost a fortnight and everybody moves on to the next item without a word of consolation.

I was on my feet for fifty minutes. They asked about the notice window, and whether the eleven names were really one holder or two, and what happened if the fund gated, which is the one move that would have killed the whole thing.

That last question was the good one and it came from a man called Reeves-Hart who had been doing this for twenty-two years.

A gate is the emergency brake. A fund in trouble can refuse to let investors out, which stops the forced selling instantly and leaves anybody positioned against it holding a position with no catalyst and a financing cost.

“So why won’t they?” he said.

“Because you only get to do it once.” I had the answer ready because I had not slept for two nights getting it. “Drop the gate and you are finished. Nobody gives you a pound again. Every fund in London knows the gate is there and every fund in London would rather bleed than pull it, and the ones that pull it are the ones with nothing left to protect. Rogue has a two-year record and a rebuild and a story. They will trade through it. They will trade through it right up until the morning they cannot, and by then the window has closed.”

He looked at me for about four seconds and said, “Right,” and gave me the size.

It was the largest position of my career.

And on the Tuesday I rang Tomas and said, “I have it. Marchmont has nothing to do with it and I can show my working to anybody who asks.”

And he said, “Good,” and then, after a pause, “Nell, when this is over, whichever way it goes, I am going to ask you a question.”

Chapter ThreeShort Interest

It went the way I said it would.

I do not want to describe the money because the money is the least interesting part and it is the part everybody wants. It was the best trade Kestrel did that year and it made my career and there is a version of this where that is the ending, and if I told it that way you would close the book feeling something quite pleasant, and it would be a lie of exactly the kind that made me good at my job.

Here is the other bit.

I was in the office on the morning of the twenty-third with four screens and the whole thing playing out in front of me at eleven minutes past nine, and at some point in the afternoon somebody put the news on and it was not numbers any more, it was a building on a street, and people coming out of it.

Rogue employed thirty-one people.

I knew that. I had known it for weeks. It was in a paragraph of a document I had read in September, and it had sat in my head as a datum about operational scale, and at about four o’clock on the twenty-third of that month it stopped being a datum, permanently.

Thirty-one. Not the partners. The partners are fine, the partners are always fine, that is what being a partner is. Operations. Compliance. A woman on the front desk. A man in his fifties in a suit that had been good about eight years ago.

I had not done it to them. I want to be exact, because I have had four years to be exact and I have not moved an inch on this. Rogue’s book was concentrated before I read a word about it, and the notice window was in its own documents, and the redemptions came from investors who had never heard of me, and if I had never existed the twenty-third of that month happens anyway, at the same hour, to the same people.

That is all true and it is worth precisely nothing at four o’clock in the afternoon.

Being the person who was correct about it does not make you not present. I was there. I had bought a ticket and sat down and watched, and then I collected.

I did not tell anybody in that office what I was feeling, and there were eleven people around me and four of them were delighted, properly delighted, in a way I understood completely because I had been delighted about smaller things a dozen times.

That is the culture and I am not going to be pious about it now. You are correct, or you are not. When you are correct there is a specific pleasure in it that has nothing to do with money and I have never found a substitute for it anywhere else, and anybody in that industry who tells you otherwise is selling you something.

I sat there and had it. I had the whole of it, for about two hours, and it was as good as it has ever been.

And then somebody put the television on.

I left at seven. He was outside the building.

“How did you know?”

“I have known where you would be at seven o’clock today since September,” Tomas said.

We went to his flat because it was nearer and neither of us pretended otherwise.

The lift in his building took a very long time and neither of us said anything in it and neither of us looked at the other, and I have thought since that if it had been eleven seconds faster the whole evening goes differently, because the thing that was actually happening was that I was about four seconds from crying and he knew it and was giving me the lift.

I remember that he did not touch me for the first ten minutes. He put a glass of something in my hand and let me talk about a man in a suit that had been good eight years ago, and he did not once say that it was not my fault, which everybody else said for the next three weeks and which I could not have stood from him.

I remember that when I finally stopped he said, “Come here,” and that I did.

I remember that at some point I said, “Don’t be careful with me,” and that he said, “No,” and meant it.

I remember that it was not gentle, and that this was mine, not his. I had been careful and correct and patient for five months, and I had been careful and correct and patient in a doorway on Charlotte Street in September, and I had had enough of it in a way I could feel in my hands.

I remember him laughing against my mouth when I got his shirt out of his waistband and then not laughing.

I remember his hands going into my hair and taking a fistful, and my head going back, and his mouth on my throat, and a noise coming out of me that I had not made in years.

I remember getting the answer to something I had wondered about for three years across forty dinners, which was what he would sound like when he stopped being the most composed man in any room, and that it was worth every one of the three years.

I remember he got hold of my wrists at one point and put them against the wall above my head, and then stopped, immediately, and said, “Is that,” and I said “yes” before he had finished the question, and the fact that he had asked at all in the middle of it did something to me that I have never been able to describe properly to anybody including him.

I remember his mouth at the base of my throat and my own voice saying something I would not write down.

I remember standing in his kitchen with my hands flat on the counter behind me and him about four inches away not touching me, deliberately, waiting, and saying, “Say the thing you said on Charlotte Street.”

“That I wanted to give you something you couldn’t get anywhere else.”

“Yes.”

“This was it,” he said. “The other thing was never it.”

And then his hands, and the counter, and the door through to the rest of the flat that we did not get through for some time.

That’s where I’ll stop.

In the morning he made coffee badly and we sat at his kitchen table and I said the thing I had not been able to say on the floor of my own head for five months.

“If I’d asked you in September, you’d have told me.”

“Yes.”

“And I’d have made the same four million pounds about six days earlier.”

“Yes.”

“So the only actual difference,” I said, “between the version where I asked and the version where I didn’t, is you.”

He turned his cup round.

“That is the correct calculation,” he said, “and I would like you to notice that you have just described a five-month decision in which the entire value was a person, and that you did it in the voice you use for the investment committee, and that you did not notice you were doing it.”

He resigned from Marchmont in the November.

Not for me, and I have made him say that out loud twice. He went to a smaller outfit doing financing for family offices, which is duller and pays two thirds, and he did it because the alternative was declaring a personal relationship with a portfolio manager at a covered client, and a declaration goes in a file, and a file follows you, and he had watched what a file does.

I asked him whether he resented it.

“I spent eleven years being the most trusted man in a room I could never leave,” he said. “You are the only thing that ever made the room worth leaving.”

I stayed at Kestrel for two more years.

I got very good and then I got tired, in that order, and the tiredness had nothing to do with morality, which people always want it to. I did not have a crisis. I simply noticed, some time in the second year, that I had begun reading the staff numbers first.

You cannot do that job and read the staff numbers first. The whole discipline is that a fund is a structure and a structure has no employees in it, and the moment you start seeing a front desk and a man near a wall, you hesitate for a quarter of a second, and a quarter of a second is the entire edge.

So I went and did something else, and I am happier, and I earn less than half.

My father died in the second of those two years.

I went back to Shropshire for a fortnight and did the things you do, and on about the ninth day I found a ledger in his office, the paper kind, going back to 1994. Every machine he ever sold, and next to a fair number of them, in pencil, a note.

Went to the son in the end. Wife not well. Bought too much, told him so.

He had known. For thirty-one years he had known exactly what he was doing and he had written it in pencil next to the numbers, in a book nobody was ever going to read, because there was nowhere else to put it.

I still think I was right. That is the part I cannot get rid of and I have stopped trying. Rogue was going to break and it broke and I saw it first and there is nothing wrong with any of that.

But I was in the room. I bought the ticket.

And somewhere in that building on the morning of the twenty-third, at a quarter to ten, a woman was standing eight feet away from Lara Voss with her hands at her sides, doing something to her that had taken eight months to build.

I have never met either of them.

I made four million pounds out of what happened between them and I did not know their names until I read them in a newspaper.