Long-Term Capital Management - LTCM
Categories: Investing, Derivatives
It sounds like something everyone should be doing. Manage your capital for the long-term. Simple enough.
But this isn't a term of general business advice. It's the name of a specific hedge fund...one that went famously (and spectacularly) belly up.
LTCM was a hedge fund set up in 1994 by famed investor John Meriwether, with other big names Myron Scholes and Robert Merton on the board. It was a classic "smartest guys in the room" situation.
The fund began trading in 1994 with about $1 billion under management. Its strategy was multi-layered and complicated, but it essentially looked to make money in currency arbitrage, taking advantage of price mismatches for various securities across different countries.
Things went well in the early going, with big gains posted in each of the first three years.
Then came 1998.
The fund had bet heavily in currencies impacted first by the 1997 Asian financial crisis and then by the 1998 Russian financial crisis. LTCM was on the wrong side of these crisises (big time), and unable to quickly extricate itself quickly. They presumed that "all things debt and currency" would regress to a kind of mean, or to a time-adjusted quasi-yield curve. They eventually did. But it was too late for the firm.
Had you shorted Yahoo in 1998 when it was at split-adjusted $65 a share, you'd have been right...eventually because it ended up being scrap-sold for about $10 a share. But it went to $250 a share in the interim. You'd have been wiped out, same way as LTCM.
It lost more than $4 billion in an extremely short period of time, with potential ripple effects that could have seriously threatened the overall financial system. As such, regulators stepped in, with the Federal Reserve overseeing a private bailout.
This intervention allowed the fund to dissolve in a relatively controlled liquidation, eventually closing out in 2000.
For a period of a few years, "Long-Term Capital Management" became synonymous with Wall Street hubris and spectacular, dangerous financial collapse. But then Enron and WorldCom happened, followed in a few years by the financial crisis...all of which made LTCM seem almost quaint in retrospect.