4 ms·

There was another famous hedge fund noted for mathematical excellence but it turned out to be a different story entirely ...

selectodude 6y ago
Renaissance?
- smabie 6y ago
  No, probably Madoff. Renaissance is incredible.
  - fractionalhare 6y ago
    Madoff was not known for "mathematical excellence", though he did fool a lot of people. This commenter is almost certainly talking about LTCM.
w1ntermute 6y ago
https://en.wikipedia.org/wiki/When_Genius_Failed https://en.wikipedia.org/wiki/When_Genius_Failed
- cvrjk 6y ago
  Amazing book. Truly astounding sequence of events. Greatest irony of all, they named their firm "Long-term Capital Management", while taking hugely leveraged short-term positions ($1 trillion dollars worth of derivatives backed by about $100 billion or so assets) that were beyond the understanding of anyone else. Didn't last 4 years before they blew. They did show 40% annual returns when they started and I guess that's what kept them going without much regulation. But man, did they crash hard. Investors who were returned their money after a year or 2, and those who were turned down from even investing must have thanked their Gods for saving them from absolute destruction. There is another book by Michael Lewis (who also wrote "The Big Short") called "The Liar's Poker", where he talks about his time at Salomon Brothers and how they collapsed in a very similar fashion. Highly levered derivatives with a magic formula that has worked well (so far..). It's fascinating how they were allowed to do what they did. Open gambling with client's money, and no repercussions on loosing it all. "Blowing up a customer" was apparently common and chalked up to a rookie's mistake. "Baptism by fire". How did the rookies even get access to millions of dollars of money to bet on crazy derivatives!! I feel that every time a major upset in the financial markets lands on us, it is because some group of really talented people managed to convince everyone that they discovered something that no one else has and have "cracked the market" by showing consistently high returns for a period of time, and gain access to huge pools of capital. Only, after a few years the market turns around, showing a side of things that they did not take into account and the whole thing goes belly up, market crashes, loads of people loose money, mostly its everyone else but that group (leverage, borrowing, access to someone else's capital etc). And because everyone who was supposed to keep them in check did not do it because despite it being their job not to, they did take them for their word, they try to cover it all up by paying the very people who caused all the trouble and who were supposed to watch out for all this. Banking world seems to have a lot of conflict of interest all around. It is much better now, with lots more rules and regulations, but it is still there.
bsdz 6y ago
There have been perhaps a few. One obvious one is LTCM whose board of directors included the mathematical creators of a highly used option pricing theory..
- smabie 6y ago
  LTCM is example of hubris, not failed mathematical models. If LTCM was given enough credit to stick it out, they would have made a killing. Of course, they didn't last that long, but it's not like their models were completely wrong.
  - throwlogon 6y ago
    > If LTCM was given enough credit to stick it out, they would have made a killing. Anyone making bets will eventually win big if there is no limit on credit, just by betting bigger and bigger until they catch a break. But there's always a limit.
    - hchz 6y ago
      That's mischaracterizing what happened. They were always winning, but hugely over-leveraged (they practically dictated the terms of their credit), and couldn't weather a regime change (LB).
      - deleted 6y ago
        [deleted]
      - throwlogon 6y ago
        I'm not quite sure what you mean, but if you can't reduce the size of your position without losing your shirt, you're not really winning; and if staying in your position requires you to put up more money than you can raise, you've hit the limit I was referring to. No one can expect to keep finding money to support their trades until they turn profitable. EDIT: Maybe you mean that they didn't try to make a larger bet after they got in trouble? But whether they needed to make a bigger bet or whether their existing bet was already too big, it's still the same issue; the only way to avoid liquidation is to expand the use of credit, which hits a limit at some point.
auntienomen 6y ago
LTCM was never noted by mathematicians for its mathematical excellence. By economists, yes, but that's a rather different thing.

selectodude 6y ago

Renaissance?

smabie 6y ago
No, probably Madoff. Renaissance is incredible.
- fractionalhare 6y ago
  Madoff was not known for "mathematical excellence", though he did fool a lot of people. This commenter is almost certainly talking about LTCM.

w1ntermute 6y ago

https://en.wikipedia.org/wiki/When_Genius_Failed https://en.wikipedia.org/wiki/When_Genius_Failed

cvrjk 6y ago
Amazing book. Truly astounding sequence of events. Greatest irony of all, they named their firm "Long-term Capital Management", while taking hugely leveraged short-term positions ($1 trillion dollars worth of derivatives backed by about $100 billion or so assets) that were beyond the understanding of anyone else. Didn't last 4 years before they blew. They did show 40% annual returns when they started and I guess that's what kept them going without much regulation. But man, did they crash hard. Investors who were returned their money after a year or 2, and those who were turned down from even investing must have thanked their Gods for saving them from absolute destruction. There is another book by Michael Lewis (who also wrote "The Big Short") called "The Liar's Poker", where he talks about his time at Salomon Brothers and how they collapsed in a very similar fashion. Highly levered derivatives with a magic formula that has worked well (so far..). It's fascinating how they were allowed to do what they did. Open gambling with client's money, and no repercussions on loosing it all. "Blowing up a customer" was apparently common and chalked up to a rookie's mistake. "Baptism by fire". How did the rookies even get access to millions of dollars of money to bet on crazy derivatives!! I feel that every time a major upset in the financial markets lands on us, it is because some group of really talented people managed to convince everyone that they discovered something that no one else has and have "cracked the market" by showing consistently high returns for a period of time, and gain access to huge pools of capital. Only, after a few years the market turns around, showing a side of things that they did not take into account and the whole thing goes belly up, market crashes, loads of people loose money, mostly its everyone else but that group (leverage, borrowing, access to someone else's capital etc). And because everyone who was supposed to keep them in check did not do it because despite it being their job not to, they did take them for their word, they try to cover it all up by paying the very people who caused all the trouble and who were supposed to watch out for all this. Banking world seems to have a lot of conflict of interest all around. It is much better now, with lots more rules and regulations, but it is still there.

bsdz 6y ago

There have been perhaps a few. One obvious one is LTCM whose board of directors included the mathematical creators of a highly used option pricing theory..

smabie 6y ago
LTCM is example of hubris, not failed mathematical models. If LTCM was given enough credit to stick it out, they would have made a killing. Of course, they didn't last that long, but it's not like their models were completely wrong.
- throwlogon 6y ago
  > If LTCM was given enough credit to stick it out, they would have made a killing. Anyone making bets will eventually win big if there is no limit on credit, just by betting bigger and bigger until they catch a break. But there's always a limit.
  - hchz 6y ago
    That's mischaracterizing what happened. They were always winning, but hugely over-leveraged (they practically dictated the terms of their credit), and couldn't weather a regime change (LB).
    - deleted 6y ago
      [deleted]
    - throwlogon 6y ago
      I'm not quite sure what you mean, but if you can't reduce the size of your position without losing your shirt, you're not really winning; and if staying in your position requires you to put up more money than you can raise, you've hit the limit I was referring to. No one can expect to keep finding money to support their trades until they turn profitable. EDIT: Maybe you mean that they didn't try to make a larger bet after they got in trouble? But whether they needed to make a bigger bet or whether their existing bet was already too big, it's still the same issue; the only way to avoid liquidation is to expand the use of credit, which hits a limit at some point.

auntienomen 6y ago

LTCM was never noted by mathematicians for its mathematical excellence. By economists, yes, but that's a rather different thing.