Edge and the Art Collector

Originally published on January 16, 2013

Originally published on January 16, 2013.

In 1999, he bought Munch’s Madonna for $11 million. In 2004, he bought Hirst’s The Physical Impossibility of Death in the Mind of Someone Living for $8 million. In 2006, he bought a Pollock for $52 million. In 2006, he bought de Kooning’s Woman III for $137 million. In 2007, he bought Warhol’s Turquoise Marilyn for $80 million. In 2010, he bought a Johns Flag for $110 million. There have been works by Bacon and Richter and Picasso and Koons. Probably only he knows how much he has spent. Someone on the internet estimates it at $700 million.

It was 1997, or maybe 1998, when I first heard of the Art Collector. I was working as a research analyst at a large New York investment bank. The broker at our firm whose responsibility was serving the Art Collector told a gathering of the bank’s research analysts that the Art Collector’s hedge fund was now one of the top payers of brokerage commissions to the bank. He may have said the top payer. It was an awakening: a hedge fund, five or six years old at the time, could now pay as much—or more—in commissions than the mutual fund giants that had always been our most important clients. The math, however, was straightforward. The mutual funds had a lot more money. The Art Collector traded many more times.

Even if I had heard of the Art Collector’s hedge fund before then, I still would have been surprised by the salesman’s purpose that day. The Art Collector’s firm, we were told, would happily continue to generate huge revenue for the bank. It was asking for only one thing in return. It was not for us to do better research on companies or their stocks, or to do the research more quickly, or in greater quantities. That would be too literal. Or figurative. The Art Collector wanted something more abstract: not better information, just early information. When we interpreted an event in the life of a company, we distributed a note to all of the bank’s clients. We also called the more important ones to provide context difficult to fire as bullet points. We had to call one client first. Why shouldn’t it be the one that paid us the most?

It was a startling request. The Art Collector wasn’t that interested in what we thought about companies or industries, competitive advantages or long-term growth. No, the Art Collector’s trading strategy was based on the thesis that one could make money trading stocks by anticipating whether Wall Street’s equity research analysts, collectively, were going to increase or decrease their estimates of how much a company was going to make the next quarter. The Art Collector didn’t invent the estimate revisions strategy. But the Art Collector had figured out that even if one worked tirelessly to discover the patterns of analysts’ opinions (or of the companies themselves), one still had no fundamental edge over other smart traders doing the same thing. What one could do—brazenly, unprecedentedly—was to pay the banks as much—more—than than any other client to get information first. This would potentially allow the Art Collector’s traders to hear some nuance from the analysts or the broker that would move a stock a sixteenth or two when the information was better propagated. This was not a restaurant’s biggest customer demanding a better table. This was a restaurant’s biggest customer demanding that other patrons get worse food.

I still can’t understand why the quid pro quo did not generate more outrage. (I never implemented it, nor was I asked to. I was young, without influence, and soon would leave the firm.) Equity research departments were not as regulated as they later would be. There was no clear understanding that research analysts’ opinions were public information—something that needed to be told to the entire public simultaneously. After all, research analysts did not have access to inside information (except, alas, when they did). They were just citizens with private opinions on stocks. If my dentist wanted to tell his barber to buy more shares of McDonald’s because he really liked Quarter Pounders, that was his private opinion too.

Over the next fifteen years or so, as hedge funds became larger and more tentacular and more important, Wall Street would learn hard the differences between hedge fund managers like the Art Collector who took 20 percent of the profits and the old-school mutual fund managers who worked for 0.75 percent fixed fees. It would get used to the spectacular velocity of trading like his, which has nothing to do with corporate capital formation or capital allocation or all the reasons we claim we believe in the market. But at the time, in the Art Collector’s strategy, we saw something slightly unseemly rather than illegal, blackjack instead of chess. Maybe that is because it was as interesting as it was new. The Art Collector was trying to corner the market on an edge.

The Art Collector, Steven Cohen, is in the news a lot lately. Prosecutors have accused seven former employees of his firm, SAC Capital, of insider trading. Three have pled guilty. Six others have been accused of insider trading while at other firms. The Times reports that more subpoenas are out. For a lot of people, this is all quite fun. Wall Street’s schadenfreude is as limitless as its greed.

The Art Collector is also in the news because the art world misses him. With $8.8 billion, he is the 106th richest person in the world, according to Forbes. He has to share this distinction with the chairman of Samsung, a guy who has made a surprisingly large amount of money in satellite dishes, and Rupert Murdoch. And while I don’t know about the tastes in consumption of Murdoch or the satellite guy, it is unlikely that 8 percent of their fortune is in art.  And so when the Art Collector made the decision not to attend Art Basel Miami in December, the Times reported distress. One gallery owner, who had sold the Art Collector a $300,000 painting a few years ago, said, “We would absolutely hate to have him not active in the market, I can wholeheartedly say that. This man is a friend of mine. I called him last week—‘How are you? What’s going on?’ I think the art world is rooting for him. I’m rooting for him. I wish he were here right now.” Another told the reporter, “It’s disconcerting . . . . We’re talking about a lot of liquid. A lot of liquid. I’ve never calculated it out, but he’s responsible for a significant percent of our business.”

I am still not sure if that was an art gallery owner trying to impersonate a boiler room stock hustler or if a boiler room stock hustler had opened an art gallery. Either way, I’m certain he has calculated it out.

On the surface, all this seems like nothing more than courtier morality. If you are in the business of selling expensive things to the rich, you probably should root for the rich to have money to spend. And the rich have large and multiple houses. Big houses have many walls. Paintings are good things to hang on walls. Rich people are unlikely to impress other rich people if those walls are covered with Monet prints from Posters.com.

But for some reason—I have little evidence—I imagine there to be something more in “this man is a friend of mine” than the old headiness. I take it at face value that the Art Collector is, as the Times reports, “the ideal collector—warm, dedicated, eager to take home the best pieces.” I don’t think the Art Collector buys a painting of a flag for $110 million because it matches his couch.

I have an average aesthetic response to what I see. I am relatively catholic in my taste but am most drawn to art that tends to be stiller and straighter and seemingly able to occupy a contemplativeness it also creates in the viewer: works by Hopper, Rothko, Newman, Judd. I do, though, know a little more about artistic struggle than I do about art. I have written novels, with mixed success, since I left the bank. Novelists rarely get to feel pity for other artists, with the constant exception of poets. But visual artists have my enduring sympathy. Precedent seems to constrict their choices infinitely more than it does those of novelists. Novels are more plastic than plastic: one can blow up and reconstruct the world’s expectations of form, but one can also be original and important in less formally flashy ways. A visual artist hits his audience with a visceral punch. The potential responses to a work’s “newness” seems much more binary. One would continue reading prose that is Bellowish and happily let the author have her influences. One would wonder after seeing a Pollockish drip painting whether the painter was an ironist or a hack.

Mandatory newness—and oceans of commentary on it—is an old problem. It’s now coming into its second century. After the March to Abstraction came the March of Ideas, when art became, in Harold Rosenberg’s words, “a species of centaur—half art materials, half words.” Yet the art world is still thriving, the papers report. The money is still flowing. The parties still glitter. New artists are declared important and great. And sometimes, they are.

But how hard it must be now for an artist when it seems that not only has every material form and format imaginable been tried to express Truth and Beauty but every idea has now also found material form. I watch in awe as artists rise to face that challenge, and even more so when they succeed. But sometimes I feel like I’m witnessing the strain. All artists respond to their inner life and the outer world and other art in some mix. These basic ingredients have not changed. But too often, after leaving a contemporary art exhibition, having hungrily wanted a powerful aesthetic experience, I wonder why I was left cold. It could be that I am not versed enough in the ideas of the centaurs to see the intellectual beauty. It could be, I remind myself, that most art in most times is just so-so; there never was an age of the ubiquitous masterpiece. But it also feels, sometimes, as if an edge has become the only ante to be exhibited at all. As if the edge has become the whole point.

I have no idea if the Art Collector is guilty of insider trading. The Art Collector’s spokesman points out that the firm does thousands of trades a day. The firm has employed thousands of people. I am certain that the Art Collector has a compliance department as shiny and expensive as his best Koons. There are plenty of scenarios for what has gone on at his fund. The Art Collector ordered his underlings to use insider information (unlikely). The Art Collector created a culture in which insider trading was implicitly accepted (possible). The Art Collector created a culture in which the constant need for an edge drove people to do bad things (my vote).

The Art Collector—all investors—wakes up each morning to face an enemy, and for most also a fate: the efficient market. Incorporating thousands and sometimes million of signals, ideas, and intelligences from every buy and sell decision, the efficient market in a security has already anticipated whatever changes you think may be in store for it. For individual investors and most professionals, the efficient market thesis is all you need to know: don’t try to beat the market. Other professional investors recognize that the market is not efficient at all. There are all sorts of inefficiencies. The problem is that they are inconsistent in their manifestations. The target always moves.

My guess is that the Art Collector himself is one of the rare people who can beat the market, given his intelligence, his ability to anticipate and exploit changes in patterns, and maybe most important his intuitive “stock sense.” But the Art Collector may have bought Hirst’s glass box because it reminded him of one of Wall Street’s favorite clichés: like a shark, if you’re not moving, you die. If you’re not managing more money, you’re managing less. His firm now manages $14 billion, with a reported $8 billion coming from the Art Collector and his employees. At times, the firm has managed significantly more. This is beyond the capital the Art Collector can trade himself. And so the Art Collector has built a cold-blooded strategy around becoming a trader of traders. When he hires you, a fuse is lit. At some point, whether years later or just as likely months, the bomb will be detonated by your own poor trading results. And you will be fired. But if before that happens you can generate good returns, you get to keep a remarkable share of the trading profits. (Bloomberg reports that it varies from 15 to 25 percent.) If you make a lot of money, you get to keep 15 to 25 percent of the profits of hundreds of millions of dollars at work: the Art Collector will give you more capital to trade. Freelance Nation, the Winner-Takes-All Society: the business model is like the hypertrophied organ of the pathologies of American life.

It also allows the Art Collector to benefit from any edge gained by his traders, legal or otherwise, while denying that he has ever told them to do anything bad. His rigorous compliance department gives powerful incentives to his traders to conceal any illegal activity and makes it less likely that the Art Collector knows the specifics of anything bad going on. The SEC and Justice Department know this. They are not looking for daily crimes by the Art Collector. They are looking for a time he slipped and let himself know too much.

But the Art Collector has made it harder for himself too. If the probability that any individual trader in the world is good enough to beat the market is very low, almost certainly well below 1 percent, the probability that a majority of the traders acting independently can do so—and also be able to offset the losses of the ones who cannot—is even lower. The Art Collector would tell you that he’s not hiring average traders but rather an All-Star team of traders; he can afford to do so, for sure. But even All-Star traders need some regular edge. The Art Collector’s have seemingly tried everything. They bought privileged access to research analysts’ changes in opinion. They participated in trading huddles, in which banks gave favored clients, like the Art Collector, access to analysts’ stream-of-consciousness thoughts, which were sometimes different from what was publicly distributed. They used “expert network” firms, as did traders at many other firms, to connect them to “experts” who had industry and sometimes company data not generally known. The highest-profile case against the Art Collector accuses one of his employees of making $276 million in profits and avoided losses after learning illegally from a doctor connected to an “expert network,” twelve days before a public announcement, that an Alzheimer’s drug was not working as planned. Before learning that, the Art Collector’s funds had invested $700 million in the two drug developers’ shares, presuming the opposite would occur.

This is not how all investors are. Most investment firms try to get their edge through other means, through computer models, by investing in private companies, by doing the ceaseless, tedious work of trying to understand a company’s strategy and financial statements better than anyone else. Unfortunately, that edge is pretty dull: those who try to beat the market through their brains alone tend, overall, to do worse than the market. The Art Collector’s traders have a certain cynical humility, in a way. They respect the market’s efficiency. If you work for the Art Collector, you can’t tell him you’re buying Hewlett-Packard shares because they seem cheap any more than you can sell him a nouveau Hudson River School landscape because of the nice hills and light.

Two fears besides that efficiency haunt the Art Collector and his traders. The first is of law enforcement and regulators, whose efforts at catching inside traders are ever present and who continually seek to unload the dice. The other, larger worry comes from rival traders seeking—or finding—the same edge. One of the open secrets in the hedge fund community is that many hedge fund managers, all with purportedly contrarian and differentiated strategies, own remarkably similar positions. An edge is mortal. When others know what you know, it becomes a ghost, living in the price.

I wonder what the Art Collector thinks, late at night, as he ignores the phone calls from his lawyers, stops calculating the probability of prison, and surveys what $700 million has bought him. Maybe he is a boob and sees in Pollock’s swirls nothing more than a mirror of his own wealth. Maybe he has become infatuated with the scale of his consumption: the goal has shifted from acquiring individual works to assembling a mountain of art. If you are not managing more money, you are managing less.

But perhaps, as an ideal collector, he communes with Jasper Johns’s Flag, admiring the conceptual edge, that once shocking mixture of surface and paint and subject and no subject at all. Maybe he stands in front of his Woman III, worth all $137 million he paid for it, and thinks about edge in general. Artists—traders—the Art Collector himself—are faced with the efficient market, the weight of precedent, all that has been and is being done. Every day it gets worse. But the best of them, like de Kooning, are mercury, racing to be first to an edge before it disappears.

The Art Collector, I’m sure, knows the rest of the story. For a few more years after painting Woman III, de Kooning created works that we still think of as important. Within a decade, though, he would sometimes sleep through the day. “At other times,” according to his biographers Mark Stevens and Annalyn Swan, “he would start drinking at dawn and go for the whole day, downing huge amounts of Scotch and vodka and Gallo wine.” De Kooning was one of the lucky ones. He lived until he was 93. Rothko and Gorky killed themselves. More died unrecognized and broke. In his eighties, de Kooning made ribbony paintings that were spare, bright, and pleasant. But art history doesn’t quite know what to do with them. They seem to lack something essential—the anger and energy—that we want from de Kooning. They also refuse to acknowledge that the edge had moved on by then, to pop and minimalism and conceptual and anything else.

This is now the template for the career of a successful artist: a few incandescent years, a few decades, and then repetition, self-parody, irrelevance, death. But that’s what we admire about them. Their fight against their condition is our fight against our condition. They are trying to fix a vanishing edge in a material form. And that struggle against the mortality of the edge, which is the mortality of every minute, which is mortality, is affirming and heroic and generous.

And the collector of this art? He has $9 billion, which is something. It is certainly more than $8 billion. And he has proved an interesting point. There is no reason to believe that a person can make $9 billion from the short-term trading of stocks except for the inconvenient fact that he has. But the Art Collector’s victories over the edge—maybe the victories of edge—are, for him, just numbers on a balance sheet. They are liquid. And so to convert them into a solid, he buys art. And not just art, but modern and contemporary artists at their peak. Perhaps he wishes that he could eat the paintings to capture their power, like cannibals used to do to their enemies. But a Warhol would be pretty expensive sushi. So he regards what he has bought. Does he hope then that others will understand the transformation he sees in front of him, of his wealth into this art, of his edge into this immortality? Or does he see only what he has never done, and could never do?

“I’ve been to the top of the mountain,” he once told Vanity Fair, “and there’s not much there.”

I think he was talking about being the best trader. But only he knows what emptiness he saw.

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