Long-Term Capital Management

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Long-Term Capital Management

A defunct hedge fund, established in 1993, that, at its height, held positions worth more than $1 trillion. Its investment strategy was to take advantage of arbitrage opportunities in bonds and other fixed-income securities; profits on individual transactions were small, so LTCM was required to borrow massive amounts of money in order to operate. It was at first enormously successful, with a 40% annualized return after fees. However, when Russia defaulted on its government bonds in 1998, there was a steep drop in bond prices, endangering LTCM's positions because of its high leverage. Because LTCM controlled upwards of 5% of the bond market at the time, defaulting on its loans would have caused global financial panic. It was eventually bailed out by a consortium of organizations under the supervision of the Federal Reserve.
References in periodicals archive ?
The possible systemic consequences of a run on a distressed firm under the Safe Harbor are best illustrated by the facts surrounding the near failure of LTCM. (183) When it became apparent that LTCM was on the brink of filing for bankruptcy, the Federal Reserve Bank of New York intervened to bail out the distressed hedge fund.
In 1998 a problem developed with the LTCM strategy.
As Lewis, Panic's editor, writes in his sharp introduction, such crises have become the norm because, like LTCM's young professors, we've developed an unhealthy faith in the system's inherent stability.
El LTCM, que estaba endeudado por millonarios prestamos, se vio en la disyuntiva de quebrar o vender sus bonos de la Tesoreria, lo que afectaria al mercado de credito en Estados Unidos y forzaria a un incremento en las tasas de interes.
The LTCM failure saw its systemic effects forestalled by the Federal Reserve's actions in bringing together a bank consortium and having them stop tile demand for sales to meet collateral.
Unlike today, the source and nature of LTCM's positions in credit spread instruments used to be more straightforward, allowing market analysts and their firms to more easily quantify and manage the fallout from this short-lived crisis.
LTCM, being heavily geared, stood to lose billions of dollars - and in order to liquidate its positions it would have to sell Treasury bonds, plunging the US credit markets into turmoil and forcing up interest rates.
Since the 1998 near collapse of Long-Term Capital Management (LTCM), a large hedge fund--a pooled investment vehicle that is privately managed and often engages in active trading of various types of securities and commodity futures and options--the number of hedge funds has grown, and they have attracted investments from institutional investors such as pension plans.
(6) Another case occurred after the market peak in July 1998; a Fed rate cut in late September was a response to the situation in the money markets following the near collapse of Long-Term Capital Management (LTCM) and not a response to the stock market per se.
Julian Robertson, much less of an LTCM, can be attributed to a failure
Mas grave fue la de Long-Term Capital Management (LTCM) en 1998, entidad que tuvo la peculiaridad de contar con dos destacados premios Nobel --Merton y Scholes-- como asociados y asesores y el agravante de exigir una operacion de salvamento organizada por la Reserva Federal de EE.UU., para evitar danos mas graves en el sistema financiero de dicho pais (4).
Ante la posibilidad de la quiebra de un fondo de alto riesgo, el Long Term Capital Management (LTCM), la muy liberal Reserva Federal se olvido de sus principios de no intervencion y lidero un paquete de ayudas al fondo en el que participaron los mas importantes bancos de inversion de EE.UU.