Long-Term Capital Management - LTCM
 |
Definition of 'Long-Term Capital Management - LTCM'A large hedge fund led by Nobel Prize-winning economists and renowned Wall Street traders that nearly collapsed the global financial system in 1998 as a result of high-risk arbitrage trading strategies.The fund formed in 1993 and was founded by renowned Salomon Brothers bond trader John Meriwether. |
 |
Investopedia explains 'Long-Term Capital Management - LTCM'LTCM started with just over $1 billion in initial assets and focused on bond trading. The trading strategy of the fund was to make convergence trades, which involve taking advantage of arbitrage between securities that are incorrectly priced relative to each other. Due to the small spread in arbitrage opportunities, the fund had to leverage itself highly to make money. At its height in 1998, the fund had $5 billion in assets, controlled over $100 billion and had positions whose total worth was over a $1 trillion.Due to its highly leveraged nature and a financial crisis in Russia (i.e. the default of government bonds) which led to a flight to quality, the fund sustained massive losses and was in danger of defaulting on its loans. This made it difficult for the fund to cut its losses in its positions. The fund held huge positions in the market, totaling roughly 5% of the total global fixed-income market. LTCM had borrowed massive amounts of money to finance its leveraged trades. Had LTCM gone into default, it would have triggered a global financial crisis, caused by the massive write-offs its creditors would have had to make. In September 1998, the fund, which continued to sustain losses, was bailed out with the help of the Federal Reserve and its creditors and taken over. A systematic meltdown of the market was thus prevented. |
Related Definitions
Articles Of Interest
-
Massive Hedge Fund Failures
Flying high one day but not the next - see the stories behind some spectacular meltdowns. -
Hedge Funds' Higher Returns Come At A Price
Learn how hedge funds win big gains for investors - and why they sometimes lose. -
When The Federal Reserve Intervenes (And Why)
The Federal Reserve doesn't interfere with the economy every time it flounders. Find out more here. -
How The Sharpe Ratio Can Oversimplify Risk
When it comes to hedge funds, this measure is not reliable on its own. -
A Brief History Of The Hedge Fund
Find out how this U.S.-born investment innovation became a $1-trillion industry that's both praised and vilified by the media. -
Hedge Funds: Higher Returns Or Just High Fees?
Discover the advantages and pitfalls of hedge funds and the questions to ask when choosing one. -
Hedge Funds Hunt For Upside, Regardless Of The Market
Hedge funds seek positive absolute returns, and engage in aggressive strategies to make this happen. -
Sell In May – Yay Or Nay?
Seasonal timing in the market, best personified by the adage, “Sell in May – Go away,” has long been the subject of debate among investors. The question remains: Is there anything to it? -
Quants: The Rocket Scientists Of Wall Street
Blend math, finance and computer skills to command a high - and well deserved - salary. -
Financial Career Options For Professionals
Find out if spreading your wings to try a new career will make you soar or fall flat.
Free Annual Reports
