Lifetime Achievement Award for Long-Term Capital Vet

Posted by John Carney, Jun 05, 2006, 9:47am

Meriwether.jpgAlternative Investment News will honor John Meriwether with its Lifetime Achievement Award later this month.


John Meriwether, who has dedicated over 30 years to alternative investment strategies and is currently at the helm of JWM Partners, is the recipient of Alternative Investment News' 2006 Lifetime Achievement Award. Meriwether will be honored during an awards ceremony June 28 in New York, where the other winners of AIN's 4th Annual Hedge Fund Industry Awards will be announced.

Does this mean Meriwether is dying? Don't "Lifetime Achievement" awards usually go to people whose lifetime is coming to a close? Has anyone checked with Meriwether doctors?

Meriwether, of course, is probably most famous for his role in the failed Long-Term Capital Management hedge fund. In 1998 the fund, which Meriwether had started in 1994, nearly collapsed. A syndicate of international banks and brokerage firms agreed to bail-out Long-Term Capital with $3.6 billion, at the prompting of the Federal Reserve. So how does running Long-Term Capital lead to a lifetime achievement award?

Here's how.

Yet neither LTCM nor Meriwether broke any securities laws, and the Fed bail-out did not directly involve taxpayer money, instead relying on a consortium of investment banks to buy out the fund and unwind its positions. And while the fund's meltdown in the summer of 1998 was indeed disastrous in terms of performance, the prior year it had returned most of its capital to investors--at annualized gains of over 40%. More importantly, the trades that caused LTCM's plight were not consistent with the firm's models, and were likely not agreed to by all principals involved. "My understanding is there had been a debate within the firm about departing from their core competencies and getting involved with...some things that were a little risky," said Ritter.

Uhm, so it was like a rogue trader, right? That's what brought down Long-Term Capital? Trades "not consistent with the firm's models?" Funny. That's not how we remember it.

Here's what Michael Lewis wrote way back in June of 1999.

The public accounts have suggested that it was lost in all manner of exotic speculations that the young professors had irresponsibly digressed into. The speculations were exotic enough, but they were hardly digressions. When I paged through their trades, the only thing I hadn't expected to find was a taste for betting on corporate takeovers. One hundred fifty million dollars vanished from Long-Term Capital when a company called Tellabs failed to complete its acquisition of a company called Ciena, and the price of Ciena stock, which Long-Term owned, dropped from 56 to 31 1/4. (''This trade was by far the most controversial in our partnership,'' Rosenfeld says. ''A lot of people felt we shouldn't be in the risk arb business because it is so information sensitive and we weren't trying to trade in an information-sensitive way.'') Of course, Long-Term had some complicated notion of its advantage in risk arbitrage, but that notion now looked silly. Still, even taking account of the $150 million loss in Ciena shares, its stock-market trading was profitable.


The big losses that destroyed Long-Term Capital occurred in the areas the young professors had for years been masters of.

Lewis's article is still the best explanation of what happened at Long-Term Capital we've read. it's a blogger cliche, but read the whole thing.

Meriwether Honored For Lifetime Achievement [Alternative Investment News via Crossing Wall Street]

How the Eggheads Cracked [New York Times]

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Comments

Posted by 2L, Jun 05, 2006 2:18PM

Meriwether, who now runs a fund called JWM Partners, doesn't plan to attend the event.
http://www.businessweek.com/magazine/content/06_24/b3988004.htm

Posted by Larry Jones, Jun 05, 2006 2:39PM

Risk arb did deviate from their traditional models. I love Michael Lewis, but he's Roger Lowenstein's bitch when it comes to LTCM.

Posted by Ed-D, Jun 06, 2006 8:56AM

yeah plus that quote from Michael Lewis seems to confirm the original article's point, namely that there was internal debate about entering that area in the first place: "that trade was the most controversial...a lot of people felt we shouldn't be in the risk arb business."

a lifetime achievement award is exactly that; it recognizes an individual's contribution over his/her lifetime. In this case, the publication is making the point that as ugly as the LTCM fiasco was, it should not detract from the overall contributions Meriwether has made in this field.

Posted by Ed-D, Jun 06, 2006 9:01AM

p.s. those overall contributions were glossed over in the original blog, but here they are, as published in the II article (http://www.iialternatives.com/default.asp?Page=1&SID=625476&ISS=21718):

Meriwether's career in the investment business dates to 1974 when he was hired out of business school by Salomon Brothers. In the mid-70s he first attracted attention through a contrarian call on short-term agency securities immediately after New York City's near-bankruptcy. He then rose to fame in the 1980s as the head of Salomon's fixed-income arbitrage group, becoming vice-chairman of the company in 1988. During this time, Meriwether was one of the early pioneers of quantitative, model-based investing, and established a trading culture that has since become ubiquitous not only at hedge funds, but at prop trading desks everywhere.

"He was a pioneer of hedge fund-style trading when he was at Salomon," said one hedge fund official. Correctly anticipating this trend, he was one of the first people on Wall Street to recruit mathematicians and physicists and turn them into investment professionals.

One of Meriwether's greatest strengths was that he was "a great manager of traders," according one former Salomon colleague. "He was enormously successful because he was a great leader; he was able to assemble talent, guide talent, and get the best out of people--and people would go over the hill for this guy."

"He's a pioneer at venturing into areas where the paths were not well-trodden," said Jay Ritter, a finance professor at the University of Florida who has followed Meriwether's career. In the early 1980s, when the market for mortgage-backed securities began to develop, Salomon, under Meriwether's stewardship, got involved at making markets and taking positions in some of the newer structured products and derivative securities, Ritter added. "Because of his success, copycats came in and the profit margins started to deteriorate."

[...]

The successor firm to LTCM launched its flagship Relative Value Opportunity Fund in November 1999. Quietly, the firm has amassed over $1 billion, while returning 9.08% annually with low volatility--3.94%--and a low 1.48% Sharpe Ratio in its flagship fund. Its second strategy, the JWM Global Macro Fund, launched in May 2004 and has returned 11.5% annually, albeit with higher volatility. "With the exception of three months, which really tarnished his reputation, [Meriwether] had a long track record where they did a lot of strategies that worked very well," said Ritter. "Everybody respects him," said the partner at a major hedge fund firm of Meriwether. "He's honorable and the original [LTCM] investors did quite well." Ritter agreed. "When you're on the forefront of things, a mistake that you make does tend to get magnified," he said, adding, "I would fully support signaling him out for an award."

Posted by L'Emmerdeur, Jun 08, 2006 10:19AM

Somehow, I doubt the group of brokerage firms and banks that bailed them out did it out of the kindness of their hearts. I'm sure that money was paid in full using cash freshly minted by the Treasury's post-modern printing presses.

Which means our tax dollars were used to bail out these criminals.

If meriwether was an honorable man, he would at least provide me with a reach-around in appreciation for my largesse.

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