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Harris’s Hedge Fund Trades on Fear, Makes Millions: Interview

Imagine the killing to be made right now if you could find a way to capitalize on fear. That’s precisely what Dr. Alexander Hoffman does in Robert Harris’s gothic new thriller, “The Fear Index.”

The physicist-turned-hedge-fund-manager unleashes a trading algorithm that feeds on human emotions to predict market fluctuations. In just a week, VIXAL-4 makes a profit of $79.7 million. Then, on May 6, 2010 -- the day of the so-called flash crash, when the Dow briefly dropped 9.2 percent -- it goes rogue, catapulting its creator into a paranoid universe of murder and market mayhem.

“The fund is like a malevolent creature,” says Harris, 54, the author of bestselling novels including “Pompeii,” “Fatherland” and “The Ghost,” the basis for Roman Polanski’s movie about a thinly veiled Tony Blair. Speaking from the depths of a leather chair in a London hotel, he shares some of his own anxieties over club sandwiches and lounge music.

Anderson: What inspired the switch from historical and political thrillers?

Harris: I see myself as writing books about power and this is the same -- it’s all about control.

A dozen years ago I wanted to write a version of George Orwell’s “1984” in which the threat to the individual wasn’t the state, but rather corporations and computers. I got very interested in artificial intelligence. It wasn’t until the financial crisis that I realized I could marry finance and computers.

Source: Random House via Bloomberg

The cover jacket of "The Fear Index" by Robert Harris. Close

The cover jacket of "The Fear Index" by Robert Harris.

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Source: Random House via Bloomberg

The cover jacket of "The Fear Index" by Robert Harris.

Financial Research

Anderson: How much did you know about finance going into this project?

Harris: I didn’t understand what a short was, or a credit derivative, or even precisely what it was that a hedge fund did. I asked a lot of very embarrassing questions of very busy people.

Anderson: So plenty of research, then?

Harris: A great friend works for Citigroup and he introduced me to the BlueCrest people. I’m amazed at the access I got. There is a curious thing I detected among powerful hedge- fund people -- they simultaneously are proud of their anonymous power and yet wish to be better known.

Anderson: Did anything you learn surprise you?

Harris: The SEC reports on the flash crash were total eye- openers. It was the first time I grasped the market’s millisecond-by-millisecond nature and its sheer scale.

When I told people in hedge funds I was setting the book around the flash crash they said, “It was over in the blink of an eye. How can you do that?” And it was, but it was a huge event when you break it down. And we’ll have another, it’s almost certain.

Photographer: Jon Enoch/Random House via Bloomberg

Robert Harris, author of "The Fear Index." Close

Robert Harris, author of "The Fear Index."

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Photographer: Jon Enoch/Random House via Bloomberg

Robert Harris, author of "The Fear Index."

Could It Happen?

Anderson: Could a trading algorithm really run amok the way VIXAL-4 does?

Harris: The financial world is the cutting edge of high technology. There are wonderful things thrown up by this but it’s buckling and distorting all the values of the world around us. How much of the volatility in the stock market is being caused by the fact that every time someone blows their nose in Jakarta they know about it in Frankfurt?

The Internet, if plotted according to human activity, resembles the brain, and I wanted the book to be like a modern “Frankenstein” in the sense that Alex calls out of the ether this force and tries to control it.

Human Ingenuity

Anderson: Where do you see it leading in the real world?

Harris: It’s a very philosophically interesting time to be alive. I think human ingenuity created this and human ingenuity will find a way of making it all work, but there may be some alarming hairpin bends along the way.

Anderson: Are you surprised that more novelists haven’t tried to tap the markets’ drama?

Harris: The sort of person who understands the financial markets is not the sort who generally is going to be a good writer, so I can see why popular culture tends to shy away from it. It’s like the first person to eat an oyster -- why would you do that?

Anderson: I hear film rights were sold on the basis of six chapters.

Harris: Yes. The director is Paul Greengrass, who made the “Bourne” movies, and I’m doing the screenplay.

I also have one last volume in my trilogy of novels about Cicero in ancient Rome, so that’ll be my next book. I’m looking forward to getting back to a world of water and wool and fire.

Anderson: Do you have a favorite work of literature about wealth?

Harris: “The Great Gatsby” remains one of the great books, and the greatest about wealth that I’ve read. Presumably Gatsby would be doing a hedge fund now, wouldn’t he?

“The Fear Index” is published by Hutchinson in the U.K. and will be published by Knopf in the U.S. on Jan. 31 (323 pages, 18.99 pounds, $25.95). To buy this book in North America, click here.

(Hephzibah Anderson is a critic for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are her own.)

To contact the writer of this column: Hephzibah Anderson in London at hephzibah_anderson@hotmail.com.

To contact the editor responsible for this column: Manuela Hoelterhoff in New York at mhoelterhoff@bloomberg.net.

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