Finance · Profile from Finance Research Companion
Long-Term Capital Management, L.P.
The Greenwich, Connecticut hedge fund founded in 1994 by John Meriwether, the former head of bond arbitrage at Salomon Brothers, with a partnership that included two future Nobel laureates (Myron Scholes and Robert Merton) and a former Federal Reserve vice chairman (David Mullins). It made ~40% a year after fees in 1995 and 1996 by betting, with very high leverage, that small price gaps between similar securities would close. At the start of 1998 it held ~$125bn of balance-sheet assets on ~$4.7bn of capital, plus derivatives with more than $1 trillion of notional value. After Russia defaulted in August 1998 nearly every spread it was betting on widened at once, and it lost ~$4.6bn in about four months. On 23 September 1998, at the Federal Reserve Bank of New York, 14 banks and brokers agreed to inject ~$3.6bn (~$3.625bn) for 90% of the fund and run it down; Bear Stearns refused to join. No public money was spent, but the Fed's role made LTCM the founding case of the modern "too interconnected to fail" problem, and the template, never quite repeated, for a privately funded rescue of a systemic non-bank.
At a glance
- Founded
- February 1994 (began trading 24 February 1994, reported); management company Long-Term Capital Management L.P., main fund Long-Term Capital Portfolio L.P. (Cayman Islands), feeder funds for US and non-US investors
- Headquarters
- Greenwich, Connecticut; offices in London and Tokyo
- Ownership / structure
- Private partnership owned by its principals; investors bought into feeder funds with a ~$10m minimum and a three-year lock-up (reported); fees ~2% of assets and 25% of profits
- Leadership
- John Meriwether (founder); principals included Eric Rosenfeld, Lawrence Hilibrand, Victor Haghani, Gregory Hawkins, William Krasker, Myron Scholes, Robert Merton and David Mullins
- Segment
- Hedge fund (relative-value / fixed-income arbitrage, later also equity volatility, merger arbitrage and directional trades)
- Scale
- ~$1.25bn raised at launch (reported, the largest hedge-fund launch to that date); capital peaked at ~$7bn in 1997; ~$4.7bn of capital, ~$125bn of balance-sheet assets and >$1tn of derivatives notional at the start of 1998 (reported)
- Returns
- Net ~20% (part-year 1994), ~43% (1995), ~41% (1996), ~17% (1997) (reported, verify exact figures); 1998: lost ~90% of capital
- Loss
- ~$4.6bn of losses in 1998 (Lowenstein; his breakdown attributes ~$1.6bn to swap-spread trades and ~$1.3bn to equity volatility). On ~$4.7bn of start-1998 capital that is ~98%; capital of ~$0.4–0.6bn at the 23 September rescue implies ~$4.1–4.3bn (~90%) lost by then, so the two figures use different cut-offs
- Rescue
- 23 September 1998: 14 institutions inject ~$3.6bn (~$3.625bn) for 90% of the fund under an oversight committee; Bear Stearns declines; earlier that day an offer from Berkshire Hathaway, AIG and Goldman Sachs to buy the fund lapsed
- End
- Positions wound down by early 2000; consortium repaid; fund dissolved (reported)
8 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 and the Partnership Raise
Founding / fundraising
1995
Convergence and Relative Value Trading Book
Launch (core strategy build-out)
1996
Equity Volatility and Risk Arbitrage Expansion
Pivot / diversification into new strategies
1997
Returning Capital to Investors
Capital restructuring (forced return of outside capital)
1998
Buffett AIG Goldman Bid
Acquisition attempt (failed)
1998
Fed Brokered Recapitalisation
Bailout (private recapitalisation convened by the Federal Reserve Bank of New York)
1998
Russian Default and August Losses
Failure (market and liquidity loss)
1999
Wind Down Tax Case and JWM Partners
Wind-down / litigation / relaunch