November 21, 2007
What I've Been Reading
Posted by David Zaring

Of late, I've been focusing my reading on James Beard recipes for turkey, stuffing and creamed spinach.  But during the downtime, I've consumed Options, by Fake Steve Jobs, and When Genius Failed, the Fall of Long Term Capital Management, by Roger Lowenstein.  Perhaps you will want to do something similar during your own holiday portions of the upcoming break.

I'll save my comments on Options for the Prawfsblawg book club - but I will say that it's different than the blog, a plot-driven, character-developing story with metaphors, dream sequences, and an arc.  It's a fun read.  When Genius Failed is the possibly not so outdated story about what went wrong with LTCM.  It's engrossing, and it even is illuminating, given that it's really difficult to understand the model-drived strategies that caused the fund to collapse in the late 90s, embarrassing two of the Nobel-Prize winning economists who came on board early, and John Merriwether and the other quants who left Salomon to start the thing.  But what stood out to me was how un-pirate-like LTCM was.  They passed on tons of trades - too risky.  They had regularly scheduled risk analysis meetings, the principals came, and they  appeared to care about what went on.  Nothing new to hedge fund veterans, I guess, but I didn't know about the primary importance of the risk analysis confab.  Lowenstein clearly found the LTCM principals to be incredibly boring, golf-obssessed drones, rather than stone geniuses.  And when things started to go south for LCTM because the models were wrong, they kept going south because other Wall Streeters piled on against their positions, which had little to do with mathematical modeling at all.  Lessons learned?  Most of the people who ran the biggest hedge fund collapse of all time were back with new funds a couple of years later.

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Comments (5)

1. Posted by 2L on November 22, 2007 @ 10:34 | Permalink

Meriwether, still revered:

When Genius Failed is best couple with Inventing Money by Nicholas Dunbar. IM is a much lighter fare, but they do go well together.

2. Posted by David Zaring on November 23, 2007 @ 8:52 | Permalink

Great links. And maybe I'll check out the Dunbar.

3. Posted by Auto on November 25, 2007 @ 18:27 | Permalink

Lowenstein's most interesting point to explain LTCM's collapse was that it was aggressive in ensuring it paid rock-bottom fees to Wall Street.

Meaning that for all the trades LTCM was doing, no one at the banks and investments who supplied them with leverage was making much money off LTCM's business.

Meaning, further, that when LTCM faced a liquidity crisis, it was in large measure due to there not being anyone at, say, Goldman, who was earning seven-figure bonuses off LTCM's business and who would have had an interest in giving LTCM time for markets to return to normal or time to unwind its positions.

Instead, Wall Street forced LTCM to liquidate at firesale prices.

4. Posted by David Zaring on November 26, 2007 @ 12:14 | Permalink

True - Lowenstein did talk about how no one got rich off of LTCM. Which must be a big part of the "was it killed" story. So I buy it - but do you? Is it really possible that the fund made all those trades and no one got any fees? Maybe so.

5. Posted by 2L on May 4, 2008 @ 19:53 | Permalink

The more things change . . .
"[JWM Partners'] leading product, Relative Value Opportunity fund, fell by 31 per cent in the first quarter of the year."

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