When Genius Failed

When Genius Failed: The Rise and Fall of Long Term Capital Management
By Roger Lowenstein
Published in October 2000
288 Pages
Thibault’s Score: 4/5

The title of this book misled me to believe that this book would be about the concept of long term capital management - instead, in this context, Long Term Capital Management (LTCM) was a hedge fund that existed from 1994 until its collapse in 1998.

LTCM’s strategy was to hedge bond bets - go both long and short at the same time. The firm’s founders, which included two nobel prize winning economists, had adopted a perverted version of Burton Malkiel’s Random Walk Down Wall Street strategy, which assumed that because markets were efficient, market events always occurred on a random distribution.

The fund was founded in 1994. Just four years later, they had accumulated billions of dollars worth of AUM. The firm attracted a team of self-important quants who looked down on non-mathematically inclined traders. Their abrasive ways would later come back to bite them.

After the Russian government defaulted on its sovereign debt, the late 1990s saw a global emerging markets financial collapse. This caused strange price fluctuations, and LTCM began losing money on both sides of its trades. Soon, LTCM found itself in bankruptcy proceedings.

LTCM had made many enemies during its four years of existence. As a result, nobody wanted to step in and bail them out. The Federal Reserve got involved. Rival bankers grudgingly united to cannibalize what remained of LTCM.

This is an amazing book. It is fun, interesting, and always captivating. I rarely read page turners like this, and strongly recommend it to anyone with an interest in finance.

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