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A review by rossbm
When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein
4.0
(read hardcopy)
What's it about?
Long-Term Capital Management (LTCM) was a hedge fund that failed spectacularly in the late 90's following the Russian currency crisis. They were overleveraged, and all their investments started to go south at the same time. LTCM's failure threatened the whole financial system. Ultimately they were bailed out by a consortium of private banks with the blessing of the Federal Reserve. Just a few months prior, LTCM's partners had returned most of their outside investors' money, due to a lack of opportunities. Yet LTCM had continued to make the same bets or even riskier ones, just with more leverage. LTCM had claimed that their mathematical models ensured that they could never lose more than a certain amount ($34 million?) in a single day. Yet LTCM had days in late August/early September 1998, where they lost more than $150 million. LTCM thought that losing that amount in a single day could only happen once in a 100 years. Yet they had several days like that. They were confident in their models, bet big, and lost.
LTCM had reason to be confident. Prior to 1998, the hedge fund had done remarkably well. A dollar invested less than 5 years before, at LTCM's inception in March 1994, would have been worth over $4 in April 1998. They were the epitome of "quant" fund. Two Nobel Laureates were partners (or just associated?). LTCM made money off of arbitrage, where they spotted very similar assets with prices that differed by more than made mathematical sense. They would then bet that the price would converge (i.e. come closer together).
LTCM made a lot of these bets. They thought that this was a very safe way to make money because they weren't putting all their eggs in one basket. Instead, they thought they were self-insuring - "all of these bets are uncorrelated"
What's it about?
Long-Term Capital Management (LTCM) was a hedge fund that failed spectacularly in the late 90's following the Russian currency crisis. They were overleveraged, and all their investments started to go south at the same time. LTCM's failure threatened the whole financial system. Ultimately they were bailed out by a consortium of private banks with the blessing of the Federal Reserve. Just a few months prior, LTCM's partners had returned most of their outside investors' money, due to a lack of opportunities. Yet LTCM had continued to make the same bets or even riskier ones, just with more leverage. LTCM had claimed that their mathematical models ensured that they could never lose more than a certain amount ($34 million?) in a single day. Yet LTCM had days in late August/early September 1998, where they lost more than $150 million. LTCM thought that losing that amount in a single day could only happen once in a 100 years. Yet they had several days like that. They were confident in their models, bet big, and lost.
LTCM had reason to be confident. Prior to 1998, the hedge fund had done remarkably well. A dollar invested less than 5 years before, at LTCM's inception in March 1994, would have been worth over $4 in April 1998. They were the epitome of "quant" fund. Two Nobel Laureates were partners (or just associated?). LTCM made money off of arbitrage, where they spotted very similar assets with prices that differed by more than made mathematical sense. They would then bet that the price would converge (i.e. come closer together).
LTCM made a lot of these bets. They thought that this was a very safe way to make money because they weren't putting all their eggs in one basket. Instead, they thought they were self-insuring - "all of these bets are uncorrelated"