Michael Steinhardt a founder of Steinhardt, Fine, Berkowitz & Company and "an aggressive trader with unbridled emotions," saw his leading hedge fund "get annihilated in the crash of 1987." In 1993, he started the Steinhardt Overseas Fund and became a globe trotting manager out of his depth among foreign stocks and with bets on the debt of Europe, Australia and Japan. Batnick says Steinhardt knew little about the foreign business environment and political system.
"Unfortunately, we walked forward unafraid," Steinhardt wrote in his memoir.
"As a VIP client, he could always get in touch with someone if he needed to buy or sell quickly. But in Europe, Steinhardt didn’t have close, long-term relationships with brokers, so he wasn’t at the top of their list when things got hairy. And they were about to get hairy," Batnick writes.
In 1994, a bond market meltdown "left a hole the size of Europe in Steinhardt’s portfolio. He lost $800 million in four days."
In his chapter on John Meriwether, a co founder of the hedge fund Long-Term Capital Management, Batnick says that even a plethora of genius can’t protect investors from disaster.
The firm’s arbitrage strategies, devised by their brilliant financial science partners (Nobelists Robert Merton and Myron Scholes), were poached by the competition, which dried up opportunities for LTCM, which then returned $2.7 billion of capital to its original investors, which led to soaring leverage and collapse in 1998.
The Federal Reserve Bank of New York devised a 90%, $3.6 billion takeover, to prevent LTCM’s failed positions from poisoning the financial system.
"Big Mistakes. The Best Investors and Their Worst Investments," by Michael Batnick. Bloomberg Press and Wiley, 176 pages, $34.95.
Eleanor O’Sullivan is an award-winning journalist who writes for Financial Advisor.