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Long-Term Capital Management
Long-Term Capital Management L.P. (LTCM) was a highly leveraged hedge fund. In 1998, it received a $3.6 billion bailout from a group of 14 banks, in a deal brokered and put together by the Federal Reserve Bank of New York.
LTCM was founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Members of LTCM's board of directors included Myron Scholes and Robert C. Merton, who three years later in 1997 shared the Nobel Prize in Economics for having developed the Black–Scholes model of financial dynamics.
LTCM was initially successful, with annualized returns (after fees) of around 21% in its first year, 43% in its second year and 41% in its third year. However, in 1998 it lost $4.6 billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financial crisis and 1998 Russian financial crisis. The master hedge fund, Long-Term Capital Portfolio L.P., collapsed soon thereafter, leading to an agreement on September 23, 1998, among 14 financial institutions for a $3.65 billion recapitalization under the supervision of the Federal Reserve. The fund was liquidated and dissolved in early 2000.
John Meriwether headed Salomon Brothers' bond arbitrage desk until he resigned in 1991 amid a trading scandal. According to Chi-fu Huang, later a Principal at LTCM, the bond arbitrage group was responsible for 80–100% of Salomon's global total earnings from the late 1980s until the early 1990s.
In 1993 Meriwether created Long-Term Capital as a hedge fund and recruited several Salomon bond traders; Larry Hilibrand and Victor Haghani in particular would wield substantial clout and two future winners of the Nobel Memorial Prize, Myron Scholes and Robert C. Merton. Other principals included Eric Rosenfeld, Greg Hawkins, William Krasker, Dick Leahy, James McEntee, Robert Shustak, and David W. Mullins Jr.
The company consisted of Long-Term Capital Management (LTCM), a Delaware-incorporated company based in Greenwich, Connecticut. LTCM managed trades in Long-Term Capital Portfolio LP, a partnership registered in the Cayman Islands. The fund's operation was designed to have extremely low overhead; trades were conducted through a partnership with Bear Stearns and client relations were handled by Merrill Lynch.
Meriwether chose to start a hedge fund to avoid the financial regulation imposed on more traditional investment vehicles, such as mutual funds, as established by the Investment Company Act of 1940 – funds which accepted stakes from 100 or fewer individuals each with more than $1 million in net worth were exempt from most of the regulations that bound other investment companies. The bulk of the money raised, in late 1993, came from companies and individuals connected to the financial industry. With the help of Merrill Lynch, LTCM also secured hundreds of millions of dollars from high-net-worth individuals including business owners and celebrities, as well as private university endowments and later the Italian central bank. By 24 February 1994, the day LTCM began trading, the company had amassed just over $1.01 billion in capital.
The main strategy was to find pairs of bonds which should have a predictable spread between their prices, and then when this spread widened further to basically place a bet that the two prices would come back towards each other.
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Long-Term Capital Management
Long-Term Capital Management L.P. (LTCM) was a highly leveraged hedge fund. In 1998, it received a $3.6 billion bailout from a group of 14 banks, in a deal brokered and put together by the Federal Reserve Bank of New York.
LTCM was founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Members of LTCM's board of directors included Myron Scholes and Robert C. Merton, who three years later in 1997 shared the Nobel Prize in Economics for having developed the Black–Scholes model of financial dynamics.
LTCM was initially successful, with annualized returns (after fees) of around 21% in its first year, 43% in its second year and 41% in its third year. However, in 1998 it lost $4.6 billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financial crisis and 1998 Russian financial crisis. The master hedge fund, Long-Term Capital Portfolio L.P., collapsed soon thereafter, leading to an agreement on September 23, 1998, among 14 financial institutions for a $3.65 billion recapitalization under the supervision of the Federal Reserve. The fund was liquidated and dissolved in early 2000.
John Meriwether headed Salomon Brothers' bond arbitrage desk until he resigned in 1991 amid a trading scandal. According to Chi-fu Huang, later a Principal at LTCM, the bond arbitrage group was responsible for 80–100% of Salomon's global total earnings from the late 1980s until the early 1990s.
In 1993 Meriwether created Long-Term Capital as a hedge fund and recruited several Salomon bond traders; Larry Hilibrand and Victor Haghani in particular would wield substantial clout and two future winners of the Nobel Memorial Prize, Myron Scholes and Robert C. Merton. Other principals included Eric Rosenfeld, Greg Hawkins, William Krasker, Dick Leahy, James McEntee, Robert Shustak, and David W. Mullins Jr.
The company consisted of Long-Term Capital Management (LTCM), a Delaware-incorporated company based in Greenwich, Connecticut. LTCM managed trades in Long-Term Capital Portfolio LP, a partnership registered in the Cayman Islands. The fund's operation was designed to have extremely low overhead; trades were conducted through a partnership with Bear Stearns and client relations were handled by Merrill Lynch.
Meriwether chose to start a hedge fund to avoid the financial regulation imposed on more traditional investment vehicles, such as mutual funds, as established by the Investment Company Act of 1940 – funds which accepted stakes from 100 or fewer individuals each with more than $1 million in net worth were exempt from most of the regulations that bound other investment companies. The bulk of the money raised, in late 1993, came from companies and individuals connected to the financial industry. With the help of Merrill Lynch, LTCM also secured hundreds of millions of dollars from high-net-worth individuals including business owners and celebrities, as well as private university endowments and later the Italian central bank. By 24 February 1994, the day LTCM began trading, the company had amassed just over $1.01 billion in capital.
The main strategy was to find pairs of bonds which should have a predictable spread between their prices, and then when this spread widened further to basically place a bet that the two prices would come back towards each other.