Wednesday, February 20, 2008

Book Review: When Genius Failed


Quicky review on this one - The book is about a hedge fund called "Long Term Capital Management." This was a badass fund in the late 90s that did bond arbitrage untill the blew up spectacularly. They had Myron Scholes and Robert Merton (of Black-Scholes-Merton option model fame) on staff. They killed it for a very long time with 25%+ returns. They were over leveraged and the spread widenings in credit after the Russian default started a collapse of the fund. The Fed stepped in when danger to the entire financial system was predicted by LTCM and their counterparty banks. It was the Fed's influence that got all of Wall Stree to participate in a bailout for LTCM. They had billions in assets and TRILLIONS in outstanding derivative's notional.

Anywho, this book iscrazy. The money is nuts, and this type of thing still goes on. How do I know that? Because I worked at a hedge fund where the SAME EXACT THING HAPPENED. We had similar strategies, and less leverage, but Keynes's quote rang true:

"Markets can remain irrational longer than you can remain solvent."

Anywho, the book is a great read even for those outside of the industry. There is not complex jargon and it gives a good insight into the fund and the minds of some of the traders. The books makes some points about the Fed's and the Wall Street bank's irresponsibility to finance and allow hedge funds to run unregulated. I found the big difference between my old employer situation and LTCM was the market was able to absorb the vol and our losses much more easily and without the Fed's influence. My fund was a much nicer place, but we got nailed on a credit crunch with similar strategies.

No comments: