I was motivated to write this article by watching a documentary filmed by the BBC – ‘Trillion Dollar Bet’. The film tells how investors were blinded by the belief in the talent of academicians Samuel Scholes and Robert Merton, who managed the LTCM fund. The history of the fund consists of both multimillion-dollar profits and a total loss of 92% of investors’ funds.
The film leads to a certain moral for every trader:
You need to be able to get out when you’re still good, you can’t ignore the mistake. That’s what good traders do.
History of the LTCM fund
LTCM – (Long Term Capital Managment) – was founded in 1994 by John Meriwether, former Vice Chairman and Head of Bond Trading at Salomon Brothers. LTCM’s board of directors included Myron S. Scholes and Robert S. Merton, who received the 1997 Nobel Prize in Economics for ‘A New Method for Determining the Value of Derivatives,’ namely the option pricing model. Initially, the fund worked very successfully, the first year of operation was closed with a profit of more than + 21%, + 43% in the second year and + 41% in the third year.
In 1998, LTCM lost $ 4.6 billion in less than four months after the Asian financial crisis in 1997. On its hectic days, the fund lost between $ 100 million and $ 500 million a day.
The final collapse of the fund came after the announcement of the Russian default in August 1998. The liquidation of the fund required intervention from the Federal Reserve System, with the liquidation and dissolution of the fund in early 2000.
The reason for the crash of the LTCM fund
My personal opinion based on watching the documentary.
After analyzing the publicly available material, I concluded that the main reason for such catastrophic losses (the fund lost $ 4.6 billion) was the reluctance of managers to agree with errors in open positions. The managers could not accept the fact of the error of open positions and fix losses. According to the film, at the time of serious losses, they began to average positions, which resulted in an almost complete loss of capital.
I recommend watching the movie Trillion Dollar Bet
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