How to lose money in derivatives: examples from hedge funds and bank trading departments

Bill Ziemba and Sebastien Lleo

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: What makes futures hedge funds fail? The common ingredient is over betting and not being diversified in some bad scenarios that can lead to disaster. Once troubles arise, it is difficult to take the necessary actions that eliminate the problem. Moreover, many hedge fund operators tend not to make decisions to minimize losses but rather tend to bet more doubling up hoping to exit the problem with a profit. Incentives, including large fees on gains and minimal penalties for losses, push managers into such risky and reckless behavior. We discuss some specific ways losses occur. To illustrate, we discuss the specific cases of Long Term Capital Management, Niederhoffer’s hedge fund, Amaranth and Société Genéralé. In some cases, the failures lead to contagion in other hedge funds and financial institutions. We also list other hedge fund and bank trading failures with brief comments on them.

Keywords: hedge fund trading disasters; over betting; Long Term Capital Management; Amarath and Société Genéralé (search for similar items in EconPapers)
JEL-codes: G21 G23 G33 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2014-05-29
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://eprints.lse.ac.uk/61219/ Open access version. (application/pdf)

Related works:
Chapter: How to Lose Money in Derivatives: Examples from Hedge Funds and Bank Trading Departments (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:61219

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