More momentously, LTCM made the mistake of going long on Russian bonds right before Russia defaulted.
After the smoke had cleared, it emerged that LTCM had been allowed to leverage its capital 25-to-1.
On the contrary, investors flocked to JWM Partners LLC, which he set up after LTCM went bust.
LTCM, a hedge fund, collapsed when interest rates suddenly shifted after Russia's default in the summer of 1998.
LTCM, which went bust before it could be proved right, argued in favour of a more cautious approach.
ECONOMIST: The peril for markets when computers miscalculate
Long Term Capital Management (LTCM), a New York fund, came close to precipitating a global crisis in 1998.
Before petering out it would engulf Latin America, then Russia, and then the once mighty hedge fund LTCM.
LTCM, you might say, is more typical of banks than of hedge funds.
LTCM, Enron was admired for its innovative use of financial theory and for its risk-management skills until it was too late.
Since most of LTCM's money came from big Wall Street banks, the New York Federal Reserve Bank organized a rescue operation.
LTCM's, and would themselves have been badly exposed had the fund failed.
After the collapse of LTCM, and amid the chaos and opportunities that it created, hedge funds did clearly produce alpha for two years.
LTCM, banks have become less willing to lend to hedge funds, which provide them with only minimal information about what they are up to.
That would follow the script from 1998 when three rate cuts between September and November helped to bring the LTCM crisis to a speedy end.
LTCM's other famous partners, Robert Merton and Myron Scholes, two economists whose work in the field of derivatives earned them a Nobel prize in 1997.
In 1998, under his brilliant leadership, LTCM performed so horridly that it required a Federal Reserve-managed bailout, in a dress rehearsal for the government bailouts 10 years later.
Yet investors concluded that LTCM's failure was merely a case of "very smart people with oversized egos" and continued putting money into hedge funds, fueling the industry's rapid post-1998 growth.
Provocatively, Mr. Taleb defines Black Swans as events (such as the rise of the Internet or the fall of LTCM) that are not only rare and consequential but also predictable only in retrospect.
Many readers may not remember the first half of 1998, but may be more likely to recall the Russian ruble crisis in July 1998 and the ensuing collapse in the fall of hedge fund Long-Term Capital Management (LTCM).
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