When Genius Failed

“At Long-Term there was radio silence. Its markets were tumbling, especially the equity volatility trade. The latest quote was 41 percent! It almost didn’t matter now. The firm had come to a halt. Trading had ceased, the phones were finally quiet. There was no one to call; the people the partners had been talking to all these weeks were in the Fed room.”

When Genius Failed is a book written by Roger Lowenstein. First published in the year 2000, the book talks of the rise and fall of Long-Term Capital Management, a hedge fund set up in 1994. The book gives an account of how the fund in its short life of only four years, rose to become one of the most sought after investment destinations, to the extent that new investors were turned away, only to become a lynchpin which could have caused a catastrophe on Wall Street.

Long term capital management was a hedge fund which was set up by former executives of the now defunct Saloman Brothers. Under the leadership of John Meriwether, the former head the arbitrage department at Saloman Brothers, the fund hired future Nobel laurates such as Myron Scholes and Robert Merton to fuse theoretical knowledge of finance with practical application of the subject. The fund developed models which seemed to earn investors a near riskless annual return of 40% for the years before its crash, this high return was achieved using the strategy of leverage.

The Asian Financial Crisis of 1998 led to a reversal of fortunes for the fund. Positions which had been taken by the fund took a huge beating and the strategy of leverage employed by the fund only made things worse. In addition, news of various positions taken by the fund spread to other bankers and people which exacerbated the fall. Ultimately the fund was sold to the very bankers who had been treated with contempt by the partners during the earlier years of the fund.

Mr. Lowenstein gives a detailed account of the short life span of the fund, he tracks the fund from its inception to the time when it peaked and ultimately its down fall. The book gives an inside account of the day to day functioning of the fund and how the fund kept all of its trades hidden from the public eye.

A person with an interest in the field of finance would learn a lot from this book. The book gives an insight to people on the functioning of hedge funds and how theoretical finance and practical application of finance may not always go hand in hand.

Share Button