RWH071: Risk, Ruin, Reinvention & Resilience w/ Victor Haghani

Victor Haghani grew up shaped by two formative disruptions: his father Musa's loss of concentrated wealth in Iran during the 1979 revolution, and his own displacement as a teenager when the revolution forced his family out of the country. Musa's experience produced two pieces of advice Haghani carried forward throughout his career: it is harder to hold on to money than to make it, and cutting your standard of living is deeply painful, so do not overspend in good times. The disruption of the revolution cost Haghani roughly six months of his junior year of high school and drove him to study and work intensely, and living across multiple countries gave him a persistent sense of being an outsider that shaped his perspective.

Haghani joined Salomon Brothers around 1984 after choosing it over JP Morgan despite a lower starting salary of 30,000 dollars versus 40,000 dollars, acting on his father's advice to prioritize faster advancement over immediate pay. The arbitrage desk he joined executed a multi-layered convergence trade combining on-the-run versus off-the-run bond positions, bond futures basis trades, and a volatility arbitrage between over-the-counter options on individual bonds and options on bond futures. Salomon's repo desk had access to thousands of institutional clients across the country, giving the group a structural advantage unavailable to standalone hedge funds. Management encouraged the desk not to trade frenetically, and Liar's Poker served informally as a vetting mechanism, giving colleagues a sense of how sensibly a person reasoned under uncertainty.

Haghani co-founded Long-Term Capital Management as its youngest partner at roughly age 32. LTCM averaged approximately 31.2 percent per year for its first four years through the end of 1997 and never lost money for two consecutive months in that period. Despite the strong returns, Haghani says the opportunity set felt like it was genuinely declining over those years. In 1997 LTCM decided to go private, returning investor capital and concentrating the capital behind the trades, a decision Haghani calls fateful and believes was wrong even on an ex-ante basis.

Russia's default on domestic ruble debt was the spark that triggered a broad risk-off move across the financial system rather than the direct source of LTCM's major losses. Haghani notes Goldman Sachs had position sizes four times bigger than LTCM's in certain of the large positions, and that all major shops held many of the same trades, making the systemic problem one of crowded positions across the industry. After LTCM lost 80 percent of its capital, leverage on remaining positions was roughly five times larger than before the losses for the same position sizes. Haghani disputes Roger Lowenstein's characterization of him as mercurial and reckless, noting that Lowenstein did not speak to him or, to his knowledge, any of the partners when writing When Genius Failed.

The most underexamined lesson Haghani draws from LTCM is personal rather than institutional. He had approximately 80 percent of his family's liquid net worth invested in the fund, failed to account for his ownership stake in the management company going to zero if the fund failed, and did not adequately weigh that his human capital and earning potential were highly correlated to LTCM's success. He concludes he should have had no more than 50 percent, or even less, of his total wealth in the fund, and draws a broader lesson for anyone working at firms like Anthropic or SpaceX about thinking carefully about how much skin to have in their own game.

After leaving LTCM in 1999 at roughly age 40, Haghani took approximately a ten-year sabbatical focused on fatherhood and self-education. He eventually moved from the Yale endowment model, which he found consumed excessive time and generated roughly a 50 percent effective tax rate, to index funds, and founded Elm Wealth in 2011. The LMETF trades on the New York Stock Exchange under the ticker ELM with an expense ratio of 24 basis points and just under 600 million dollars in assets. Its current allocation is approximately 15 percent underweight US equities at around 30 percent, 14 percent overweight non-US assets at around 34 percent, and 10 percent overweight fixed income mostly in Treasury bills, driven by a US cyclically adjusted earnings yield of roughly 3 to 3.25 percent against 10-year TIPS yields of around 2.25 percent, implying approximately a 1 percent equity risk premium.

Haghani argues that LTCM's failure was partly caused by focusing on the most likely outcome rather than properly weighting severe left-tail scenarios, and that this shaped his broader view that expected utility maximization rather than expected wealth maximization is the correct framework for position sizing. He believes that if he had internalized this principle before 1998, his personal financial decisions during that period would have been different even if the firm's institutional decisions remained the same. He adds that reading a book alone is insufficient to produce that change and that someone must also forcefully impress upon the reader that the lessons must be taken to heart.