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

Roger Lowenstein

When Genius Failed chronicles the highs and lows of Long Term Capital Management, an initially successful hedging firm that became the centre of one of the world’s largest financial collapses.

In 1993, headed by John Meriwether, a group of talented bond arbitrage traders joined forces with future Nobel Prize winning academics to form a Hedge Fund different from anything Wall Street had seen before. With water-tight mathematical models suggesting they had tamed the animal of risk and Wall-Street banks falling over each other to invest, the stage was set for dramatic events to unfold. Increasing enormously leveraged deals to previously unheard of levels, the traders had not anticipated every permutation in their calculations. Over a period of just five weeks, the firm's 100 billion dollar balance sheet collapsed, forcing the U.S. Federal Reserve to underwrite the losses to prevent a global disaster.

The book, more a novel than a practical tool, is perhaps a guide for how not to manage finances. Lowenstein looks in detail at the anatomy of the hedge fund, explaining how investors were drawn in through promises of sizable returns on their investments. Using a raft of different material including confidential internal memos and key insider interviews, the book provides a flow of didactic information to create an aura of high tension and drama. The statistics are truly awesome, as the book divulges, and it's perhaps easy to see why LTCM was initially so successful:
 

• At Its height, LTCM commanded more than $100 billion in assets
• Between 1994 and 1998, the fund showed a return on investment of more than 40% per annum
• LTCM had more than $1 trillion dollars of enormously leveraged arbitrage
• In one month, LTCM lost $1.9 billion

This book is aimed at a financial audience with knowledge to appreciate the ins and outs of hedge funds and financial trading. It is a tragedy set on the financial stage. Prepare for a fast-paced and deep analysis of an incredible tale of human folly or maybe just plain bad luck.

When Genius Failed tells a timeless story of human talent, investors' greed and the unpredictable world of financial trading. It should stand as both a tragic and a cautionary tale to investors, academics and traders alike about avoiding similar future losses.