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  When Genius Failed is the possibly not so outdated story about what went wrong with LTCM.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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