Book Description
Inside markets, innovation, and risk
Why do markets keep crashing and why are financial crises greater than ever before? As the risk manager to some of the leading firms on Wall Street–from Morgan Stanley to Salomon and Citigroup–and a member of some of the world’s largest hedge funds, from Moore Capital to Ziff Brothers and FrontPoint Partners, Rick Bookstaber has seen the ghost inside the machine and vividly shows us a world that is even riskier than we think. The very things done to make markets safer, have, in fact, created a world that is far more dangerous. From the 1987 crash to Citigroup closing the Salomon Arb unit, from staggering losses at UBS to the demise of Long-Term Capital Management, Bookstaber gives readers a front row seat to the management decisions made by some of the most powerful financial figures in the world that led to catastrophe, and describes the impact of his own activities on markets and market crashes. Much of the innovation of the last 30 years has wreaked havoc on the markets and cost trillions of dollars. A Demon of Our Own Design tells the story of man’s attempt to manage market risk and what it has wrought. In the process of showing what we have done, Bookstaber shines a light on what the future holds for a world where capital and power have moved from Wall Street institutions to elite and highly leveraged hedge funds.
Customer Reviews:
Spectacular info... but ah what to do, what to do.......2007-09-22
This book is very well layed out and is an excellent primer on what is going on behind the scenes in the financial markets.
The end is a bit disappointing in that the issues are clearly explicated but the solution seems a bit murky and maybe impossible. The author does acknowledge the difficulty of implementing a truly workable solution.
Great risk insights, and lots of useful reminders on liquidity mechanics .......2007-09-21
A finance-related book like this one is always something I open with a fear of "deja vu". To Bookstaber's credit, his numerous insights quickly got me over this. It is a constant reminder to risk practitioners and traders that liquidity supply is a serious matter. It does indeed move mountains. For new comers into risk management and trading, it explains the sources of the LTCM debacle, and its learnings. By all standards, I recommend this book to any finance graduate, experienced trader, or risk manager. A very useful read.
The Wisdom of the Cockroach.......2007-09-14
In recounting his time as risk manager at a number of prominent houses (Morgan Stanley, Salomon Brothers, Citigroup etc.), Bookstaber completes the i-banking trifecta. First there was the Michael Lewis classic, Liar's Poker, detailing the juvenile bravado and macho antics of the trading floor. Then Jonathan Knee gave an intimate portrait of the i-banker deal making culture with The Accidental Investment Banker.
And now, in A Demon of Our Own Design, we get a glimpse at the risk management side of things... a sort of master plumber's walking tour through the bowels of the system, with technical descriptions of exactly what happens when pipes burst and boilers explode. (Some will find Bookstabers' level of detail intolerably dull; others will find it quite fascinating. I was in the fascinated camp.)
Nature of the beast
In describing the finer points of risk arbitrage, Bookstaber explains why it's normal -- expected even -- for trading desks to take a good whack every so often. The nature of the beast is to make relatively steady profits, month in and month out, and then give back a chunk of those profits when something goes haywire. (That's how you move huge sums on an arb desk; grind out small bets that are almost guaranteed to work, juice up the returns with leverage, and try not to be in the vicinity when the rare position goes kablooey.)
In light of this general modus operandi, perhaps it isn't surprising that the "quant" funds recently took a major hit (as of September 2007). They had been minting money for an extraordinarily long period, had the leverage to show for it, and now, after the recent "oops," seem to be generally back in business.
In fact it appears natural for much of Wall Street to work in this "make a little, lose a lot" fashion... the key idea being that all the little updrafts make up for the once-in-a-blue-moon downdrafts. (Such calculus works better for the fee collectors than the fee payers, but that's a different kettle of fish.)
Bookstaber's detail-rich description of the various trades that investment houses put on, many of them lasting years, is also enlightening. The details seem to confirm that, by and large, Wall Street is a gigantic, slow moving, conventional-returns type machine. (And what else could it be, really, with such an ocean of capital to allocate and so many jobs to fill? There is only so much creativity and contrarianism to go round.)
A dangerous combination
Risk manager war stories aside, Bookstaber's goal is to hammer home a key philosophical point regarding risk. He wants readers to understand that financial markets are inherently unstable, and this reality places limits on how far we (or anyone) should go in pursuit of outsized returns.
To make his point, Bookstaber uses various analogies to describe how the market is a highly complex, tightly coupled system... and to explain why the combination of high complexity and tight coupling is particularly dangerous.
The counterexample Bookstaber gives of a highly complex, loosely coupled system is the US Postal Service. The USPS has countless potential points of failure and myriad moving parts, but there are no catastrophic linkages involved. A lost package does not set off a disastrous daisy chain of events in which millions of packages are lost.
In contrast, the classic example of a highly complex, tightly coupled system is a nuclear reactor. The reactor is tightly coupled because any point of failure can lead to a knock-on chain reaction; one small thing going wrong can set the entire mechanism on a path to disaster. Being a highly complex, tightly coupled system, the market is less like the postal service and more like the nuclear reactor, in that the combination of aggressive leverage, complex methodologies and heavily interlocking parts leads to significant potential for catastrophe.
Exquisitely adapted
Another serious problem is Wall Street's deeply ingrained tendency to push the envelope. (Richard Lowenstein put it exceptionally well in his book Origins of the Crash: "Finance has its own Peter Principle, by which a successful model will be adapted to progressively riskier causes until it fails.")
In this habit of fighting for every inch of profit, Wall Street is like a self-evolving animal overquick to embrace the particulars of its immediate environment. The more precisely an animal is attuned to a particular "fitness landscape," the better that animal can thrive... in the short term at least, as long as everything stays just so. To be exquisitely adapted (as opposed to robustly adapted) is to be vulnerable to the slightest change.
Thus when the fitness landscape DOES change -- as it inevitably will -- the heavily specialized competitors tend to get crushed (if not go extinct). If a strategy-gone-sour broadsides a large enough group of market participants, the entire financial ecosystem can be thrown into turmoil. When the turmoil from this upheaval spills into the broader economy, wreaking havoc in its wake, the "demon" spoken of in the book's title is unleashed. (As this reviewer interprets it anyway.)
Wisdom of the cockroach
So the problem, in sum, is Wall Street's tendency to `overadapt' to every appealing landscape it encounters, building up complexity and leverage to dangerous levels in doing so.
Bookstaber's suggestion is to heed the wisdom of the cockroach.
The cockroach has survived a longer time span, and a wider variety of harsh environments, than humans could ever match. It is one of the creatures man cannot wipe out no matter how hard he tries. And yet, the cockroach's key risk management strategy is embarrassingly simple... simpler, even, than putting in a stop loss. The deeper point is that simple equals robust; by refusing to get fancy, and sticking with the tried-and-true, the cockroach ensures its reign as champion survivor.
Bookstaber uses the cockroach (and other examples from nature) to argue that we, too, should consider cutting back on our excessively specialized ways. The cost of a rough-edged strategy is forgoing excess profits in accomodative environments... but the benefit is increased likelihood of survival in a much wider range of environments, including the truly harsh ones. (As Jim Grant likes to joke, if so many of these credit-driven vehicles can barely handle prosperity, how are they supposed to fare when adversity hits?)
Harrumphs all round
Bookstaber's finger-wagging solution (be less fancy; take less risk) has the ring of common sense to it, especially in the way it frustrates all those market participants determined to have their cake and eat it too.
For those who seek to wring every last nickel out of the market (as LTCM used to brag of doing), Bookstaber argues persuasively that flying too close to the sun will always be perilous. The commitment to leveraging every edge on a broad scale inevitably leads to disaster-prone configurations, no matter how smart the players.
For those who think the answer is greater regulation of markets, i.e. more rules, Bookstaber shows how extra layers of bureaucracy can actually bring about the exact opposite of the intended affect. Perversely, layers of red tape can (and often do) make a situation more risky, by increasing confusion and complacency simultaneously.
Nor is greater information disclosure the answer. If the market's traditional liquidity providers (traders, market makers, speculators etc.) are forced to disclose their positions to the world in real time, they will react in the manner of poker players forced to play their hands face-up. To the extent that disclosure resolves uncertainty, it also drives market participants from the game. And because "liquidity is a coward" as the old saying goes, always running away when you need it most, strict disclosure rules would likely make bad market conditions worse at the least opportune times.
Some left smiling
Two groups in particular may be left smiling at the end of this book -- value investors and trend followers. In both the theory and practice of their normal operations, value investors and trend followers intuitively embraced Bookstaber's message a long long time ago, favoring longevity and robusticity over the temptations of adjusting to the moment.
It is perhaps not surprising, then, that value investors and trend followers are arguably the most profitable market participants by far on an absolute-dollar basis, hauling in hundreds of billions in profit over the course of many decades. They are champion survivors too... with a touch more class than the cockroach.
A MUST READ for all financial markets professionals.......2007-09-13
This is an excellent book. I cannot say enough good things about it. Unquestionably one of the best books on financial markets of the hundreds that I have read. This book provides a ringside view of how the major banks and hedge funds work and why financial risks have become more magnified than before.
Derivatives, trading and hedge funds are here to stay. They perform a valuable service to the financial markets, though Warren Buffet will disagree with me. Nevertheless, it is the mis-use of derivatives and the excessive use of leverage that leads to financial disasters. This book provides an excellent insight into why we witness financial turmoil in some of the most liquid markets.
I strongly recommend it to all MBA finance students as well as to financial markets professionals at hedge funds, prop trading desks, risk managers, quants, bankers, pension fund managers.
Demon.......2007-09-12
I found this book very interesting and full of information I haven't seen elsewhere. A Wall Street "quant" insider's perspective, focused on what can and does go wrong. The author also ties his analysis of famous Wall Street tailspins to other notable failures, including Chernobyl and the Challenger, and finds common themes.
Book Description
The tools and techniques needed to successfully launch and maintain a hedge fund
In The Fundamentals of Hedge Fund Management, both budding and established hedge fund managers will learn the fundamentals of building and maintaining a successful hedge fund business. Strachman presents the facts in an accessible and easy-to-use format that will empower readers to create a lasting fund that provides significant income for years to come. The Fundamentals of Hedge Fund Management provides information on everything from picking a lawyer to creating a fund's documents to determining what markets attract investors. Readers will glean valuable information from real-life experiences (both negative and positive) that have shaped and continue to guide many of today's leading and most respected funds.
Customer Reviews:
NY Hedge Fund.......2007-10-01
This book is fantastic for anyone thinking about launching a hedge fund. It provides a comprehensive blueprint of the formation and launch process; if you read it before meeting with service providers the process will be easier and you'll have a clearer understanding about where everyone fits into the larger picture.
What is more, DAS's comments on capital raising are spot on and should be read (multiple times) by every aspiring hedge fund manager so as to avoid being romanced by the "whiskey talk" of every prime broker's cap into team -- who will INcorrectly tell you that all you need is performance...hmmm, don't think so.
Incredible read. Succint and Informative.......2007-09-26
Dan Strachman has written THE blueprint for getting started in hedge funds. The guy who gave it one star doesn't know what he's missing. No one can TEACH running money. But if you know how, and you have drive, this book will lay the groundwork for getting started. Specifically, back office operations and how to garner assets are explained in detail, but not to the point where it bores the reader. Mr. Strachman specifically tells the readers that this is NOT a book on how to manage money. Or a book on strategy. He does however, give a look into the psyche of the people you want to grab for assets. Who they are, and more importantly, how they think. Once again, excellent read! Hats off. Two thumbs up, etc.
GREAT OVERVIEW.......2007-09-08
This book provides for an excellent overview of hedge fund industry. Does not cover specifics, but provides great list of sources where to find certain information.
Excellent Primer for Starting a Fund........2007-08-27
Daniel Strachman takes a difficult subject and makes it accessible. It is very clear his writing stems from real world experience and is not just an exercise in academics. If you want to have a fundamental understanding of the business side of the hedge fund industry, this is an excellent place to start. The asking price of the book is far offset by the value gained in the insights that Strachman shares. I believe Mr. Strachman's advice has helped to save me from some serious mistakes that would have doomed my fund.
What a waste of money.......2007-08-23
Save your money and get a better book on how to start up a business. This book is NOT about Hedge Funds in any depth. It is about the basics in starting a business. WOW, he should write a book on marketing. He got me to pay $57.00 for a "basic" how to start a business book!
Book Description
In Asymmetric Returns, financial expert Alexander Ineichen elevates the critical discussion about alpha versus beta and absolute returns versus relative returns. He argues that controlling downside volatility is a key element in asset management if sustainable positive compounding of capital and financial survival are major objectives. Achieving sustainable positive absolute returns are the result of taking and managing risk wisely, that is, an active risk management process where risk is defined in absolute terms and changes in the market place are accounted for. The result of an active risk management process-when successful-is an asymmetric return profile, that is, more and higher returns on the upside and fewer and lower returns on the downside. Ineichen claims that achieving Asymmetric Returns is the future of active asset management.
Alexander M. Ineichen, CFA, CAIA, is Managing Director and Senior Investment Officer for the Alternative Investment Solutions team, a key provider within Alternative and Quantitative Investments, itself a business within UBS Global Asset Management. He is also on the Board of Directors of the Chartered Alternative Investment Analyst Association (CAIAA). Ineichen is the author of the two UBS research publications In Search of Alpha—Investing in Hedge Funds (October 2000) and The Search for Alpha Continues—Do Fund of Hedge Funds Add Value? (September 2001). As of 2006 these two reports were the most often printed research papers in the documented history of UBS. He is also author of the widely popular Absolute Returns—The Risk and Opportunities of Hedge Fund Investing, also published by John Wiley & Sons.
Customer Reviews:
Disappointing.......2007-09-13
Alexander M. Ineichen has written some excellent research on hedge funds. His pioneering work titled "In Search of Alpha" was brilliant.
However, this book does not match up to his previous work and honestly I was disappointed.
Lack Depth.......2007-05-31
I was impressed with Ineichen's knowledge and writing skills in his first book, Absolute Returns. I had read many hedge fund books but Absolute Returns was clearly the most entertaining to read and one could learn tremendously from it.
Ineichen's charm and witty humour could be found in this book as well, and it made reading a technical book a breeze. Ineichen had convinced me that the success of investment management is to manage the portfolio risk actively. However, very little is written on how active risk management can be achieved. I was disappointed on this note.
Moreover, many parts of this book are repeated from the first book.
While I bought both his books, I think I will only keep his first.
The Boiling Frog Syndrome.......2007-02-23
Educational books on hedge funds have become a cottage industry, but this one is exceptional. Ineichen, the head of hedge fund investing at UBS, is intimate with both the practice and the analytical issues. Hedge funds became serious competition for traditional money managers in 2000, when the stock market bubble ended. Because stock portfolios plummeted, people looked for alternatives: investments that don't go down with the market, but do go up with it. This desired asymmetry is the subject (and title) of the book.
Ineichen argues that conventional buy-and-hold strategies do not meet investor needs and hedge fund-type strategies are superior. The latter are more flexible, can bet on prices going down, not just up, and use derivatives and novel tactics to profit from all matter of market variations. This perspective goes against the received wisdom one finds in the media, where derivatives and unconventional tactics spell danger. The book shows why such instruments have become so popular; they allow people to make money in ways not possible before.
A dramatic metaphor expresses a central theme of the book. If one misses the significance of changes, one may end up in the same situation as a boiling frog--the unfortunate creature stays in comfortably warming water, oblivious as the temperature gradually builds up. The frog does not recognize it is about to boil, because it has never boiled before. Similarly, investors may think it's business as usual until a market collapses from under them.
But hedge funds themselves are subject to catastrophic collapse, a recent example being the failure of Amaranth hedge fund in September 2006 from bad bets on natural gas. Mr. Ineichen calls it idiosyncratic risk--it can be eliminated by diversifying one's portfolio of hedge funds, or investing in a fund of funds.
Because it carries this idiosyncratic risk, a hedge fund is like a single stock, not a mutual fund. United States law allows everybody to buy single stocks, but only people who meet certain wealth or income criteria can buy shares in a hedge fund. Until recently, investors with less wealth had limited choice: they could buy single stocks -like Enron, with the same risk as a specialized hedge fund - or they could invest in mutual funds that make bets in a single direction.
But in recent years, hybrids have become available. These have the legal structure of mutual funds but use hedge fund-type strategies. That may help some U.S. investors avoid the boiling frog syndrome.
As for hedge funds, they're grown massively and are now moving toward $1.5 trillion in assets. Ineichen argues that there's no bubble in this fast-growing area, although there are red flags such as a lot of rookies coming to the party. If you're going to read one book about hedge funds today, this is the one.
Enlightening and entertaining.......2007-02-16
Even if you are interested in the subject, most finance books are dry and boring. This book is not one of them. I find this book informative, at times thought provoking, and very entertaining. As with the author's other book "absolute returns", the author managed to weave together tons of data into a coherent framework, shedding much light on an otherwise opaque industry. The focus is not so much on theory but on the practical realities of the active fund management industry. While there are many books about hedge funds, many are long on theory but short on practice. This book is a synthesis of both theoretical and practical elements that I find missing in other books.
Although certain section of the book would be shorter, I find the book essential reading for understanding the seismic shifts that are taking place in an increasingly important industry that is at the forefront of the financial innovations.
A Very Important Book.......2007-02-05
In response to the first review of this book, I found Ineichen's digressions and colorful metaphors to be quite entertaining - a welcome break from a complex storyline. For me, they didn't obfuscate his thesis at all. I found it to be a very accessible book. But maybe I'm just too into this topic...
In any case, when I cracked open "Asymmetric Returns" I expected it to be a highly focused, quantitative analysis of a somewhat esoteric financial topic. But I was surprised to see how much he managed to cram into the book. He uses the notion of asymmetric returns as a sort of "unifying theory" for various seemingly disparate issues in asset management today: from the growth of hedge funds to performance fees, hedge fund "replication", market efficiency, "alternative beta" and even the organizational structure of asset managers.
Ineichen argues that we are entering a period if "financial enlightenment" when traditions as time-honored as strategic asset allocation will be questioned. Even if you don't believe this, I think you will find this to be a thought provoking book. Based on my experience in the asset management industry, I suspect it will be the first of many similar books in the coming years.
[...]
Book Description
With about $450 billion in assets, funds of hedge funds are the most recent darling of investors. While hedge funds carry high risk for the promise of high returns they are designed for the very rich and for large institutional investors such as pension funds. A Fund of Hedge Funds (FOF) spreads investments among a number of hedge funds to reduce risk and provide diversification, while maintaining the potential for higher than average returns. Odds are that some pension fund of yours is invested heavily in these products, and more recently these FOFs have been opened to more and more individual investors in offshore jurisdictions with lower minimum entry levels. Since this is a new and extremely fast-moving financial phenomenon, academic research has just begun in earnest, and this is the first book to present rigorous academic research by some of the leading lights in academic finance, carefully analyzing the broad array of issues involved in FOFs.
* With over $450 billion in assets, hedge funds of funds are the darling of investors
* First book to present rigorous academic research about funds of funds
* Leading lights in academic finance from around the world analyze the broad array of issues involved in funds of funds
Customer Reviews:
Stunning book. Excellent reference for Funds of Hedge Funds.......2006-09-11
The book is split into four parts: the first finds out the distinctiveness of performance for funds of hedge funds (alpha, persistence, factor decomposition, portfolio optimization). The second part deals with diversification, selection, allocation and hedge fund indices where correlations effects are analysed among different managing styles. Thirdly, some essays are devoted to construction, and statistical properties of funds of hedge funds, such as distributional characteristics, and higher-moment performance characteristics. Finally, the volume investigates specific items such as monitoring risk, due diligence and special classes of funds of funds, where one of the main problems is to implement quantitative methodologies to select the hedge funds. The book is a must-read for those who are looking for an edge in applying the more sophisticated approaches that have recently been developed in the hedge funds industry.
Giampaolo Gabbi, University of Siena and SDA Bocconi, Italy
One of the few but certainly the best.......2006-09-08
Hedging has always tempted the investors and the boom of hedge funds on the market has cought us the academic world unprepared just like the era of Tatcher and Reagan that has created tatcharism and reaganomics. This study is one of the few in this sphere but certainly one of the best for giving knowledge in the area of hedge funds and funds of hedge funds. This can be a excellent handbook for lots of emerging market economies, where people has suffered from lots of financial robberies - first by the communist party and then by their pyramidal creations.
- Dr. Georgi Smatrakalev, Florida Atlantic Univeristy, USA
Book Description
A self-study course that reviews the technical and quantitative knowledge necessary to properly manage a hedge fund
Today, traditional asset managers are looking to develop their own hedge funds as alternative offerings to their clients. Hedge Fund Course presents all the technical and quantitative knowledge necessary to run a leveraged investment company, and complements the less-technical information presented in the popular, How to Create and Manage a Hedge Fund (0-471-22488-X). Filled with in-depth insight and expert advice, this book represents an executive-level educational program for money managers exploring the launch of alternative investment strategies or entering the hedge fund industry for the first time.
Stuart A. McCrary (Winnetka, IL) is a partner with Chicago Partners LLC and specializes in options, mortgage-backed securities, derivatives, and hedge funds. As president of Frontier Asset Management, McCrary managed and ran his own hedge fund before joining Chicago Partners. He received his BA and MBA from Northwestern University.
Download Description
A self-study course that reviews the technical and quantitative knowledge necessary to properly manage a hedge fund Today, traditional asset managers are looking to develop their own hedge funds as alternative offerings to their clients. Hedge Fund Course presents all the technical and quantitative knowledge necessary to run a leveraged investment company, and complements the less-technical information presented in the popular, How to Create and Manage a Hedge Fund (0-471-22488-X). Filled with in-depth insight and expert advice, this book represents an executive-level educational program for money managers exploring the launch of alternative investment strategies or entering the hedge fund industry for the first time. Stuart A. McCrary (Winnetka, IL) is a partner with Chicago Partners LLC and specializes in options, mortgage-backed securities, derivatives, and hedge funds. As president of Frontier Asset Management, McCrary managed and ran his own hedge fund before joining Chicago Partners. He received his BA and MBA from Northwestern University.
Customer Reviews:
good, but not well written.......2005-03-04
This book is more quantitative than the author's other book, but it is still very basic. The author is also a little redundant in his writing. He spends a lot of time talking about the different types of funds available, but not actually giving that much insight into how they are run.
This is a good book for someone like myself that has very little prior knowledge about hedge funds, although it could have been written better. There are many misprints, yet the organization is good.
The most rewarding parts of the book are the questions at the end of each chapter. The answers are provided at the end of the book and many of the Q & A's give you more insight into hedge funds than the actual body. This is a good book for someone with no knowledge of hedge funds but would be too simplistic for someone that has already has knowledge of them.
Book Description
The Hedge Fund Compliance and Risk Management Guide provides you with a broad examination of the most important compliance and risk management issues associated with today’s hedge funds. Straightforward and accessible, this invaluable resource covers everything from how hedge funds continue to generate lucrative returns to why some use sophisticated instruments and financial engineering to get around fundamental regulatory laws.
Customer Reviews:
The publisher has some explaining to do.......2007-09-11
I don't own the book. But I just received the latest issue of GARP Risk Review which features an article by the esteemed Aaron Brown (he has an Amazon weblog). Before you dare spend $95 on the book, please read his review. In a generous act of professionalism, he offers a detailed critique that ends with "If Wiley can get away with this in risk management, we are not a profession." The problem is not that the book is bad or that it does not reflect its title, not even that it has not been edited. Rather, Brown itemizes why the book's contents are largely "downloaded from the internet or taken from unpublished papers that are of little or no relevance to the topic." In short, the author and the publisher need to explain themselves and issue refunds to buyers. I read a lot of hedge fund books for work and this is not an isolated case: some publishers pick hot topics in finance (hedge funds, credit derivatives), where the price points are really high (you have $125/$150 books in this category), then they rush "products" to market where much of the content is simply copied from previous sources.
Amazon.com
On September 23, 1998, the boardroom of the New York Fed was a tense place. Around the table sat the heads of every major Wall Street bank, the chairman of the New York Stock Exchange, and representatives from numerous European banks, each of whom had been summoned to discuss a highly unusual prospect: rescuing what had, until then, been the envy of them all, the extraordinarily successful bond-trading firm of Long-Term Capital Management. Roger Lowenstein's When Genius Failed is the gripping story of the Fed's unprecedented move, the incredible heights reached by LTCM, and the firm's eventual dramatic demise.
Lowenstein, a financial journalist and author of Buffett: The Making of an American Capitalist, examines the personalities, academic experts, and professional relationships at LTCM and uncovers the layers of numbers behind its roller-coaster ride with the precision of a skilled surgeon. The fund's enigmatic founder, John Meriwether, spent almost 20 years at Salomon Brothers, where he formed its renowned Arbitrage Group by hiring academia's top financial economists. Though Meriwether left Salomon under a cloud of the SEC's wrath, he leapt into his next venture with ease and enticed most of his former Salomon hires--and eventually even David Mullins, the former vice chairman of the U.S. Federal Reserve--to join him in starting a hedge fund that would beat all hedge funds.
LTCM began trading in 1994, after completing a road show that, despite the Ph.D.-touting partners' lack of social skills and their disdainful condescension of potential investors who couldn't rise to their intellectual level, netted a whopping $1.25 billion. The fund would seek to earn a tiny spread on thousands of trades, "as if it were vacuuming nickels that others couldn't see," in the words of one of its Nobel laureate partners, Myron Scholes. And nickels it found. In its first two years, LTCM earned $1.6 billion, profits that exceeded 40 percent even after the partners' hefty cuts. By the spring of 1996, it was holding $140 billion in assets. But the end was soon in sight, and Lowenstein's detailed account of each successively worse month of 1998, culminating in a disastrous August and the partners' subsequent panicked moves, is riveting.
The arbitrageur's world is a complicated one, and it might have served Lowenstein well to slow down and explain in greater detail the complex terms of the more exotic species of investment flora that cram the book's pages. However, much of the intrigue of the Long-Term story lies in its dizzying pace (not to mention the dizzying amounts of money won and lost in the fund's short lifespan). Lowenstein's smooth, conversational but equally urgent tone carries it along well. The book is a compelling read for those who've always wondered what lay behind the Fed's controversial involvement with the LTCM hedge-fund debacle. --S. Ketchum
Book Description
John Meriwether, a famously successful Wall Street trader, spent the 1980s as a partner at Salomon Brothers, establishing the best--and the brainiest--bond arbitrage group in the world. A mysterious and shy midwesterner, he knitted together a group of Ph.D.-certified arbitrageurs who rewarded him with filial devotion and fabulous profits. Then, in 1991, in the wake of a scandal involving one of his traders, Meriwether abruptly resigned. For two years, his fiercely loyal team--convinced that the chief had been unfairly victimized--plotted their boss's return. Then, in 1993, Meriwether made a historic offer. He gathered together his former disciples and a handful of supereconomists from academia and proposed that they become partners in a new hedge fund different from any Wall Street had ever seen. And so Long-Term Capital Management was born.
In a decade that had seen the longest and most rewarding bull market in history, hedge funds were the ne plus ultra of investments: discreet, private clubs limited to those rich enough to pony up millions. They promised that the investors' money would be placed in a variety of trades simultaneously--a "hedging" strategy designed to minimize the possibility of loss. At Long-Term, Meriwether & Co. truly believed that their finely tuned computer models had tamed the genie of risk, and would allow them to bet on the future with near mathematical certainty. And thanks to their cast--which included a pair of future Nobel Prize winners--investors believed them.
From the moment Long-Term opened their offices in posh Greenwich, Connecticut, miles from the pandemonium of Wall Street, it was clear that this would be a hedge fund apart from all others. Though they viewed the big Wall Street investment banks with disdain, so great was Long-Term's aura that these very banks lined up to provide the firm with financing, and on the very sweetest of terms. So self-certain were Long-Term's traders that they borrowed with little concern about the leverage. At first, Long-Term's models stayed on script, and this new gold standard in hedge funds boasted such incredible returns that private investors and even central banks clamored to invest more money. It seemed the geniuses in Greenwich couldn't lose.
Four years later, when a default in Russia set off a global storm that Long-Term's models hadn't anticipated, its supposedly safe portfolios imploded. In five weeks, the professors went from mega-rich geniuses to discredited failures. With the firm about to go under, its staggering $100 billion balance sheet threatened to drag down markets around the world. At the eleventh hour, fearing that the financial system of the world was in peril, the Federal Reserve Bank hastily summoned Wall Street's leading banks to underwrite a bailout.
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 is the cautionary financial tale of our time, the gripping saga of what happened when an elite group of investors believed they could actually deconstruct risk and use virtually limitless leverage to create limitless wealth. In Roger Lowenstein's hands, it is a brilliant tale peppered with fast money, vivid characters, and high drama.
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John Meriwether, a famously successful Wall Street trader, spent the 1980s as a partner at Salomon Brothers, establishing the best--and the brainiest--bond arbitrage group in the world. A mysterious and shy midwesterner, he knitted together a group of Ph.D.-certified arbitrageurs who rewarded him with filial devotion and fabulous profits. Then, in 1991, in the wake of a scandal involving one of his traders, Meriwether abruptly resigned. For two years, his fiercely loyal team--convinced that the chief had been unfairly victimized--plotted their boss's return. Then, in 1993, Meriwether made a historic offer. He gathered together his former disciples and a handful of supereconomists from academia and proposed that they become partners in a new hedge fund different from any Wall Street had ever seen. And so Long-Term Capital Management was born.
Customer Reviews:
Illuminating and Fascinating Business Classic.......2007-10-07
Roger Lowenstein's 'When Genius Failed' has been justly acclaimed as a business classic. In the wake of the 2007 credit crunch, Lowenstein's riveting study of the 1998 collapse of Long Term Capital Management (LTCM) retains its relevance and has much to teach market observers.
Ironically, LTCM had much going for it. The firm was founded by savvy Salomon Brothers veterans, and its luminaries included Nobel Prize winner Myron Scholes, the creator of the acclaimed Black-Scholes options pricing model. LTCM was also established on the premise of hedging risk and thereby minimizing financial loss.
The unraveling of LTCM, lucidly and compelling depicted by Lowenstein, has many parallels with the subprime mortgage meltdown of 2007:
--An unwavering faith in financial engineering, coupled with the erroneous belief that financial structures will protect against substantial losses.
--The insatiable search for higher yields in crowded markets, which ultimately drives even savvy managers to investments with unfortunate risk profiles.
--The use of significant amounts of borrowed capital to boost returns. Sadly, the use of leverage forces the rapid liquidation of positions to repay lenders during declining market conditions, excarbating market slides and the withdrawal of credit.
--Hubris. Hedge fund managers and successful traders tend to get overconfident after a run of good luck, leading them to take riskier positions with borrowed capital.
Together, these factors led to the downfall of LTCM and to the 2007 subprime meltdown.
Kudos to Roger Lowenstein for demystifying the arcana of derivatives trading and the Black-Scholes model-- if you want an account that describes these subjects lucidly, this is your book. As well, Lowenstein offers a riveting depiction of the 1998 market slide that sent LTCM reeling toward insolvency, and the rescue events coordinated by the Federal Reserve and undertaken by an international capital consortium.
Bottom line: a five star financial read that maintains its relevance.
Incredible story.......2007-10-06
Two things make this a great book: a riveting story (losing hundreds of millions a day is mind-boggling) and excellent writing. Roger Lowenstein, first of all, is a master of using analogies explain complex things, like financial derivaties and how the big investment banks operate. Long Term Capital Management was a gang of complex gamblers (including a couple of Nobel Prize winners to boot) that employed equations and theories from the academic world of finance to build an enormously successful hedge fund that sucked in the big banks of Wall Street. Lowenstein details the rise of LTCM (it seems it had to have taken place with an interesting mixture of Luck, Smarts, and Arrogance) and their massive and rapid failure with a cadence that makes it difficult to put the book down. When Genius Failed offers a glimpse into the world of big-time finance and the unrepentant and bizarre characters that it attracts (the money these guys rake it in and how they do it will stun you if you aren't familiar with Wall Street). Highly recommended - even a decade after the collapse of LTCM!
great book.......2007-09-20
Great read. Didn't want to put it down and finished it in a few days. Great to read how these smart guys lost all their money by being too greedy. Thumbs up for sure.
A fantastic tale of risk, reward and rue.......2007-09-20
It's a wonderfully written account of a remarkable risk taking adventrue crafted by the best of wall street's arbitrage mavens and acclaimed academic laureates. Author has done a supreb job as a slueth who followed the trail that aparantly divulged very little about its journey into the financial debacle that could've brought the whole financial world down. Throughout the work of the author, one can perceive the vastness of his research into this matter, his depth of knowledge in the world of arbitrage and his exquisite story telling skill.
He portrayed each character with great care that went above and beyond what I expected. Though at times the deatils seemed a bit overwhelming and unnecessary, it was enjoyable nonetheless.
Besides gaining a great deal of knowledge about bond trading, risk arbitrage and about all the parties associated with it, it also gave me a good picture about the human inter-relations that plays into the rise and fall of such wall street ventures. One thing I wanted to see in this book is Greenspan's involvement and opinion on this. But, not sure why his role in the shoring up of LTCM wasn't covered. I earlier read a book on Greenspan where his rebuttal on the criticism of Fed's involvement with the bail out LTCM was deatiled. I expected Lowenstein to cover this as well.
I first came across the story of LTCM from Taleb's "Black Swan", then went to wikipedia to know more about it, and finally got a hold of this book and I'm glad that I did. I love real life stories where turns of events and drama unfold from the work of an invisible hand, not from that of a gifted writer. I would love to see the story of LTCM on big screen one of these days. I caught a glimse of the NOVA's episode "The Trillion Dollar Bet [2000]" which covered LTCM, but I couldn't get a hold of the full content.
It's a must read for anyone who has interest in wall street, business, risk and how they all work. Lowenstein is a great writer in my opinion and I will move on to reading his pervious work on Buffet.
Great insight into market movements.......2007-09-12
The LTCM story is fascinating, and Lowenstein makes clear enough what kind of 'hedging' they were doing. The most valuable details to me were the intertwining of instituions and trades. I thought it illuminated how forced trading and fear can spread. Also captures the mood of the nineties well, I'd like to find detailed history of other market eras.
And from an academic viewpoint, his discussion of 'fat tails' was great.
Book Description
Hedge funds now account for 25 percent of all NYSE trading volume and are one of the fastest growing sectors in today’s financial industry. Managing a Hedge Fund examines every significant issue facing a hedge fund manager, from management of numerous types of risk to due diligence requirements, use of arbitrage and other exotic activities, and more. Broad-based where most hedge fund books are narrowly focused, it provides current and potential managers with a concise but comprehensive treatment on managing—and maximizing—a hedge fund in today’s fiercely competitive investing arena.
Customer Reviews:
Excellent Primer on Hedge Funds.......2006-04-27
If you aren't familiar with hedge funds and need a book that explains it in layman's terms, this is the book for you. The title is a little misleading since it should be more appropriately named "A Primer on Hedge Funds" The author introduces what hedge funds are and its affects on portfolio performance and then explains various hedge fund strategies and how to measure hedge fund performance. The wealth of data presented in the book is well worth the money by itself. The author presents information such as tables on the Sharpe Ratios by strategy, Sortino Ratios by strategy, as well as correlations of the various hedge fund strategies to each other and to the S&P 500 during up and down markets and to the MSCI Debt index in up and down markets. The text is well written and an easy read. If you want more details on hedge funds in highly quantitative terms and have the background to understand them then you're better off reading articles from the Journal of Finance, Journal of Derivatives, Journal of Fixed Income, or other publications of this nature. Overall, if you are new to hedge funds and want to get your bearings on this hot topic, then this book is an excellent starting point.
Straight Forward No-Nonsense Approach to Understanding Hedge Funds.......2006-02-09
Mr. Black's book on hedge funds offers a straightforward no-nonsense approach to understanding hedge funds. The book is written in such a way that a person not enrolled in a masters degree in finance can get a basic understanding of fees, the various strategies and the required due diligence of the funds. As hedge funds are obviously becoming more and more mainstream, it is imperative that the general public has a source, which describes to them how hedge funds work and how it applies directly to them. This book is said source and should be viewed as such.
As a student of Mr. Black's and of the school where he teaches, I have found him insightful and inspiring during lectures. He combines current market trends and various hedge fund scandals into the discussion making the topic come alive and real. In my opinion, he is an asset to the school and any student who has the opportunity to take his course should seize it!
Full of usual topics .......2006-01-09
The MS program at the school where Keith Black teaches finance is far from good and totally pathetic. The program director at this school John Bilson and Dean Zia Hasssan individually or as a faculty group lacks the edge and seriousness to run a full fledged program. They had no time or showed any inclination to grade student test papers. The course ciuricullum is vague and they avoided teaching intricate mathematical models to students. These models have been the foundation for evolution of hedge funds or in the development of advanced portfolio managment techniques. Therefore the classroom projects used by this author is a poorly conceived idea for writing a book on such critical topic in finance. To understand hedge funds and to gain expertise it is absolutely not necessarty to even touch such a book. There are definitely better written books.
A hedge fund book among many.......2006-01-02
The Author is a below average teacher. This book is likely to establish this fact more than teaching the reader about hedge funds.
If you are a true buy-side prospect, this is kindergarten...........2005-10-28
I am afraid I have to agree with the review here of Robert Altena wholeheartedly. This book simply describes the very basics of several investment strategies (most of which have existed for decades). Hedge funds have long ago moved beyond any of these strategies, although the obviously still employ all of them as a bulk of their operations, and they constantly move into uncharted territory. That is what is separating the top funds from the `pretenders' nowadays.
If these strategies are new to you and/or if you actually learned anything new from this book then you have NO business trying to start a hedge fund. Of course if you need to buy a book to consider doing so, then you are really in trouble anyways. This book is useful however for anyone that is considering putting their money with [reputable] hedge fund managers and therefore need to educate themselves on various basic strategies the funds may employ (thus why I gave it 2 stars instead of 0 or 1).
I think Mr. Black is an excellent professor and his writing in this book is pretty good, but the title is very misleading. A more accurate title may have been: The Basic Hedge Fund Strategy for Investors. For those who already work at buy-side institutions (or serious prop traders at bulge bracket firms), if you plan to branch out on your own please do not think ANY book will aid you in your quest. Instead, if you need insight into risk management, quant, partnership accounting, etc. in order to complete your education BEFORE starting a fund (recommended that you do!), then consider reviewing published industry papers from Wharton, MIT, Cal Tech, Chicago B.S., HBS, NYU, etc. (I would put particular concentration on the top finance and tech schools and not the top management schools - MIT, Wharton, NYU, etc.) These offer the best academic insight into how funds should be managed, in theory anyhow, in truly technical jargon. If you can't understand the jargon, then stick with working with your broker or day trading because starting a hedge fund will only put you into bankruptcy.
Book Description
Whether already experienced with hedge funds or just thinking about investing in them, readers need a firm understanding of this unique investment vehicle in order to achieve maximum success. Hedge Funds unites over thirty of the top practitioners and academics in the hedge fund industry to provide readers with the latest findings in this field. Their analysis deals with a variety of topics, from new methods of performance evaluation to portfolio allocation and risk/return matters. Although some of the information is technical in nature, an understanding and applicability of the results as well as theoretical developments are stressed. Filled with in-depth insight and expert advice, Hedge Funds helps readers make the most of this flexible investment vehicle.
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