Hedge Fund Frankenstein Algorithm Stalks Robert Harris Thriller

The cover jacket of "The Fear Index" by Robert Harris. Source: Random House via Bloomberg

Dr. Victor Frankenstein thought it would be a good idea to bring an inanimate body to life. We all know how that turned out.

Now Robert Harris -- bestselling author of novels about Nazi Germany (“Fatherland”), ancient Rome (“Pompeii”) and modern Britain (“The Ghost”) -- has updated Mary Shelley’s classic tale of hubris in “The Fear Index,” a brisk new thriller set at a Geneva hedge fund.

Instead of a lumbering giant, the monster is a computer algorithm that makes a killing on the stock market by sensing fear and trading on this information.

Our flawed hero is a quant named Alex Hoffmann, a brilliant American physicist who moved to Geneva to work on the Large Hadron Collider at CERN and then founded a hedge fund. Not because he cared about making money; it was just the best way to test his “autonomous machine-learning algorithm.” He doesn’t like the term “artificial intelligence,” but that’s what he’s talking about -- an algorithm that keeps learning, growing and improving its performance.

Everything goes swimmingly for a while. Powered by the latest version of the algorithm, VIXAL-4, Hoffman’s fund has made $79.7 million in just one week. On the day he and his partner are scheduled to meet with their top clients to give them the opportunity to invest more money, things go wrong.

Sharpen the Knives

First someone sends Alex an expensive first edition of a book by Charles Darwin -- anonymously.

Then Alex finds an intruder sharpening knives in the kitchen of his $60 million house, but there’s no sign of a break-in. How did he get past the security system, with its two different codes? He cracks Alex over the head with a fire extinguisher and takes off.

Over the course of the day, Alex finds mysterious e-mails sent from his own address opening bank accounts, transferring money, even buying that Darwin book. Is someone trying to make him look crazy, or is he actually crazy? Perhaps a computer algorithm that trades on fear is doing a little experiment of its own. Or maybe it was that bump on the head.

Harris is a master of pacing -- the story moves swiftly while never feeling rushed, and the tension increases subtly chapter by chapter.

There isn’t much time for characterization, but there are some intriguing details. Alex, for instance, is so averse to publicity that he pays a public relations firm $200,000 a year to keep his name out of the papers.

Anonymous Clothing

“His clothes said nothing at all about him, which was the way he liked it,” Harris writes of Alex. “A hedge fund manager with $10 billion dollars in assets under management could these days pass for the guy who delivered his parcels.”

Alex’s wife, Gabrielle, is an artist having her first exhibition; she worries that it’s only because of her husband’s money. There’s also his English partner, Hugo Quarry, who has “an ex-wife and three children safely stowed in a gloomy Lutyens mansion in a drizzled fold of Surrey,” and Leclerc, the police inspector assigned to the break-in, who lost half his savings in the market and has to commute from France because it’s cheaper than Geneva.

As the day goes on, VIXAL-4 takes ever-riskier positions, eliminating the hedge from the fund. That’s not what it was programmed to do. Once an algorithm can run a hedge fund by itself, what’s next?

“The Fear Index” is published by Knopf in the U.S. and Hutchinson in the U.K. (286 pages, $25.95, 18.99 pounds). To buy this book in North America, click here.

(Laurie Muchnick is an editor for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are her own.)

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