Lehman Case Study

Topics: Long-Term Capital Management, Hedge fund, Myron Scholes Pages: 8 (2764 words) Published: March 10, 2013
Long-Term Capital Management
From Wikipedia, the free encyclopedia
Long-Term Capital Management

IndustryInvestment services
Founder(s)John W. Meriwether
HeadquartersGreenwich, Connecticut
Key peopleMyron S. Scholes
Robert C. Merton
ProductsFinancial Services
Investment management
Long-Term Capital Management L.P. (LTCM) was a hedge fund management firm[1] based in Greenwich, Connecticut that utilized absolute-return trading strategies (such as fixed-income arbitrage, statistical arbitrage, and pairs trading) combined with high financial leverage. The firm's master hedge fund, Long-Term Capital Portfolio L.P., collapsed in the late 1990s, leading to an agreement on September 23, 1998 among 14 financial institutions for a $3.6 billion recapitalization (bailout) under the supervision of the Federal Reserve.[2] LTCM was founded in 1994 by John W. Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Members of LTCM's board of directors included Myron S. Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences for a "new method to determine the value of derivatives".[3] Initially 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 requiring financial intervention by the Federal Reserve, with the fund liquidating and dissolving in early 2000. Contents  [hide] 

1 Founding
2 Trading strategies
3 Tax avoidance
4 Downturn
5 1998 bailout
6 Aftermath
7 See also
8 Notes
9 Bibliography
10 Further reading

LTCM Partners
John W. MeriwetherFormer vice chair and head of bond trading at Salomon Brothers; MBA, University of Chicago Robert C. MertonLeading scholar in finance; Ph.D., Massachusetts Institute of Technology; Professor at Harvard University Myron S. ScholesCo-author of Black–Scholes model; Ph.D., University of Chicago; Professor at Stanford University David W. Mullins Jr.Vice chairman of the Federal Reserve; Ph.D. MIT; Professor at Harvard University; was seen as potential successor to Alan Greenspan Eric RosenfeldArbitrage group at Salomon; Ph.D. MIT; former Harvard Business School professor William KraskerArbitrage group at Salomon; Ph.D. MIT; former Harvard Business School professor Gregory HawkinsArbitrage group at Salomon; Ph.D. MIT; worked on Bill Clinton's campaign for Arkansas state attorney general Larry HilibrandArbitrage group at Salomon; Ph.D. MIT

James McEnteeBond-trader
Dick LeahyExecutive at Salomon
Victor HaghaniArbitrage group at Salomon; Masters in Finance, LSE John W. Meriwether headed Salomon Brothers' bond trading desk until he resigned in 1991 amidst a trading scandal.[4]

Myron S. Scholes (left) and Robert C. Merton were principals at LTCM. In 1993 he created Long-Term Capital as a hedge fund and recruited several Salomon bond traders and two future Nobel Laureates, Myron S. Scholes and Robert C. Merton.[5][6] Other principals in the firm included Eric Rosenfeld, Greg Hawkins, Larry Hilibrand, William Krasker, Dick Leahy, Victor Haghani, James McEntee, Robert Shustak, and David W. Mullins Jr. The company consisted of Long-Term Capital Management (LTCM), a company incorporated in Delaware but based in Greenwich, Connecticut. LTCM managed trades in Long-Term Capital Portfolio LP, a partnership registered in the Cayman Islands. The fund's operation was designed to have extremely low overhead; trades were conducted through a partnership with Bear Stearns and client relations were handled by Merrill Lynch.[7] Meriwether chose to start a hedge fund to avoid the financial regulation imposed on more traditional investment vehicles, such as mutual funds, as established by the Investment Company Act of 1940—funds which accepted stakes from one hundred or fewer individuals with more than one million dollars in net worth each were exempt from most of...
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