Sunday, 5 June 2011

Trillion Dollar Bet

Long Term Capital Management is the name of a hedge fund that some today may have forgotten or not know about. The fund was founded in the early 1990's to capitalize on a new body of financial theory; a group of PhDs, Nobel prize winners, and seasoned Wall Street veterans joined together to exploit their mathematical models that were supposed to reap tremendous rewards with little risk. However their so-called arbitrage strategy of yield convergence failed when a series of 'long-tail' events derailed the strategy, lost the fund billions of dollars, and threatened to take down the financial system with it. Long Term Capital Management, or LTCM is frequently used as a case study in risk management for finance students. This documentary is a must see for anyone involved in financial markets as well as those curious about the world of finance and hedge funds.

For those who want to learn more, Roger Lowenstein wrote a very good book on LTCM, titled "When Genius Failed: The Rise and Fall of Long-Term Capital Management".

Video Description:

In 1973, three brilliant economists, Fischer Black, Myron Scholes, and Robert Merton, discovered a mathematical Holy Grail that revolutionized modern finance. The elegant formula they unleashed upon the world was sparse and deceptively simple, yet it led to the creation of a multi-trillion dollar industry. Their bold ideas earned Scholes and Merton a Nobel Prize (Black died before the prize was awarded) and attracted the elite of Wall Street.
In 1993, Scholes and Merton joined forces with John Meriweather, the legendary bond trader of Salomon Brothers. With 13 other partners, they launched a new hedge fund, Long Term Capital Management, which promised to use mathematical models to make investors tremendous amounts of money. Their money machines reaped fantastic profits, until their theories collided with reality, and sent the company spiraling out of control. The crisis threatened to bring markets around the world to the brink of collapse.
Join NOVA in the quest to turn finance into a science. Plus, trace the little-known history of predicting financial markets and go to work with some successful modern traders who rely on intuition as well as mathematical models.

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  1. aka. BBC Horizon - 1999 - The Midas Formula [1999-12-02]