DEFINITION of Blow Up
Blow up is a slang term used to describe the complete and abject failure of an individual, corporation, bank, development project, hedge fund, etc. The term is often used when a hedge fund fails but is not exclusive to hedge funds.
BREAKING DOWN Blow Up
Hedge funds frequently engage in high-risk investment tactics to try to aggressively accumulate capital gains. Often a hedge fund is so highly leveraged that losses can be catastrophic, and since a hedge fund can have extremely large portfolios, even a small percentage loss can lead to huge cash losses. As funds fail to perform, investors may withdraw, forcing the fund to dissolve or blow up.
Example of a Blow Up
Perhaps, Long-Term Capital Management was the most famous blow up in modern financial market history. Founded by former bond trading heavyweights from Salomon Brothers and anchored by two Nobel Prize-winning economists, Long-Term Capital Management was a veritable Dream Team of finance and investments. In 1998, in response to a Russian debt crisis, they blew up their hedge fund anyway. The saga was chronicled by Roger Lowenstein in his book, "When Genius Failed: The Rise and Fall of Long-Term Capital Management."
Other popular bets that went bad include:
- Bear Stearns: $1.6 billion collapse of highly leveraged hedge funds in mid-2007 — one of the first distress signs in the credit markets.
- Societe Generale: SocGen’s Jerome Kerviel blew up 4.9 billion euros with another rogue trader scandal.
- Amaranth Advisors: Amassed a $6 billion loss on disastrous gas bets, which precipitated the Greenwich, Conn. fund’s collapse in 2006.
- Barings: Singapore-based derivatives trader Nick Leeson in 1995 fled from authorities after sinking Britain’s oldest merchant bank, Barings. While at Barings, Mr. Leeson made and tried to hide a series of derivatives trades on the Japanese stock market that led to a $1.3 billion trading loss. Leeson's story is the stuff of lore: sparking the nickname, Rogue Trader.