When Genius Failed: The Rise and Fall of Long-Term Capital Management

by Roger Lowenstein

By 1996, Long-Term had grown to well over a hundred employees and the partners were building immense fortunes. All along, they had been deferring the 25 percent of the outside investors’ profits that they took as fees, thus leaving the money in the fund, where, untouched by the tax man, it could compound all the faster. As their third year drew to a close, the partners collectively had a stake in the fund of $1.4 billion, nine times their initial $150 million investment. It was an incredible fortune to have made in so little time—and all from bond spreads! The partners’ nervy decision to keep redoubling their bets had vaulted them into the ranks of the superrich overnight. Unlike corporate titans, who hedged their bets by continually peeling off shares, J.M., Hilibrand, Rosenfeld, and the rest left every nickel on the table. When they needed spending money, they simply redeemed a bit of the fund, which they treated like a personal checking account.