Founded as a Hedge fund management company it had in its helm two great Nobel laureates adding to its great reputation as a risk arbitrage enterprise and had a great success in developing innovative risk strategies for its clients. The firm had a high growth with a lot of investments favored by lending firms across the globe due to its reputation in the financial world and garnered more than $1 trillion as a capital base, before its downfall.
Are the Markets to be blamed?
As a high return on the risk, it became the highest player in the Risk arbitrage market to grow at a very fast pace during a 5 year period. Taking a risk on something which does not have, and need could be a great disaster in the long term which was how LTCM headed for a downfall in how they risked the entire fund, clients they had.
Both the call on margins and the selling of assets to cover a systematic risk was totally an immature move on the part of the fund and thus came its downfall.
- extreme movements in the financial markets forced the LTCM to be victimized and lose its shine in the markets drastically
- the Russian bond default was surprising and which pushed the markets which were losing all to face such trying times by weakling the dollar against the Russian rubles
- in the so-called Reverse Plaza accord, the US Government increased the value of the dollar against the Japanese Yuan which was reduced, shifting the focus on the halving of the Russian rubles which weakened the subsequent Asian currencies due to demand in the crude oil consumption
- The Russian economy has been always sensitive to the oil prices, with a lesser demand for Russian oil and decrease in their revenue from oil and taxed revenue made the currencies to be diluted and fall in the global currency markets sending a ripple effect in managed funds across the world
- As many owners scrambled to offload the Russians bonds, which coupled with the currency devaluation became a huge run for cover operation for the investors with the effect on the bonds market and ultimately on the LTCM.
The widening of the spread of the risk arbitrage US Treasury bonds saw a huge fall, made the liquidity of the investors on a high-risk radar and thus making investors not to depend on correlated trades and exposure to converging markets.