LTCM 25th Anniversary

Welcome to the fortieth Pari Passu newsletter.

Today, we are learning more about one of the most fascinating stories in the world of secret hedge funds, Long Term Capital Management.

Almost exactly 25 years ago, on September 23, 1998, bankers from Goldman Sachs, Bear Stearns, Chase, J.P. Morgan, Morgan Stanley (and nearly every major firm on Wall Street) met at the Federal Reserve Bank of New York to save a firm known as Long Term Capital Management (LTCM). It was a spectacular fall from grace for LTCM, a firm that was a perfect combination of success, secrecy, intelligence (and leverage). 

LTCM Background

LTCM’s story begins with John Meriwether, a bond trader at Salomon Brothers. He was a successful trader, making Salmon Brothers’ fixed-income arbitrage desk one of the most profitable units within the firm. However, in 1991, he was forced to resign after news of the desk's involvement in illegal bidding practices for U.S. Treasury bonds resulted in fines and a reputational hit for the firm. Meriwether’s strategy at Salmon was simple - find two bonds that traded (almost) together, and profit when there was a discrepancy in pricing. It led to huge success, which motivated him to start Long-Term Capital Management (LTCM). His vision was to replicate the success of the bond arbitrage desk on a grander scale, employing more quantitative methods and leverage to generate consistent returns. To realize this vision, Meriwether recruited an all-star players, many of whom had previously worked with him at Salomon Brothers. Larry Hilibrand, Victor Haghani, Myron Scholes, and Robert C. Merton were among the individuals who served as Partners at LTCM. You may know Scholes and Merton as Nobel Prize Laureates for their creation of the Black–Scholes–Merton model. One of LTCM's distinguishing features was its low-overhead design. The fund operated with a lean structure, minimizing administrative costs and focusing on generating returns through trading strategies.

LTCM secured capital from various sources, leveraging Meriwether and the other Partner’s reputations, as well as assistance from Merrill Lynch. UHNW individuals, celebrities, private university endowments, and even the Italian central bank became investors in the fund. 

Early Success and Strategy

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