When Genius Failed Summary & Study Guide

Roger Lowenstein
This Study Guide consists of approximately 29 pages of chapter summaries, quotes, character analysis, themes, and more - everything you need to sharpen your knowledge of When Genius Failed.
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When Genius Failed Summary & Study Guide Description

When Genius Failed Summary & Study Guide includes comprehensive information and analysis to help you understand the book. This study guide contains the following sections:

This detailed literature summary also contains Topics for Discussion and a Free Quiz on When Genius Failed by Roger Lowenstein.

When Genius Failed by Roger Lowenstein is the story of the Long Term Capital Management hedge fund from its creation to its fall. 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 they fell, they fell hard and fast at the end.

The book gives a look into the world of international investment banking and bond and equities trading. Meriwether and his cronies developed the concept of arbitrage, or hedge trading. 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. As long as the markets behaved in this way, the traders made hundreds of millions of dollars. Arbitrage trading was considered to be very low risk.

Meriwether developed the Arbitrage department at Salomon Brothers, hiring academics to develop mathematical and computerized models to predict prices based on market volatility. 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. 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.

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 investors didn't really care because of the amount of money they were making. 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 book does a lot of explaining about how bond and equity markets function. Lowenstein explains the technical jargon and how positions like swaps were accomplished. He also explains the reasoning—who wins, who could lose, and why. 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.

The book is interesting reading even though it is a little technical. It helps if the reader has some knowledge of financial markets, although it is not necessary. But it is a fascinating story of how a group of men went from fantastic wealth to near bankruptcy in five short weeks.

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