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. By 24 February 1994, the day LTCM began trading, the company had amassed just over $1.01 billion in capital. With the help of Merrill Lynch, LTCM also secured hundreds of millions of dollars from high-net-worth individual including business owners and celebrities, as well as private university endowments and later the Italian central bank. The bulk of the money raised, in late 1993, came from companies and individuals connected to the financial industry. 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 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. LTCM managed trades in Long-Term Capital Portfolio LP, a partnership registered in the Cayman Islands. The company consisted of Long-Term Capital Management (LTCM), a company incorporated in Delaware but based in Greenwich, Connecticut. Other principals included Eric Rosenfeld, Greg Hawkins, William Krasker, Dick Leahy, James McEntee, Robert Shustak, and David W. 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. 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. John Meriwether headed Salomon Brothers' bond arbitrage desk until he resigned in 1991 amid a trading scandal. MIT worked on Bill Clinton's campaign for Arkansas state attorney generalĪrbitrage group at Salomon Masters in Finance, LSE MIT former Harvard Business School professorĪrbitrage group at Salomon Ph.D. MIT Professor at Harvard University was seen as potential successor to Alan GreenspanĪrbitrage group at Salomon Ph.D. Vice chairman of the Federal Reserve Ph.D. Leading scholar in finance Ph.D., Massachusetts Institute of Technology Professor at Harvard UniversityĬo-author of Black–Scholes model Ph.D., University of Chicago Professor at Stanford University Founding LTCM Partnersįormer vice chair and head of bond trading at Salomon Brothers MBA, University of Chicago The fund was liquidated and dissolved in early 2000. 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. 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. 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. Merton, who three years later in 1997 shared the Nobel Prize in Economics for having developed the Black–Scholes model of financial dynamics. Members of LTCM's board of directors included Myron Scholes and Robert C. LTCM was founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. 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 a highly leveraged hedge fund.
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