Long Term Capital Management

About Long Term Capital Management

Long Term Capital Management was a hedge fund founded in 1994 by John Meriwether, formerly of Salomon Brothers. Nobel laureates Myron Scholes and Robert Merton were partners. LTCM used sophisticated mathematical models and high leverage, eventually reaching leverage of 25 to 1. The fund managed 7 billion but had derivatives positions with a notional value of 1.25 trillion. In August and September 1998, following the Russian default, LTCM lost 4.6 billion. The Federal Reserve Bank of New York organized a 3.6 billion private bailout by 14 banks. The Fed did not contribute funds but facilitated the rescue to prevent systemic risk. LTCM was liquidated by 2000. The case highlighted the risks of excessive leverage and the potential for systemic risk from hedge funds. It also demonstrated the limitations of quantitative models that underestimate tail risk.