Intelligence operatives are a hot commodity on Wall Street as investors tap into their expertise in human behaviour to help them stay ahead of the game.
The spy who came in from the hedge fund
What do you do if you are a spy who just can't pull in the big bucks? The position of James Bond has been filled and the money earnt for monitoring eye-wandering husbands just isn't what it used to be. One option is to moonlight on Wall Street, according to a new book that exposes some of the previously undocumented and reassuringly clandestine links between hedge funds and the spy game.
Why reassuringly? The fact is that for a while there, hedge funds were getting a little boring. Their mystery was stripped away by the financial crisis during which many of them failed even to outperform the S&P 500 let alone post returns worthy of a 20 per cent or more performance fee and 2 per cent for simply managing money in the first place. But now they are back with a bang as the hedge fund industry enjoyed a phenomenal 2009, with a return of 18.6 per cent, for its greatest rebound in 15 years, according to the data provider Credit Suisse Tremont.
These signs of a return to form coupled with revelations of spy connections are welcome because, if we are honest, most of us don't want hedge funds to be boring. We want blockbuster returns, billionaires with outlandish houses in the Hamptons with too many stables and tennis courts. We want big white yachts that only Russians called Roman or absent Americans named Tiger are meant to be able to afford. We certainly do not want low-risk strategies that look like any other fund manager. And we definitely do want anything that connects them to spies.
Eamon Javers, the author of Broker, Trader, Lawyer, Spy: The Secret World of Corporate Espionage, published last week, says the US Central Intelligence Agency (CIA) is offering operatives a chance to peddle their expertise to private companies on the side; a nice source of pocket money for the agents in question that also gives financial firms and hedge funds access to the nation's top-level intelligence talent.
In one case, the book says, active-duty officers moonlighted at a hedge-fund consulting firm that wanted to tap their expertise in "deception detection", the highly specialised art of telling when executives may be lying based on clues in a conversation. Javers points out that the moonlighting policy is defended by sources close to the CIA as a vital tool to prevent brain drain at Langley, Virginia, where the CIA is headquartered. The agency has seen an exodus of highly trained, badly needed intelligence officers to the private sector, where they can easily double or even triple their government salaries. The policy gives agents a chance to earn more while staying on the government payroll.
"If hedge funds are hiring CIA agents, that certainly adds some spice and intrigue to the market," says Bob Treue, the founder of Barnegat Fund Management, a US based fixed income arbitrage fund. "The fact is hedge funds are essentially in the information arbitrage business," Mr Treue says. "If you want to beat the market, you need to be smarter and know more than the market. Employing spies is obviously an extreme measure, but it does demonstrate the lengths some are prepared to go to ensure they stay ahead of the game."
Hedge funds have long employed staffers dedicated to giving them the edge where information is concerned. Typically, these employees come from backgrounds in some other information gathering role such as journalism or data analysis. Journalists in particular are frequently hired by hedge funds as information gatherers whose job it is to collect and analyse information not ordinarily available and present to traders their findings and recommendations for how the fund should position itself with respect to a particular company. Hedge funds often try to recruit the journalists who have a demonstrable track record of providing good information that the hedge fund itself may have used to inform its trading decisions.
They are tasked with jobs as varied as test-driving cars, interviewing branch managers of retail outfits and interviewing members of test audiences for coming movies. Their job is made harder by the fact that most people are less inclined to give you any information once they know you are representing a hedge fund. These information gatherers are a little known, but key part of some of the world's largest hedge funds. Their primary purpose is to gain access to information that is not available elsewhere.
But in an age during which information is spewing out of endless outlets at a dizzying rate, knowing something that somebody else does not already know is increasingly tricky. That information is still at a premium is a function of the oft quoted Gordon Gekko cliche that is not about lunch or greed: "The most valuable commodity I know of is information." And hedge funds are prepared to pay for information.
That some are now employing CIA agents just shows how valuable information and intelligence has become. Javers says that among other things, hedge fund clients are often looking for agents to teach them what is known as "tactical behaviour assessment" (TBA). This technique allows examiners to work without hooking up their subject to a series of wires. The subject never knows they are being examined in the way that a lie detector demands.
TBA focuses on the verbal and non-verbal cues that people convey when they are not telling the truth. Psychologists familiar with the method say it works because human beings are not hard-wired to lie well. Holding two opposing ideas in your brain at the same time - as you have to do in order to tell a lie - causes a phenomenon they term "cognitive dissonance", which creates actual physical discomfort. And when people are uncomfortable, they squirm.
Javers says agents look for the physical indicators of lying. They watch for a person shifting anchor points: if the person is leaning forward on one elbow, does he switch to the other one? Interrogators watch for grooming gestures such as adjusting clothes, hair or eyeglasses. They look to see if the person picks at his fingernails or scratches himself. They watch for the person to clean his surroundings: does he straighten the paper clips on the table or line up the pens? If he does, he could be lying.
So as hedge funds emerge from the credit crisis with renewed vigour and try to take advantage of increasingly short-lived arbitrage opportunities, they are also tapping the most secretive of intelligence sources to ensure they remain ahead of the game. In doing so they demonstrate that the CIA's own motto, "And ye shall know the truth and it shall set you free", strikes a chord on Wall Street every bit as loudly as in Langley.