Cookies?
Library Header Image
LSE Research Online LSE Library Services

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

Ziemba, Bill and Lleo, Sebastien (2014) How to lose money in derivatives: examples from hedge funds and bank trading departments. Special Papers (No 2). Systemic Risk Centre, London School of Economics and Political Science, London, UK.

[img]
Preview
PDF - Published Version
Download (1MB) | Preview

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.

Item Type: Monograph (Report)
Official URL: http://www.systemicrisk.ac.uk/
Additional Information: © 2014 The Author
Divisions: International Relations
Systemic Risk Centre
Subjects: H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions
G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy; Liquidation
Sets: Departments > International Relations
Research centres and groups > Systemic Risk Centre
Date Deposited: 13 Mar 2015 14:26
Last Modified: 20 Feb 2019 02:02
Projects: ES/K002309/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/61219

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics