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

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With the credit crisis of 2008, JWM Partners LLC was hit with a 44% loss from September 2007 to February 2009 in its Relative Value Opportunity II fund. Deciding how much higher is the heart of bond trading, but the point is that bonds trade on a mathematical spread. It is said that they simultaneously held almost 60-70 different kind of trades spread across assets and geographies, to safeguard their portfolio from any catastrophic event. When Genius Failed recounts the story of Long-Term Capital Management (LTCM, a hedge fund founded in 1994 by a group of prominent Wall Street financiers and Nobel Prize-winning economists.

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. As of 2014, there have been four editions in English, five editions in Japanese, one edition in Russian and one edition in Chinese. Investing is more of an art where once the basic financial numbers are obtained; rest is dependent upon the investor’s subjective judgment and common sense.And history has proven that banks raced to join funds like this because they simply didn't fully understand the risks. According to LTCM’s models, the probability of losing everything in a single year was only one in a septillion (or ten to the power of 24). They are as intricate and immutable as the rules of a great religion, and it is no wonder that Meriwether, who kept rosary beads and prayer cards in his briefcase, found them satisfying. If you have some money set aside, and you are thinking about investing in a hedge fund – or even if you have a lot of money set aside, and you are thinking about investing in a hedge fund of funds – “When Genius Failed” may help you separate the facts from the fiction better than any other theoretical work.

Though a city landmark building constructed in 1924, the bank is a muted, almost unseen presence among its lively, entrepreneurial neighbors. When losses mount, leveraged investors such as Long-Term are forced to sell, lest their losses overwhelm them. Born in 1954 to famous lawyer Louis Lowenstein, Roger graduated from Cornell University and then spend more than ten years writing for “The Wall Street Journal.billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financial crisis and 1998 Russian financial crisis. 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). Ultimately, the Federal Reserve had to intervene to prevent a full-blown global financial crisis from occurring. The firm’s capital account used to be scribbled in a little book, left outside the office of a partner named Allan Fine, and each afternoon the partners would nervously tiptoe over to Fine’s to see how much they had lost. humbly warned, however, "It's a wrong perception to believe that you can eliminate risk just because you can measure it.

LTCM was founded in 1993 by a group of trading and intellectual “geniuses” that included Nobel Prize-winning economists, such as Scholes and Merton, as well as successful bond arbitrageur John Meriwether. The bulk of the money raised, in late 1993, came from companies and individuals connected to the financial industry. If Long-Term defaulted, all of the banks in the room would be left holding one side of a contract for which the other side no longer existed.Armed with the cachet of its founders' stellar credentials (Robert Merton and Myron Scholes, 1997 Nobel Prize laureates in economics, were among the partners), it quickly parlayed expertise at reading computer models of financial markets and seemingly limitless access to financing into stunning results. The story of Long-Term Capital Management's fall from grace shows how quickly markets can change, and how important it is to be prepared for these changes. It was still a small firm, but it was in the center of great changes that were convulsing bond markets everywhere. When the crisis broke in the summer of 1997, LTCM noticed a slight drop in profits, but that still didn't stop them.