What is Long Term Capital Management?
Long-Term Capital Management L.P. was a hedge fund established in Greenwich, Connecticut, that used absolute-return trading tactics in derivatives contracts with substantial financial leverage. John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers, started LTCM in 1994.
LTCM was profitable in its heyday in the 1990s, drawing over $1 billion of investor capital by promising that its arbitrage strategy would yield enormous returns for investors.
At its near failure, the LTCM Fund was the most highly leveraged extensive hedge fund reporting to the CFTC. The combination of LTCM Fund’s large capital base and a high degree of leverage allowed it to hold more than $125 billion in total assets, nearly four times the assets of the next largest hedge fund.
Why is it important to know about LTCM?
Primarily because of the failed strategy they adopted, which the risk professionals should avoid. The primary method of LTCM was to engage in convergence trades. These trades entailed locating securities that were mispriced with one another and placing long positions in the inexpensive ones while shorting the expensive ones.