LTCM

First, let's start with what a hedge fund is. A hedge fund is a partnership between investors that use high-risk methods, such as investing borrowed money, with hopes of making large capital gains. LTCM is a hedge fund.

LTCM stands for long term capital management. The idea for LTCM began with John Meriwether who ran bond arbitrage (a municipal bond issued for the purpose of investing the proceeds in securities with higher yields than those paid by the municipal bond) at Salomon Brothers. Meriwether began to hire very smart people to build formulas predicting market prices and outliers. The idea was to buy or sell the bonds when prices deviated from the norm (norm was found through the formulas). Then they would wait for prices to converge again so that they could make money. The group became known within Salomon Brothers for its confidence and success. Bond arbitrage started to spread across the financial industry. By the1990S the number of hedge funds in the U.S. had gone up exponentially, from about 200 to 3000 in just over twenty years.

Shortly after Meriwether was forced to resign due to a mishap with an employee but that didn't stop him. He builds his own new hedge fund around the same principles that had brought him success with Salomon Brothers. He filled his new fund with industry veterans and respected academics. Meriwether had big plans for his hedge fund. First, he wanted to raise capital of 2.5 billion dollars. Second, he decided that LTCM's asking fees would be 25% of profits on top of an annual two percent charge on assets (hedge fund managers usually charge an asset management fee based on the fund's net assets along with a performance-based fee structure as a share of the fund capital appreciation. The asset management fee is generally between 1% and 2% of the fund’s net assets and is typically charged on a monthly or quarterly basis. The performance fee, structured as an allocation of partnership profits for tax purposes, has historically been 20% of each investor’s net profits for each year). Third, he required investors to keep their capital in for a minimum of three years. These were not common standards for the typical hedge fund. Because his methods were atypical he recruited a lot of respected academics, including Myron Scholes who was a financial-economic and Nobel prize winner, to give his company credibility. By February of 1994, LTCM launched with the largest amount of funding ever: 1.25 billion dollars. In just two years LTCM has risen over 140 billion dollars in assets.
Critics began to get worried about the dependency of LTCM's models has on a completely rational market. As we learned in class the formula's don't always work. And the more you rely on that 0.01% chance of something bad occurring the more likely it becomes that it will occur. It turns out these critics had a right to be worried. When the Asian markets fell LTCM had its first big loss. With the global financial crisis, came panic. Banks began to withdraw from more risky investments. LTCM began to lose money on every bet it made. Another problem for them was Salomon, which played a large role in its positions, began to liquidate their assets. Everything took a turn for the worse when Russia hit its financial crisis. LTCM continued to lose money and investors and was eventually left with only 500 million in assets and was barely able to clear trades. Banks began to prepare for the possibility that LTCM would default. In the end, the Federal Reserve along with Wallstreet and major banks put together a 3.65 billion bailout package. If they hadn't bailed LTCM out it Wallstreet would have faced huge losses and there would have been a financial crisis in the US. In the aftermath of it all most partners went to start new hege funds and financial firms.




 https://www.businessinsider.com/the-fall-of-long-term-capital-management-2014-7
https://financial-dictionary.thefreedictionary.com/arbitrage+bond