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Investments: ES SU RE
Investments: ES SU RE
x perien
d in g e
Bo n d t ra
Black LOANS
.6B
= $3
U T
I LO
RE
B A
SU
ES
PR
%
p t o 40
Scholes U
rns
retu
r
ri wethe
Me INVESTMENTS
Merton Up to $1 trillion in derivatives
Mullins
LTCM
$1.25 billion up to $7B PRES
down to $555M SU RE
LOANS
Agenda
• Introduction
• Strategies
• LTCM’s Success
• When Genius failed
• Counterparties
• Bailout-Fed’s Intervention
• Lessons Learnt
• Conclusion
Background
Key Members
• John Meriwether who founded Long Term
Capital Management 1993.
• Fixed Income Trader at Salomon Brothers.
• Two Nobel Laureates: Robert Merton and
Myron Scholes.
• Former Regulator David Mullins.
• Had huge respect in Wall Street more than
Average Dealer or Broker.
Strategies
• Spread Trades
Relative-value trades
paired trades
Convergence trades
• Fixed Income Arbitrage-Yield Curve Trades
• Pooled mortgage market Investments
• Buying and selling volatility
• Merger Arbitrage/Risk Arbitrage
Cash Merger
Stock Merger
It was a Game
• It was unregulated.
• Free to operate in any market.
• No capital charges.
• Only few reporting to US Securities &
Exchange Commission (SEC).
• Interest rate swaps on market rate with no
initial margin.
Borrow From a bank
$4.50
4.00
3.00
2.00
1.00
0.00
3/1994 1/1995 1/1996 1/1997 1/1998
• Investment strategies
• Market dynamics
• Moral hazards
Lessons
The account of collapse of LTCM made
us analyze and think of things which were
essential to be considered to make sure
such type of mistakes doesn’t happen the
next time.
They are
Risk Factor
Risk is basically anything affecting the efficient performance.
Transparency
It is basically to deal with relationship management and openness.
Trading Credit
Taking leverage to multiply the profits. Good ? To a certain level.
Regulations
There must be proper regulations to hedge funds as well . Though it is not
confined to retail investors it is still public money and something should have a
strict enforcement in using the same.
Risk types
•Liquidity Risk
Operational efficiency to meet the margin requirements,
budgeted planning etc.
•Market Risk
Market perceptions, factors driving the market, psychological
aspects on making a instrument liquid and illiquid etc.
•Credit Risk
Efficient formulation of credit policies and ensuring lesser
deviations, in such formed policies.
•Governance Risk
Corporate governance, responsibility and regulatory measures.
•Operational Risk
Maintaining secrecy of operational information, trying to avoid
small mistakes as it could lead to bigger problems.
•Reputational Risk
Maintaining the so earned reputation with good transparency
with clients, employees,shareholders, investors etc.
Reference List
• Shirreff, D (n.d.) “Lessons from the Collapse of
Hedge Fund, Long-term Capital Management”.
• Butler et al (2007) “Long Term Capital Management
case study” Cornell University, New York.
• Halstead, J,M et al (2005) “Hedge Fund Crisis and
Financial Contagion: Evidence from Long Term
Capital Management” pp.65-67.
• The Trillion Dollar Bet (2000) [Accessed from
www.youtube.com on 6’ November’ 2015].
ce
x perien
d in g e
Bo n d t ra
Black LOANS
.6B
= $3
U T
I LO
RE
B A
SU
ES
PR
%
p t o 40
Scholes U
rns
retu
r
ri wethe
Me INVESTMENTS
Merton Up to $1 trillion in derivatives
Mullins
LTCM
$1.25 billion up to $7B PRES
down to $555M SU RE
LOANS