Wednesday, August 15, 2007

History Repeats

I concentrated on finance during my recent MBA studies, and a case which was often repeated was that of Long-Term Capital Management, or LTCM. LTCM, despite being run by some of the brightest minds on Wall Street including a score of PhDs and even a couple of Nobel Prize winners, went bankrupt in 1998 during the Asian and Russian financial crises, and had to be bailed out by a group of banks organized by the New York Fed. The moral of the story is, no matter how smart you think you are, you cannot beat the market, any bet you take is still a risk. Markets are not entirely rational, and when there is a panic the computer models don't hold up, and you have to be prepared to weather the storm until it passes.

Thus it is quite ironic, that we are now witnessing much of the same thing going on:

Aug. 15 (Bloomberg) -- Goldman Sachs Group Inc. waived fees to draw investors to its Global Equity Opportunities hedge fund after stock-market losses wiped out $1.4 billion of assets this month, according to a person with direct knowledge of the terms.

New participants won't pay the 2 percent management charge and Goldman will cut its performance fee in half, said the person, who declined to be named because the information is private. The New York-based firm and investors including billionaire Maurice ``Hank'' Greenberg agreed to put $3 billion in the fund earlier this week. Goldman spokesman Lucas van Praag confirmed the terms and declined to comment further.

Goldman, the world's most profitable securities firm and second-largest hedge fund manager, needed capital after stock declines worldwide confounded Global Equity's computer-driven bets and threatened to spur withdrawals. The so-called quantitative fund lost 28 percent of its value this month. Other quant funds, including AQR Capital Management LLC and Highbridge Capital Management LLC, also suffered declines.

Presumably Goldman is full of bright young MBAs who know this even better than I do, but people think it can never happen to them, that they are the exception. Incidently, for a great insight into LTCM I suggest When Genius Failed by Roger Lowenstein.