octubre 12, 2004

Long Term Capital Management

Last night I read Roger Lowenstein's book on the rise and fall of Long Term Capital Management. I didn't intend to, but I started it and I couldn't put it down.

Long Term Capital Management was a hedge fund started by former Salomon Arbitrage Group head John Meriweather. Meriweather was one of the stars of Michael Lewis' Liars Poker, a book about the author's years at Salomon.

Frankly, the book -- especially the beginning -- made me want to go work for a hedge fund. I've emailed some friends with some questions, so we'll see where this takes me. I've dabbled in the market before, but I'm a bit of a dilettante.

Anyway, Meriweather was a bond trader at Salomon who became a partner by buying out someone else's big risk and then having that risk pan out well. He eventually recruited academics to Salomon, who brought financial models with them and relied heavily on the models. The academics were a big success, and Meriweather ran a loose ship at Salomon. He gave his former academics free reign, and eventually a rogue trader caused him trouble with the SEC.

After a 3 month suspension of his license, Meriweather started his own hedge fund, Long Term Capital Management. He brought along his most of his old Salomon group. These guys were very loyal to him, and all very big names. They were able to raise $1.25 billion, and started with a leverage to assets ratio of 30. Their goal: exploit market inefficiences wherever they found them.

They did very well, running that $1.25 billion way up, to the point where they had to give money back to their original investors. Eventually though, they took some foolish risks and went broke. The fall of LTCM is much less interesting than the rise -- they had to get the Fed Reserve to push 25 Wall Street banks to bail them out.

Meriweather and group are now in a new hedge fund. If at first you don't succeed...well, in this case start a new hedge fund and raise $250 million.

Fascinating story. I imagine this will inspire some other posts.