Long-Term Capital Management


Long-Term Capital Management

A defunct hedge fund, established in 1993, that, at its height, held positions worth more than $1 trillion. Its investment strategy was to take advantage of arbitrage opportunities in bonds and other fixed-income securities; profits on individual transactions were small, so LTCM was required to borrow massive amounts of money in order to operate. It was at first enormously successful, with a 40% annualized return after fees. However, when Russia defaulted on its government bonds in 1998, there was a steep drop in bond prices, endangering LTCM's positions because of its high leverage. Because LTCM controlled upwards of 5% of the bond market at the time, defaulting on its loans would have caused global financial panic. It was eventually bailed out by a consortium of organizations under the supervision of the Federal Reserve.