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    Long Term Capital Management - Case Study

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    Anas Godil
    Long Term Capital Management (LTCM) was a highly successful hedge fund founded in 1994 by former Salomon Brothers trader John Meriwether. It employed top academics and traders and pursued strategies across global markets. However, the fund suffered massive losses in 1998 due to the Russian financial crisis and other events, which caused credit spreads and volatility to rise sharply against LTCM's models. By September 1998, LTCM had losses of over $4 billion and was bailed out by a consortium of banks to the tune of $3.765 billion in order to prevent a broader financial crisis.

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    Long Term Capital Management - Case Study

    Uploaded by

    Anas Godil
    369 views10 pages
    Long Term Capital Management (LTCM) was a highly successful hedge fund founded in 1994 by former Salomon Brothers trader John Meriwether. It employed top academics and traders and pursued strategies across global markets. However, the fund suffered massive losses in 1998 due to the Russian financial crisis and other events, which caused credit spreads and volatility to rise sharply against LTCM's models. By September 1998, LTCM had losses of over $4 billion and was bailed out by a consortium of banks to the tune of $3.765 billion in order to prevent a broader financial crisis.

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    Long Term Capital Management (LTCM) was a highly successful hedge fund founded in 1994 by former Salomon Brothers trader John Meriwether. It employed top academics and traders and pursued strategies across global markets. However, the fund suffered massive losses in 1998 due to the Russian financial crisis and other events, which caused credit spreads and volatility to rise sharply against LTCM's models. By September 1998, LTCM had losses of over $4 billion and was bailed out by a consortium of banks to the tune of $3.765 billion in order to prevent a broader financial crisis.

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    369 views10 pages

    Long Term Capital Management - Case Study

    Uploaded by

    Anas Godil
    Long Term Capital Management (LTCM) was a highly successful hedge fund founded in 1994 by former Salomon Brothers trader John Meriwether. It employed top academics and traders and pursued strategies across global markets. However, the fund suffered massive losses in 1998 due to the Russian financial crisis and other events, which caused credit spreads and volatility to rise sharply against LTCM's models. By September 1998, LTCM had losses of over $4 billion and was bailed out by a consortium of banks to the tune of $3.765 billion in order to prevent a broader financial crisis.

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    Presented By Anas Yousuf Bilal Shafiq Shahnawaz Saud Khan

    Long term capital management was a hedge fund firm founded in 1994 by Jhon Meriwether. It had 25 Ph.d.s, a former vice chairman of the federal reserves and a wall street successful trader. Despite of having such qualified people, in 1998 it near collapse roiled markets and required a rescue plan organized by the Federal Reserve bank of Newyork.

    LTCM generated high returns in first few years which were 43% in 1995 and 41% in 1996
    They had positions in equity, fixed income, and derivatives markets all over the world. They were of the view that high spread between prices on long term treasury bonds and long term corporate bonds was too high and that this anomaly would disappear and the spread would narrow

    But the case was different, the spread between corporates and Treasuries rose rather than narrowed as predicted by Ltcm. Therefore Ltcm took big losses on its positions, Which decreased its equity position All of this happened due to the collapse of the Russian financial system in August 1998, and other flattering economies .

    Russia unexpectedly defaulted on its debt, which increased their interest rates to 200%. Brazil also devalued its currency, further increasing their interest rates Therefore Investors switched to government bonds. Yields on corporate bonds also increased . This increased the quality rather than decreasing credit spreads, causing losses to LTCM.

    LTCM, by mid September had to liquidate its portfolio of $80 billion as they were unable to meet the demands of their creditors. Here the Federal reserve bank with 14 leading banks and investment houses intervened with a rescue plan and invested $3.765 billion for a 90% stake.

    Model Risk

    LTCM faced model risk Model risk assumes that historical relationships are useful predictors of future relationships, which is true only in the absence of economic shock. LTCM faced economic shock due to financial crises in russia and other countries, which increased credit spreads, risk premiums, liquidity premiums and volatility around the world. The model under estimated the risk

    Diversification

    Ltcm was trading with different assets across the globe.

    All their strategies were based on the notation that the risk premiums and market volatility would ultimately decline.
    Therefore they faced market Risk as all their trading strategies were hinged on a single economic prediction which made them less diversified

    Operational Risk

    LTCMs reporting obligation to regulators was limited Although they required financial statement reporting and daily position reporting, these reports were incomplete and lacked disclosure of derivates positions and trading strategies.

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