Trading & Options · Profile from Trading and Options Research Companion
Long-Term Capital Management
The Greenwich, Connecticut hedge fund that John Meriwether founded in February 1994 with the core of his former Salomon Brothers bond-arbitrage group and two future Nobel laureates, Myron Scholes and Robert Merton. It earned ~43% in 1995 and ~41% in 1996 (Federal Reserve History; the President's Working Group report of April 1999 calls them "about 40 percent" net) by running small convergence spreads at more than 25 times its capital. After Russia's default in August 1998 nearly every spread it was long widened at once. It lost 44% in August and ~$4.6bn in the year, and on 23 Sep 1998 a consortium of 14 banks and brokers convened by the New York Fed put in ~$3.6bn ($3.625bn) for 90% of the fund. The Fed lent nothing (Federal Reserve History; Shared facts). For a trading book LTCM is the reference case of a correct model defeated by leverage, crowding and illiquidity. Most of its spreads were genuine premia and many converged after it had lost control of the book. The fund could not survive the path to convergence. Its story turns on survival. It is a single-event entity in this KB, so the profile carries seven moves (blueprint rule 6).
At a glance
- Founded
- Feb 1994 (Federal Reserve History); began trading 24 Feb 1994 (Dunbar, Inventing Money, 2000, as cited — verify). Management company Long-Term Capital Management L.P. (Delaware); main fund Long-Term Capital Portfolio L.P. (Cayman Islands) (President's Working Group report, Apr 1999)
- Founder
- John W. Meriwether, formerly vice-chairman of Salomon Brothers and head of its bond-arbitrage group (Salomon Brothers Arbitrage Group)
- Headquarters
- Greenwich, Connecticut; offices in London and Tokyo (Finance KB)
- Ownership / structure
- Private partnership owned by its principals; outside investors in feeder funds; ~$10m minimum, three-year lock-up, fees ~2% and 25% of profits (Finance KB, reported — verify)
- Type
- Fixed-income relative-value / convergence-arbitrage hedge fund that added equity volatility, merger arbitrage, equity pairs and emerging-market positions from 1996
- Scale (dated)
- Raised ~$1.25bn at launch (Finance KB, reported); section 19's case file gives "just over $1bn" (Dunbar as cited) — two figures, verify. Capital ~$7bn in 1997 before returning ~$2.7bn at end-1997 (Finance KB; PWG). Capital $4.8bn on 1 Jan 1998 (PWG) or ~$4.7bn (Lowenstein, as cited). Balance-sheet assets $129bn at end-1997 and over $125bn on 31 Aug 1998; OTC derivatives notional $1.3tn end-1997 (PWG)
- Signature record
- Returns ~20% (1994, part-year), 43% (1995), 41% (1996), 17% (1997) (Federal Reserve History, basis not stated); PWG: about 40% net in 1995 and 1996 and slightly under 20% in 1997
- The blow-up
- −44% in Aug 1998; equity $2.3bn at end-Aug (PWG) and ~$400m by 25 Sep (Lowenstein, as cited); ~$4.6bn lost in 1998 (Lowenstein, as cited; Shared facts) — ~98% of ~$4.7bn on a full-1998 basis, against ~90% lost by the 23 Sep rescue; different cut-off dates
- Rescue
- 23 Sep 1998: 14 firms, $3.625bn for 90%; the original owners kept 10%; the last of the money returned by end-1999 (Federal Reserve History)
- Regulators
- None supervised its leverage. It reported to the CFTC as a commodity pool operator (Finance KB); the New York Fed convened the rescue; the President's Working Group (Treasury, Fed Board, SEC, CFTC) reported in Apr 1999
7 strategic moves analysed
Each one gets a full strategy file in the companion: context, the decision, the financing, what happened, and the lesson.
1994
Founding With the Salomon Arbitrage Team
Founding or fund launch
1995
Convergence Book and the On the Run Trade
New strategy / large position (building the core book)
1996
Short Equity Volatility and Risk Arbitrage
Strategy pivot / new market (failure)
1997
Returning Capital and Raising Leverage
Return of outside capital / leverage change (failure)
1998
Fed Convened Recapitalisation
Restructuring, bailout or liquidation (privately funded, officially convened)
1998
Russian Default and the August Losses
Loss, drawdown or blow-up response (failure)
1999
Wind Down the PWG Report and JWM Partners
Liquidation / regulatory aftermath / relaunch