Long-Term Capital Management

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Long-Term Capital Management L.P. (LTCM) was a hedge fund management firm based in Greenwich, Connecticut that utilized absolute-return trading strategies (such as fixed-income arbitrage, statistical arbitrage, and pairs trading) combined with high leverage. The firm's master hedge fund, Long-Term Capital Portfolio L.P., failed spectacularly in the late 1990s, leading to a massive bailout by other major financial institutions,[1] which was supervised by the Federal Reserve.

LTCM was founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Board of directors members included Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences.[2] Initially enormously successful with annualized returns of over 40% (after fees) in its first years, in 1998 it lost $4.6 billion in less than four months following the Russian financial crisis and became a prominent example of the risk potential in the hedge fund industry. The fund was closed in early 2000.

Contents

Founding

John Meriwether headed Salomon Brothers' bond trading desk until he was forced to resign in 1991 when his top bond trader, Paul Mozer, admitted to falsifying bids on U.S. Treasury auctions. Because Salomon was the largest bidder on treasury bonds at auction, the Treasury department feared that Salomon would be able to take a strategic position on the bonds in order to influence the price.[3]

As such, Salomon (or any single bidder) was restricted from purchasing more than 35% of the bonds sold at any auction. Mozer circumvented this limitation by making fraudulent bids on behalf of Salomon clients and then transferring the bonds to Salomon's accounts following the transaction. The revelation of this scandal depressed the company's share price and drove investor Warren Buffett to sack its chief executive officer, John Gutfreund. Though Meriwether was not directly implicated, calls for his ousting rose within the company and he resigned before he was let go.[4]

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