But it is a fascinating story of how a group of men went from fantastic wealth to near bankruptcy in five short weeks.About the Book In "When Genius Failed, " bestselling author Lowenstein captures the entire roller-coaster ride of long-term capital management in gripping detail. It helps if the reader has some knowledge of financial markets, although it is not necessary. The book is interesting reading even though it is a little technical.
All of these explanations of the working of the international capital markets are done within the framework of the story of the Long-Term hedge fund. He also explains the reasoning-who wins, who could lose, and why. Lowenstein explains the technical jargon and how positions like swaps were accomplished. The book does a lot of explaining about how bond and equity markets function. When it became difficult to place positions, some of the investors had to sell, which left the partners and a few others bearing the burden when the market spreads kept widening. The investors didn't really care because of the amount of money they were making. Hedge funds were not subject to stringent reporting requirements at the time, so they operated without even letting their investors know what the portfolio's invested in or what their exposure was. The hedge fund was set up with a system of feeders as a Cayman Islands partnership and had a Long-Term Capital Management company which managed the investments of the partners. When Meriwether left Salomon, he basically duplicated the set-up he had there and hired away many of the traders and staff to form Long-Term. Meriwether developed the Arbitrage department at Salomon Brothers, hiring academics to develop mathematical and computerized models to predict prices based on market volatility. Arbitrage trading was considered to be very low risk. As long as the markets behaved in this way, the traders made hundreds of millions of dollars.
This was trading based on the fact that in well behaved markets, the spreads between cash and futures converge as the contracts come to expiration. Meriwether and his cronies developed the concept of arbitrage, or hedge trading. The book gives a look into the world of international investment banking and bond and equities trading. When they fell, they fell hard and fast at the end.
The fund was created by John Meriwether after he departed from Salomon Brothers and it resulted in tremendous wealth for Meriwether, the partners, and other investors while it lasted. When Genius Failed by Roger Lowenstein is the story of the Long Term Capital Management hedge fund from its creation to its fall.
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