When Genius Failed: A Monkey's Review

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When Genius Failed: A Monkey's Review by In The Flesh HF (King Kong, 1111 Points) on 7/19/11 at 8:15am In 1998, where were we? Most likely, we were taking part in some combination of cashing in on the dot-com bubble, following the McGwire-Sosa home run race, and wondering by what margin the Bulls would win their sixth title. Underneath all that though, few people realized that the conditions were almost perfect for the Great Recession to start ten years early. And it required only a spark. That spark was Long-Term Capital Management. Another book routinely ranked in the top 10 Wall Street reads, Roger Lowenstein’s “When Genius Failed” tells the story of that famous quant fund headed by John Meriwether of Salomon Brothers and led by head traders Larry Hillibrand and Victor Haghani. If you invested $1 in LTCM at its founding in March 1994 and cashed out in April 1998, you would have received $4.08 before fees. If you waited until October of that year, you would have gotten about $.30. If you’re looking for fun tales of late-90’s Wall Street ballertude, you’ll probably be disappointed. However, if you’re interested in the heavily quant-oriented world of bond trading, this book is a must. Mr. Lowenstein takes you through the strategies that resulted in those eye-popping returns, including a 59% growth for FY1995—still one of the best starts by any fund, ever. One of those strategies was “snap trades,” profiting on the narrowing of spreads between “on-the-run” Treasuries and “off-the-run” Treasuries, all backed with massive amounts of leverage. It proved very successful in Italy, where Mr. Haghani engineered a position on the two types of Italian government debt among the chaos of the coming monetary union. It made LTCM $600 million in one year. Of course, all good things must come to an end, and the quants and professors found themselves in a

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