Long-Term Capital Management (LTCM) was a hedge fund founded in 1994 by a group of highly successful investors, including Nobel Prize-winning economists Myron Scholes and Robert Merton. The fund’s primary strategy was to use mathematical models and sophisticated trading techniques to identify and exploit pricing inefficiencies in the global financial markets.
LTCM’s approach involved using highly leveraged positions in a wide range of assets, including government bonds, currencies, and derivatives. The fund became highly successful and was able to generate substantial returns for its investors, including some of the largest institutional investors and banks in the world.
However, in 1998, LTCM faced significant losses due to the Russian financial crisis and the default of several of its counterparties. The fund was unable to meet its margin calls, leading to widespread panic in the financial markets. To prevent a broader financial crisis, the Federal Reserve Bank of New York orchestrated a bailout of LTCM, which involved a consortium of banks and investment firms providing a $3.6 billion rescue package to the fund.
The collapse of LTCM was a significant event in the financial industry, highlighting the potential risks associated with highly leveraged trading strategies and the interconnectedness of the global financial markets. It also sparked a renewed debate over the role of hedge funds in the financial system and the need for better risk management practices.