Book Review: When Genius Failed ; the Rise and Fall of Long Term Capital Management

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Book Reviews of:
When Genius Failed; the rise and fall of Long-term Capital Management by Roger Lowenstein &
Monkey Business; swinging through the Wall Street jungle By John Rolfe and Peter Troob

When Genius Failed: The Rise and fall of Long-Term Capital Management by Roger Lowenstein

The book tells the story of long-term capital management. It is the detailed history of how a group of elite investors who called themselves the ‘LTCM’ (Long term capital management) contributed to the rise and fall of a hedge fund that brought the financial world to its knees when it lost $4 billion trading exotic derivatives. This short biography is in a nutshell about risk management, this is a gripping book of our era that tells the financial story of what happened to a group of intellectuals that believed that they could actually deconstruct risk and use virtually limitless leverage to create limitless wealth. The book describes the failure of Long term Capital management a hedge fund that was founded by John Meriwether. The infamous hedge fund that nearly collapsed the world's financial system, along with its many founders and advisors, including John Meriwether, David Mullins (former Vice Chairman of the Federal Reserve), Robert Merton and Myron Scholes (two esteemed academics in finance who won the Nobel price in economics in 1997).

John Meriwether was one of the top bond traders at Salomon Brothers and later became head of the fixed income securities department (Mortgage security and bond trading). But Meriwether, to use Michael Lewis' term, was a Big Swinging Dick, a Master of the Universe, an Uber-Trader. Meriwether was one of the first people on Wall Street to recruit mathematicians and physicists from schools and turn them into bond traders. Old instincts of market traders are been replaced by mathematical pricing models and the old Wall Street operators are replaced by academic financial theory, which provides a new framework that allows markets to function more efficiently. An example of this used in the book is the Black Scholes model for pricing stock options. The Black Scholes model has been accepted on a world level that E*Traders website quote the Black Scholes prices alongside the stock option prices. This emphasises the fact that modern trading is now entirely paperless and takes place in the cyberspace of computers and computer networks.

In Lowenstein’s book Chapter two is titled the ‘Hedge fund’ Lowenstein says that as far as securities are concerned there is no such thing as a hedge fund. ‘In practice the term refers to a limited partnership at least a small number of which have operated since the 1920’s’ The book shows how hedge funds allow freedom as they need not register with the Securities and exchange commission, and the hedge fund allows the contents of the portfolios to be kept hidden and allows the participants to borrow as much as hey choose. ‘In fat hedge funds are free to sample any or all of the more exotic species of investment flora, such as options, derivatives, short sales, extremely high leverage and so forth’ The book tells of how hedge funds operate with a select few, like ‘private clubs’ By law no more than ninety nine investors. The book gives a good insight into the history of hedge funds and a detailed overview of its characteristics. The book describes the reasoning behind the explosion of the number of hedge funds in the United States in 1990’s although no one knows the exact number. From the book my knowledge of a hedge fund is that a hedge fund is an investment fund for wealthy individuals or those that call themselves the ‘dollar millionaires’ and also for institutions like banks and pension funds. I also learnt that the number of investors in a hedge fund is limited as they are restricted in theory to only those who can afford the risks, which are associated with the hedge fund, unlike mutual funds, hedge funds are unregulated. The long-term capital management was a hedge...
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