22nd August 2012: Crowded Quants & LTCM

The 1998 collapse of the hedge fund Long-Term Capital Management is a case study in intellectual hubris. I read Roger Lowenstein’s When Genius Failed whilst writing a 2003 foresight post-mortem on LTCM (PDF). There were several different explanations for LTCM’s failure. One group blamed Russia’s default in August 1998 as an external, exogenous shock that blind-sided the firm. Another group blamed LTCM’s Nobel Laureates and traders. A third group found deep divisions in LTCM and blamed the firm’s computer systems. Ludwig Chincarini‘s new book The Crisis of Crowding: Quant Copycats, Ugly Models and the New Crash Normal (New York: Bloomberg/Wiley, 2012) revisits LTCM’s demise and argues that it foreshadowed the 2007 crisis in quantitative firms and the 2008-09 global financial crisis. Wiley has posted chapter excerpts whilst Brenda Jubin has a positive review for Reading the Markets — Chincarini looks to have written a very interesting book on rational herding in financial markets (PDF).