When Genius Failed: The Rise and Fall of Long Term Capital Management

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Long Term Capital Management was a hedge fund made up of a group of former hotshot bond traders from Solomon Bros., together with some high powered financial academics (including two Nobel prize winners), and one former central banker. They were the biggest stars in the business, and they had all the arrogance and greed that you could possibly imagine. They also seemed to be as good as they thought themselves. In five years, they turned a billion dollars into 4.5 billion dollars. Then they lost it all in just a few months and came close to bringing down the financial sector in the process. O'Rourke, Breffni (1997-09-09). "Eastern Europe: Could Asia's Financial Crisis Strike Europe?". RadioFreeEurope/RadioLiberty . Retrieved 2015-08-22. Apparently, just like Midas’ touch, the Midas formula had one essential flaw: it couldn’t take into consideration the extent of the irrationality of the market and its speed (calculations were sometimes out-of-date few moments before they were even made).

Many people believe that there is a gap between the knowledge and opinions of high-minded academics and the conditions of the “real world.” John Meriwether to shut hedge fund - Bloomberg". Reuters. July 8, 2009 . Retrieved 11 January 2018. Jacque, Laurent L. (2010). Global Derivative Debacles: From Theory to Malpractice. Singapore: World Scientific. ISBN 978-981-283-770-7. . Chapter 15: Long-Term Capital Management, pp.245–273 As the English essayist G. K. Chesterton wrote, life is "a trap for logicians" because it is almost reasonable but not quite; it is usually sensible but occasionally otherwise: "It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait”However, improbable things happen all the time, and it was certainly difficult for Meriwether to predict that in 1991, a scandal (which he had little or nothing to do about) would force him out of Salomon Brothers. Which immediately calls to mind Nassim Nicholas Taleb and his ideas and contemplations about things such as randomness, fragility, and risk calculation. The account of the LTCM debacle is a vivid illustration of how hubris can lead to disaster in finance."

of 5 stars 2 of 5 stars 3 of 5 stars 4 of 5 stars 5 of 5 stars When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein The models that the academics and experts at LTCM developed were centered around the axiom that, if disrupted, markets will always revert to their natural position. The book received numerous accolades, including being chosen by BusinessWeek as among the best business books of 2000. [3] Overview [ edit ] Many banks and investors began to look for ways to control and rescue LTCM. They fear that once LTCM loses control, all the money LTCM earns will be in jeopardy. But over time, their position only worsened, they had no other choice. John Meriwether headed Salomon Brothers' bond arbitrage desk until he resigned in 1991 amid a trading scandal. [6] According to Chi-fu Huang, later a Principal at LTCM, the bond arbitrage group was responsible for 80–100% of Salomon's global total earnings from the late 1980s until the early 1990s. [7]Do you know the story of Icarus? He was given a pair of wings that allowed him to fly, and he took full advantage. Unfortunately for him, he got a little carried away. Despite warnings not to, he proceeded to fly as high as he could, so high that the sun started to melt the wax that held his wings together. Within seconds, his wings fell apart and he plunged to his death.

problems. The fund had entered into thousands of derivative contracts, which had endlessly intertwined it with every bank on Wall Street. These contracts, essentially side bets on market prices, covered an astronomical In “ When Genius Failed ,” Roger Lowenstein draws on numerous interviews and discussions with everyone involved in the story to see what went wrong – after going so right so long. Who Should Read “When Genius Failed”? And Why? The fat tails in the financial markets happen a lot more than the normal distribution suggests. LTCM had forgotten that traders and investors are not rational, but people moved by greed and fear, capable of extreme behavior and swings of mood so often observed in crowds.Just for comparison, what this means in real-world terms: during the mid-1990s, LTCM was twice bigger than the second largest mutual fund in the world , and a staggering four times as large as its closest hedge fund rival! Though strategies used & operations of a hedge fund are quite secretive, still they are successful in using quants to make money in different market conditions. What’s your say on quant models, need your guidance. At its high point in 1998, it had USD 4.6 billion in partner’s equity. However, its total asset size was much larger than USD 4.6 billion. LTCM used to get heavily leveraged directly by using the credit lines extended by almost all the Wall Street institutions and indirectly by taking exposure in derivatives including credit default swaps (CDS). As expected, the initial success of LTCM dwarfed its competitors: it had annualized return of 21% in the first year of its existence, 43% in the second, and 41% in the third. did not want to use their diminishing capital to help a competitor. Sanford I. Weill, chairman of Travelers/Salomon Smith Barney, had suffered big losses, too. Weill was worried that the losses would jeopardize his company's

Siconolfi, Michael; Pacelle, Mitchell; Raghavan, Anita (1998-11-16). "All Bets Are Off: How the Salesmanship And Brainpower Failed At Long-Term Capital". The Wall Street Journal. Leading scholar in finance; Ph.D., Massachusetts Institute of Technology; Professor at Harvard University When Genius Failed. 2011. p.55. While J.M. presided over the firm and Rosenfeld ran it from day to day, Haghani and the slightly senior Hilibrand had the most influence on trading. However, LTCM believes that it will make a difference. Their plan is to apply expert knowledge and academic theories to the real world.thoughts on “ “When Genius Failed”: 9 timeless lessons from LTCM, the biggest investing failure in history!” These problems started with the Asian financial crisis in 1997, when Thailand, Indonesia, and South Korea suddenly dropped prices. This raises a question for LTCM as to whether they should set limits on the regions and products in which they can safely invest. The successful plan, the subsequent default and disintegration of LTCM did not harm the market as a whole. However, in the process of bailing out LTCM, they created many favorable conditions for the tycoons of LTCM. Founded in 1994 by John W. Meriwether, Long-Term Capital Management (LTCM) described itself as “the financial technology company.” One of my favorite books, Fooled by Randomness, covers exactly what went wrong with LTCM: you have to prepare for freak behavior in the markets.