The Little Guy Never Wins. But Sometimes He Comes Close
A brief tale of my first experience with hedge funds.
About a year after 9/11, I had a job interview for a sales-trading position at Burlington Capital, a trading firm in the Trump building on Wall Street. I’d never heard of the firm, but since I was relatively new to the City, that didn’t mean much.
I’d moved to New York in late 2000 to reinvent myself after closing the investment firm I’d started five years earlier in Little Rock, Arkansas. For a brief period in the 1990s, Weems & Company was one of the only Black-owned investment firms in the Deep South — the first in my home state of Arkansas.
My wife and I made it to New York City just in time for the internet bust, followed by 9/11. The job that brought me to NYC laid me off the month after the attacks, so I needed my interview with Burlington Capital to go well.
To my surprise, that’s exactly what happened. After the usual back and forth, the interviewer lobbed a question out of left field: “Do you know anything about running minority brokerage firms?” It was one of those moments when you look around for the hidden camera that is surely concealed somewhere in the room.
But I wasn’t being punked. Hours later, I walked into our Weehawken, New Jersey apartment with a banker’s box filled with corporate documents. I’d just become the president—and sole employee—of Saratoga Capital, a soon-to-be minority-owned broker-dealer that only existed on paper. My wife was in shock, not knowing what to think.
A few months later, Saratoga Capital was ready to trade
By “Saratoga Capital,” I mean me plus a former Burlington trader who came aboard to help get things going. The markets were beginning to go electronic and that capability was our calling card.
On our first day of business, we immediately got trades from our only account, a hedge fund named S.A.C. Capital. My clients were traditional investors, so I wasn’t that familiar with S.A.C., or SAC, as they were known, but by day's end, we’d traded over a million shares on their behalf. We couldn’t have been more stoked.
Over the next several days, our little two-person shop did so many trades for SAC that Sonic, our electronic trading platform, could barely handle the enormous number of orders. Our clearing firm called me, angry that we didn’t warn them we would do so much business so quickly. After all, we were just two guys sitting in an otherwise empty room.
Soon after that, a couple of things happened. First, our clearing firm changed our risk profile. They said we traded a lot more than they initially expected, so they increased the amount of cash we deposited with them. That meant we had to come up with more money, but there was so much business on the horizon that Burlington, our investor, was okay with it.
Next, the trader we covered at SAC Capital became a lot more difficult to deal with. He’d figured out that they were our only big client, and it showed in the way he treated us.
Like the day the trader at SAC came back an hour after executing a trade with us because he decided he didn’t like the price, we gritted our teeth, let him out of the transaction, and took a loss amounting to thousands of dollars.
We were just little guys, and we wanted the business to keep going, so we thought it was worth it. But I remember thinking how this felt like something that happened to a friend of mine back in Arkansas; a guy who owned a wholesale candy business. Walmart was his company’s most important client, which was great until Walmart decided to buy all their candy directly from the candy makers. My friend closed his business that same day. I resolved that SAC would not make me that guy.
Pretty soon, the SAC trader had an issue with nearly every trade we did for him. But there was so much money to be made; we figured that was the cost of doing business.
I honestly felt sorry for the other guy at my two-person firm. He’s the one who dealt with SAC, who got shouted at if the guy didn’t like his trades that day. Things got so bad; soon, I couldn’t tell if he worked for Saratoga Capital or if he worked for SAC Capital.
For example, one day, there was a pop-up store in the City that the SAC trader wanted to visit, but he couldn’t get away from work. For the folks that have never heard of them, sometimes high-end designers will occasionally open up in a temporary, or pop-up, storefront just for a few days, with special merch you can’t get anywhere else.
For the most exclusive pop-ups, you almost had to know someone even to know where they are, so if you like that kind of thing, it’s a big deal. It so happened the SAC trader liked that kind of thing.
But when you’re a trader at a place like SAC, you can’t just leave to go clothes shopping. Just imagine the “Dollar Bill” character on Billions saying to Bobby Axelrod, “Hey, Axe, I’m gonna put my billion-dollar trading book on hold for a few hours to go shop for a Sherpa fleece…” Take my word for it, that ain't happening.
But when your best customer asks if you wouldn’t mind running over to a pop-up store and standing in line on his behalf, what’s a trader to do? And by asking, I mean strongly suggest. Like “if you want to keep my business, you’ll do this thing for me” suggest. So that’s exactly what my guy did.
At some point, we realized SAC’s business might not be worth the trouble. We decided life was too short to get verbally abused every other trade or to stand in pop-up store lines, and then discover at the end of the month that you didn’t make that much for your trouble.
So we parted ways with S.A.C. Capital. I’m sure they didn’t miss us. We were just little guys to them.
There’s this movie where Richard Dreyfus a horse-racing fiend who never wins. Hear me out.
Then one day, everything seems to go his way. Thinking it may be his lucky day, he decides to let his winnings from the first race roll over to the next, and so on.
Here’s the thing. For that one day, he could not lose. He kept taking his winnings and rolling all the money over to the next race. In the end, everybody at the track was watching him, pulling for this poor guy, the perennial loser. They couldn't help but want him to win.
There’s a scene at the end of the movie with a guy standing alone in the track’s bar. He’s listening to the last big race of the day on the radio, pulling for Dreyfus to win. He prays out loud, “Come on, let the little guy have this one.”
This week, watching the guys on Reddit have their proverbial big day at the expense of Wall Street hedge funds, I was that guy from the movie, the one in the bar. I was pulling for them to win. Now I played the game long enough to know that they weren't the only ones riding the giant wave that sent GameStop, AMC, and a few other so-called Meme Stocks to the moon.
I also know Wall Street is full of sharks, and when there’s blood in the water, sometimes the sharks don’t mind if it helps the little guy. The small fish — the Reddit investors — are a nuisance, like the fish that hang onto Great White sharks, catching the crumbs.
But this time for once, it seemed the small fish all banded together, and perhaps they might beat the Street’s sharks at their own game.
So when I saw that Steve A. Cohen, the New York Mets owner, the guy whose initials were the S.A.C. in S.A.C. Capital, the billionaire who is the inspiration for the show Billions, was losing his shirt because of a legion of little guys who flipped the script, I smiled.
I thought about how ruthless their trader was with my little two-person startup, simply because they knew they could crush our little business. I remembered all the losses he forced on us that we couldn’t afford. I thought of my poor trader standing in line at a pop-up store. How he had to shop for clothes for a spoiled hedge fund client in the middle of the workday. Just to keep the trades coming.
Then I poured myself a pint of beer, closed my eyes and, like the guy in the movie, I thought, “Come on. Let the little guys have this one.”
But then I remembered how things turned out that time for my trading desk. I recalled how hard it is to beat the big guys because they own the entire game. I don’t remember how that movie with Richard Dreyfus ended, but I know how the GameStop story will turn out.
Still, for a few minutes, even though I knew better, I couldn’t help hoping that against the odds, this time, the little guys might actually win.
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Bravo! Unfortunately, I suspect Point 72 aka SAC and many other HF's made a massive amount of money on GME and AMC this past week. Only the 40 or so funds like Melvin Cap that had large short positions in those names were burned. Sadly, this isn't going to end well for many retail investors.