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

This book authored by Roger Lowenstein, is a short biography and chronology of an infamous hedge fund.

Background

So before getting into the review of this excellent read we need to understand, what does hedge fund means?

Investopedia defines the term hedge funds as “An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns”.

For most of us (read naive to financial jargons), hedge funds would refer to something which creates volatility in the market and most of the times makes our well thought out investment decisions wrong.

One such hedge fund, which was a cause of envy for the fellow hedge fund managers till it was operative (for the kind of returns it generated) and created ripples in the markets, (as much as to force the Federal Reserve to arrange a bail-out so as to avoid a systemic crisis) was Long Term Capital Management commonly known as LTCM.

About author

Roger Lowenstein earlier authored the bestselling biography of Warren Buffet named Buffet: The Making of an American Capitalist. He was also a financial journalist for The Wall Street Journal and today a columnist for SmartMoney. Following this book, Roger also authored –

The book – When Genius Failed

LTCM is all about John Meriwether who was a successful trader at Salomon Brothers. He is also credited with establishing the best arbitrage desk at Salomon Brothers. He is even mentioned in Michael Lewis’ book Liar’s Poker, were he has been described as Salomon Brothers Uber-trader and master of Liar’s Poker. In 1991, following a scandal involving one of his trader he had to resign. This is when seeds of LTCM were sown.

Over the next two years, Meriwether convinced his earlier team comprising mainly of mathematicians and stasticians to join him in forming a new hedge fund. One of the biggest draw of the fund was that Nobel laureate Myron Scholes and Robert Merton became the partners in the fund. Over the 4 year period from 1993-1996, LTCM earned spectacular profits, sometimes in excess of 40%. By the spring of 1996, LTCM was holding $140 billion. The fund thrived on speculative trades in the name of arbitrage by using complex models earning small amount of profit on huge volume of trades.

However, following a few wrong bets placed and the strategy of LTCM to double its bets each time it went wrong, proved disastrous for the fund. Also as the world wide traders came to know that bets placed by LTCM had failed and it might have to liquidate, things worsened and the losses of LTCM increased. Fearing the probable systemic crisis, Federal Reserve System had to arrange for a bail-out. Buyers of distressed assets of LTCM however made profit later on.

Positives

What I like the most in the book is that the details of each of the above events have been captured in gripping detail by Lowenstein. Even after 13 years, you get an illusion of experiencing the events. Especially towards the end, when he captures the events of bail out of the fund, Lowenstein’s conversational but equally urgent tone carries it along well.

Negatives

I felt that the language of the book is not very lucid. Author assumes its readers to have a basic understanding of the financial concepts. You might have to put a little strain on the brain to completely comprehend the book.

Conclusion

To someone who is interested in how no one can keep on winning the trading game, this book is a good read. To someone willing to know about the inside story of how a great profitable financial entity can be rapidly built and how because of a fundamental mistake it can crash, this book is an even better read.

If you would like to read this book you can buy online from FlipKart.com. If you have read this book, share your review with other readers b y posting a comment below.

 

Author : Praveen Bajaj, MBA (SCMHRD)

 

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