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Long-Term Captial Management (LTCM) - Swaps, VIX, emerging markets
Count of distinct funds: 1
The ironically-named Long Term Capital Management (LTCM) was started in 1994 by Salomon Brothers bond trader John Meriwether in concert with academians Myron Scholes and Robert C. Merton. It in fact lasted four years. Scholes and Merton had developed quantitative hedging models for fixed income arbitrage, and the trio sought to implement them proftably as a hedge fund. This all worked beautifully, producing returns of about 40% per year, until late 1998. At this point, amidst the Asian Financial Crisis, Russia defaulted on its sovereign debt, and a cascade of events was set off that destroyed the fund. LTCM was vulnerable because, to profit based on its arbitrage strategy, extremely high leverage needed to be employed (100:1 or more). The fund had a equity of about $4.72 billion at peak, and positions in excess of $1.25 trillion. Thus a small mistake leading to a few percentage drop in the net position's worth could completely wipe out the capital base. This is indeed what happened, and we defer to Wikipedia for the details of the downfall as well as the subsequent bank/Fed bailout:
Over the years we have observed many rumors (and some open discussion) regarding a gold connection at LTCM. The fund allegedly had about 400 tonnes of gold held on a lease from the Fed or some other major bank, worth about $4 billion at the time. Apparently a payment of approximately this amount was made to the Fed by the LTCM bailout consortium: was this cash in lieu of LTCM's gold loss? Or was the gold supplied from somewhere else, e.g., the Bank of Italy? If so, the bailout cannot be categorized as "free of public funding", as the public (some public) would still be out the corresponding amount of gold. This article has another interesting observation regarding LTCM and gold:
We would love to hear more details if anyone knows anything.
We also note with much dismay that Meriwether was awarded a Lifetime Achievement Award in 2006 by Alternative Investment News. We do agree, however, that producing a total collapse in value, engendering a bailout, and nearly precipitating a broader collapse in global financial markets is an "alternative" outcome.
For further information on LTCM's collapse, see the following:
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Important: This fund is on our list of hedge funds that have "imploded" (see also ailing lenders). However, please note that "imploded" is a somewhat subjective. The "imploded" list contains hedge funds (or other unregulated and autonomous speculative investment funds) which have gone through some sort of permanent adverse change. This is a somewhat subjective call, and does not necessarily mean total shutdown or bankruptcy. It can also mean steep and rapid mark-downs in net asset value; or abnormal "bail-out" by corporate parents or peers in order to avoid write-downs and provide liquidity. The funds are of any type and sector.