![[Cover Image of When Genius Failed]](https://CCapitalist.b-cdn.net/ccapitalist/wp-content/uploads/2006/10/when_genius_failed.jpg)
The recent collapse of the hedge fund Amaranth Advisors seemed to be a good time to read about the meteoritic rise and spectacular fall of Long-Term Capital Management, a hedge fund run by some really smart people that imploded in a matter of weeks and threatened to take down the world capital markets that the U.S. Federal Reserve was compelled to intervene.
The book, written by financial journalist Roger Lowenstein, tells a gripping tale of the founding of LTCM by John Meriwether, the assembling of a team of brilliant partners including two future Nobel Memorial Prize winners, the initial years when the fund was able to successfully play the arbitrage opportunities in the bond market and finally the fall triggered when Russia defaulted on its bonds and investors fled en masse to the safety of Treasury bonds. The fund, founded in 1993, earned 40% a year with little or no volatility for over four years before losing it all in just five weeks in the fall of 1998.
The LTCM story holds a valuable lesson for investors (other than avoiding hedge funds like the plague): When outsized returns are earned, it means that outsized risks are being taken, even if the fund is run by very smart people. The book is excellent and is definitely worth checking out.
