“Long-Term Capital Management (LTCM) was a hedge fund founded in 1994 by a group of prominent financial professionals, including Nobel laureate economists and former Wall Street traders. The fund was designed to use complex mathematical models to generate high returns with low risk by taking advantage of market inefficiencies.
At its peak, LTCM managed over $100 billion in assets and was one of the largest hedge funds in the world. However, in 1998, the fund faced a significant crisis as a result of the Russian financial crisis, which led to a sharp decline in global markets and a liquidity crisis in the hedge fund industry.
LTCM’s portfolio suffered significant losses, and the fund was on the verge of collapse. The situation was considered a systemic risk to the financial system, as many major banks and financial institutions had significant exposure to LTCM’s investments.
In response to the crisis, the Federal Reserve Bank of New York organized a consortium of banks to provide a bailout package for LTCM, which prevented its collapse and stabilized the financial system. However, the incident raised concerns about the risks posed by highly leveraged hedge funds and the need for greater oversight and regulation of the financial sector.
The LTCM crisis is widely regarded as one of the most significant events in the history of modern finance, as it demonstrated the potential for even the most sophisticated and well-respected financial institutions to fail in the face of unexpected market shocks. It also highlighted the need for greater transparency and risk management in the financial sector, which led to increased regulatory oversight and changes in industry practices.”
Sourced from Chat GPT, assessed by Sean Lee
Postscript: One of the biggest positions that LTCM had was the basic USD/JPY carry trade and they had a very big one. When the market got wind of the fact that LTCM was starting to bail out of its positions, USD/JPY fell by as much as 14 big figures in a single session (or two, if my memory serves me correctly).