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Finance, Accounting and Control Case Study

Case Title:

Long Term Capital Management Fund: What Went Wrong

Publication Year : 2004

Authors: Guru Dutta P & G Srikanth

Industry: Banking, Insurance and Financial Services


Case Code: FAC0017

Teaching Note: Available

Structured Assignment: Available

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Long Term Capital Management fund (LTCM), one of the world's largest hedge funds was known for many wrong reasons. LTCM, which was started by a group of renowned and experienced traders of Wall Street, took full advantage of the poor disclosure requirements of a hedge fund. LTCM was able to parlay its prestige built over the period of time into a virtually unlimited access to borrowed money. The fund managers took speculative positions on a bet that the asset prices would converge. In due course, the fund assets were leveraged higher than most other hedge funds.

Pedagogical Objectives:

  • To discuss how the risk in convergence trading activity can affect the volatility of the asset prices
  • To discuss the risks arising from high leverage of the funds' assets.

Keywords : Long Term Capital Management (LTCM), Hedge fund, John Meriwether, Convergence trades, Relative-value trades, Directional trades, Finance Case Study, High leverage of funds, Commercial mortgage backed bonds, Junk bonds, Warren Buffet, Societe Generale, Credit Agricole, BNP Paribas, US Federal Reserve bailout, US economy

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