When Genius Failed: The Rise and Fall of Long-Term Capital Management (2000) by Roger Lowenstein
This book provides a compelling account of the people and events surrounding the dramatic rise and epic fall of Long-Term Capital Management (LTCM), a hedge fund that existed for a short period in the 1990s.
The first half of the book covers the rise of LTCM, explaining how top bond traders and esteemed academics came together and started the fund, using their combined knowledge and skills to engage in trading strategies involving bond, stock, and merger arbitrage. During the fund's first four years, from May 1994 to April 1998, it produced impressive double-digit returns with very low volatility, leading to an influx of new capital and great acclaim for the fund's principals.
The second half of the book covers the fall of LTCM, explaining how a combination of excessive leverage and overconfidence in precise mathematical models based on historic norms resulted in an accelerating downward spiral when the activity in various global markets failed to conform to model predictions. In a span of less than five months, from May 1998 to September 1998, the fund suffered catastrophic losses (billions of dollars) that threatened to disrupt the global financial system because of the fund's massive size and exposure. The situation was contained when the Federal Reserve helped coordinate a hasty bailout by several major financial institutions. After making up some of its losses, the fund was shut down in 2000.
I enjoyed reading this book, which could be considered a real-life financial thriller story. It was interesting to find out some of the things that went on behind the scenes and how such a massive failure could happen. From a practical standpoint, the book highlighted the dangers of using leverage and being overconfident in one's decisions.
Note: I read this book in July 2012.