The Crisis of Crowding – Quant Copycats, Ugly Models, and the New Crash Normal Quant Copycats, Ugly Models, and the New Crash Normal

A rare analytical look at the financial crisis using simple analysis

The economic crisis that began in 2008 revealed the numerous problems in our financial system, from the way mortgage loans were produced to the way Wall Street banks leveraged themselves. Curiously enough, however, most of the reasons for the banking collapse are very similar to the reasons that Long-Term Capital Management (LTCM), the largest hedge fund to date, collapsed in 1998. The Crisis of Crowding looks at LTCM in greater detail, with new information, for a more accurate perspective, examining how the subsequent hedge funds started by Meriwether and former partners were destroyed again by the lapse of judgement in allowing Lehman Brothers to fail.

Covering the lessons that were ignored during LTCM's collapse but eventually connected to the financial crisis of 2008, the book presents a series of lessons for hedge funds and financial markets, including touching upon the circle of greed from homeowners to real estate agents to politicians to Wall Street.
* Guides the reader through the real story of Long-Term Capital Management with accurate descriptions, previously unpublished data, and interviews
* Describes the lessons that hedge funds, as well as the market, should have learned from LTCM's collapse
* Explores how the financial crisis and LTCM are a global phenomena rooted in failures to account for risk in crowded spaces with leverage
* Explains why quantitative finance is essential for every financial institution from risk management to valuation modeling to algorithmic trading
* Is filled with simple quantitative analysis about the financial crisis, from the Quant Crisis of 2007 to the failure of Lehman Brothers to the Flash Crash of 2010

A unique blend of storytelling and sound quantitative analysis, The Crisis of Crowding is one of the first books to offer an analytical look at the financial crisis rather than just an account of what happened. Also included are a layman's guide to the Dodd-Frank rules and what it means for the future, as well as an evaluation of the Fed's reaction to the crisis, QE1, QE2, and QE3.

The Crisis of Crowding is the story of a new crisis normal where volatility rocks the stock market on a regular basis, where banks and nations are in constant need of financial rescue, and the speed of the financial markets increases the risk of black swan level events exponentially. Using three central case studies as evidence of our crisis era, Ludwig Chincarini explains how quantitative models, crowding and parallel behavior, leverage, and speed have created no room for error. In 1998, an overleveraged and crowded bet that failed based led to the largest rescue of a hedge fund by the Federal Reserve to date, Long-Term Capital Management. In the summer of 2007, quantitative hedge funds all suffered dramatic losses due to the same factors: leverage and crowding. The flash crash in May 2010, the volatile up-and-down of August 2011, and the coming debacle in gold are all threads of the same original string. Part narrative, part quantitative analysis, The Crisis of Crowding illustrates how the market has shifted into a new and more dangerous form, why, and what can be done about it.

A rare analytical look at the financial crisis using simple analysis The economic crisis that began in 2008 revealed the numerous problems in our financial system, from the way mortgage loans were produced to the way Wall Street banks leveraged themselves. Curiously enough, however, most of the reasons for the banking collapse are very similar to the reasons that Long-Term Capital Management (LTCM), the largest hedge fund to date, collapsed in 1998. The Crisis of Crowding looks at LTCM in greater detail, with new information, for a more accurate perspective, examining how the subsequent hedge funds started by Meriwether and former partners were destroyed again by the lapse of judgement in allowing Lehman Brothers to fail. Covering the lessons that were ignored during LTCM's collapse but eventually connected to the financial crisis of 2008, the book presents a series of lessons for hedge funds and financial markets, including touching upon the circle of greed from homeowners to real estate agents to politicians to Wall Street. Guides the reader through the real story of Long-Term Capital Management with accurate descriptions, previously unpublished data, and interviews Describes the lessons that hedge funds, as well as the market, should have learned from LTCM's collapse Explores how the financial crisis and LTCM are a global phenomena rooted in failures to account for risk in crowded spaces with leverage Explains why quantitative finance is essential for every financial institution from risk management to valuation modeling to algorithmic trading Is filled with simple quantitative analysis about the financial crisis, from the Quant Crisis of 2007 to the failure of Lehman Brothers to the Flash Crash of 2010 A unique blend of storytelling and sound quantitative analysis, The Crisis of Crowding is one of the first books to offer an analytical look at the financial crisis rather than just an account of what happened. Also included are a layman's guide to the Dodd-Frank rules and what it means for the future, as well as an evaluation of the Fed's reaction to the crisis, QE1, QE2, and QE3.