Long-Term Capital Management

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Long-Term Capital Management
legal form Investment company
founding 1994
resolution 2000
Seat Greenwich , Connecticut
management Robert C. Merton , Myron Samuel Scholes , John Meriwether
Number of employees <200
Branch Hedge funds

Long-Term Capital Management ( LTCM ) was a 1994 by John Meriwether (former deputy head and head of pensions trading at Salomon Brothers ), was established in hedge funds . Myron S. Scholes and Robert Carhart Merton , who were awarded the 1997 Alfred Nobel Memorial Prize for Economics , were among the directors . The distress of the Fund in 1998 threatened the international financial system; a financial crisis was averted by a rescue operation and the fund was finally dissolved by 2000.

history

LTCM was founded in 1994 by John Meriwether (former Vice President and Head of Fixed Income Trading at Salomon Brothers ).

Successful years (1994–1998)

At its peak in early 1998, LTCM on equity of 7.3 billion USD after the end of 1997 $ 2.7 billion to investors as returns were repaid. The minimum investor investment was $ 10 million with a minimum term of three years, with virtually no means of obtaining information about the nature of the fund's operations. Due to the high investment capital of 80 investors, no new investors were accepted in 1995. LTCM financed its investments almost exclusively with borrowed capital and had to deposit small amounts of collateral. Strategically, fixed-income arbitrage was speculated. In anticipation of the approaching European Monetary Union , a uniform interest rate was expected to develop in the euro area. This meant that the prices of fixed income securities such as For example, Italian government bonds , which still had traditionally high interest rates, had to rise, while the prices of German government bonds , with traditionally rather low interest rates, had to fall in comparison. So it was invested in Italian fixed-income bonds while short selling German fixed-income bonds.

LTCM had approximately $ 4 billion in equity in early 1998, compared to a $ 125 billion short sale portfolio . The securities were used as collateral to borrow even more leverage so that bonds and options could be entered into on derivatives based on the value of the British pound . The securities included Russian and American Treasury Bonds as well as Danish real estate mortgages. In the end, the derivatives reached a value of 1.25 trillion USD (in today's purchasing power 1.96 trillion USD).

Crisis and Dissolution (1998–2000)

The crisis was caused by severe turbulence on the financial markets due to the open economy and the currency crisis in Russia in 1998 . As a result of the Russian crisis, large funds and portfolios were increasingly shifted into US government bonds, which were considered safer, so that the spread between swap interest and treasury bonds rose sharply. In Europe, in particular, there was more investment in safe German fixed-income securities and at the same time, Italian fixed-income securities, which were now more suspicious, were sold - exactly the opposite of what would have been expected from the coming introduction of the EU monetary union.

As LTCM had speculated on a narrowing of these spreads, it suffered massive losses. At the same time, many market participants were now aware of LTCM's positions and problems. Knowing that LTCM had to close out its positions sooner or later, many market participants drove the spread wider and wider. In August 1998, equity decreased to $ 2.1 billion and LTCM subsequently sold most of the assets at bargain prices. The leverage effect on the loss account via credit mechanisms was so strong that a chain reaction on the international financial markets was feared, as due to the decline in capital in August, equity of USD 2.1 billion was offset by a nominal value of USD 1.25 trillion.

Since there was not enough equity to compensate for this and LTCM was facing insolvency, the US and international financial systems were feared to collapse . Therefore a rescue operation was initiated:

  1. US Federal Reserve Chairman Alan Greenspan had to cut key rates.
  2. It was decided that LTCM would get fresh capital of approximately $ 300 million each (totaling US $ 3.75 billion) from the new investors and that they would take over 90% of LTCM with new management.

Among the actors at the meeting to rescue LTCM at the Central Bank of New York on September 23, 1998 were:

This rescue operation was unique at the time and remained so until the financial crisis from 2007 .

The LTCM fund was finally dissolved in 2000.

After the dissolution

Robert Merton is now a professor at Harvard Business School. Myron Samuel Scholes is again running a hedge fund under the name Platinum Grove Asset Management with assets under management of around five billion US dollars. John Meriwether ran a new hedge fund under the name JWM Partners from immediately after the dissolution of LTCM until 2009. This invested according to the same method as LTCM at that time, by speculating with the help of large loans on the decline in anomalous price differences in the financial markets. However, JWM Partners LLC suffered a 44% loss on its Relative Value Opportunity II Fund from September 2007 to February 2009. JWM Hedge Fund and JWM Partners LLC closed in July 2009.

See also

literature

  • Roger Lowenstein : When Genius Failed. The Rise and Fall of Long Term Capital Management . Random House, New York 2000 (English).
  • Nicholas Dunbar : Inventing Money: Long-term Capital Management and the Search for Risk-free Profits . Wiley & Sons, Chichester 2000 (English).
  • Ulrich Pape, Matthias Schlecker: Reaction of credit spreads to financial market crises using the example of the subprime crisis and the LTCM crisis . In: Finanzbetrieb . Vol. 11, No. 1 , p. 32-39 ( online ).
  • M. Stein: Unbounded irrationality: Risk and organizational narcissism at Long Term Capital Management . In: Human Relations . tape 56 , no. 5 , 2003, p. 523-540 (English).

Web links

Individual evidence

  1. ^ A b Nasser Saber: Speculative Capital Volume 1 - the invisible hand of global finance . Financial Times Prentice Hall, London 1999, ISBN 0-273-64155-7 (English).
  2. ↑ Cihan Bilginsoy: A History of Financial Crises: Dreams and Follies of Expectations . Routledge, 2015, ISBN 978-0-415-68724-9 (English). Here page 353.
  3. ↑ Handelsblatt of September 23, 2008, page 10