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

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million: Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P.Morgan, Morgan Stanley, Salomon Smith Barney, UBS

At that time, the size of LTCM was 2.5 times larger than the second largest mutual fund in the world and 4 times larger than the rival hedge fund right behind it. They also control more assets than investment banks like Lehman Brothers or Morgan Stanley. LTCM attempted to create a splinter fund in 1996 called LTCM-X that would invest in even higher risk trades and focus on Latin American markets. LTCM turned to UBS to invest in and write the warrant for this new spin-off company. [20] Do you know the story of Icarus? He was given a pair of wings that allowed him to fly, and he took full advantage. Unfortunately for him, he got a little carried away. Despite warnings not to, he proceeded to fly as high as he could, so high that the sun started to melt the wax that held his wings together. Within seconds, his wings fell apart and he plunged to his death. Theoretically, the odds against a loss such as August’s 1998 had been prohibitive. Such a debacle was, according to the mathematicians, an event so freakish as to be unlikely to occur even once over the entire life of the universe. But it still happened. One dollar invested in 1993 was at the peak in early 1998 worth 4 (quadrupled). Quite an astonishing performance. However, all this performance was due to leverage. According to the author, the return without gearing was a tiny annual 2.45% from 1993 until the end of 1995.

Siconolfi, Michael; Pacelle, Mitchell; Raghavan, Anita (1998-11-16). "All Bets Are Off: How the Salesmanship And Brainpower Failed At Long-Term Capital". The Wall Street Journal.

Greenspan, Alan (2007). The Age of Turbulence: Adventures in a New World. The Penguin Press. pp. 193–195. ISBN 978-1-59420-131-8. Because LTCM was not the only fund pursuing such a strategy, and because the proprietary trading desks of the banks also held some similar trades, the divergence from fair value was made worse as these other positions were also liquidated. As rumours of LTCM's difficulties spread, some market participants positioned in anticipation of a forced liquidation. Victor Haghani, a partner at LTCM, said about this time "it was as if there was someone out there with our exact portfolio,... only it was three times as large as ours, and they were liquidating all at once." Scholes and Merton had devised a formula – colloquially known as the Midas formula – which should have essentially eliminated risk from trading.LTCM is a hedge fund or hedge fund founded in 1994 by bond trader John Meriwether. Hedge funds hold a huge amount of money from the richest group of investors. Contrary to its cousin mutual fund, which is a fund that raises funds from a wide range of investors, hedge funds are low in popularity and are not overly regulated, meaning there are no limits on the size of the fund. size of the fund as well as the place of investment.

But the bankers felt that Long-Term had already caused them more than enough trouble. Long-Term's secretive, close-knit mathematicians had treated everyone else on Wall Street with utter disdain. Merrill Lynch, the firm that had brought Long-Term Roger Lowenstein, the bestselling author of Buffett, captures Long-Term’s roller-coaster ride in gripping detail. Drawing on confidential internal memos and interviews with dozens of key players, Lowenstein crafts a story that reads like a first-rate thriller from beginning to end. He explains not just how the fund made and lost its money, but what it was about the personalities of Long-Term’s partners, the arrogance of their mathematical certainties, and the late-nineties culture of Wall Street that made it all possible. When Genius Failed shows us the importance of understanding the full scope of a situation before taking risks."One of the trading lessons learned: long-term thinking is a luxury not always available to the highly leveraged; they may not survive that long. When Russia defaulted, LTCM was suddenly in almost unchartered territory.