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 ?
In the wake of the LTCM crisis, banks significantly raised haircuts and stopped financing much of their repo activity.
When LTCM was about to fail, the Federal Reserve stepped in to broker a deal to prevent default, thereby avoiding triggering a broader systemic shock.
Not a single one of them factored the 9/11 terrorist attacks into their calculations any more than LTCM included Russia defaulting on its bonds in theirs.
uncertainty about values and the thin trading markets, in which LTCM was
However, after the 1998 collapse of LTCM, most dealer-banks required full collateralization of hedge fund transactions.
According to this explanation, Bear was selected for punishment by the Wall Street colleagues it had snubbed 10 years earlier (among them future Treasury Secretary Henry Paulson, who was then working at Goldman Sachs) by declining to join a team assembled by the Federal Reserve to bail out the broken LTCM hedge fund.
For example, the Russian financial crisis in 1998 was a major contributor to the collapse of aforementioned LTCM fund, but mathematical modules could not and did not predict the crisis.
Because of the impeccable reputation of its advisers, not only was LTCM able to assemble $1.
A hedge fund that specialized in fixed-income arbitrage, LTCM was run by ex-academics who were widely considered too brilliant to lose money, let alone preside over one of history's greatest financial disasters.
However, the resultant complacency provided the background for the onset of the present crisis--calamity akin to a global LTCM on steroids.
Another is that unlike 1987, and unlike LTCM, this is not a liquidity crisis in which fear of panic-selling by others causes investors to unload intrinsically sound assets at bargain-basement prices.
The resulting downward cycle is exactly what we saw with the demise of LTCM.