what was long term capital management ltcm 
long term capital management ltcm was a large hedge fund led by nobel prize winning economists and renowned wall street traders that blew up in 1998 forcing the u s government to intervene to prevent financial markets from collapsing understanding long term capital management ltcm from its start in 1994 ltcm was wildly successful attracting about 3 5 billion of investor capital by the spring of 1998 with the promise of an arbitrage strategy that could take advantage of temporary changes in market behavior and theoretically reduce the risk level to zero 12however ltcm s highly leveraged trading strategies failed to pan out and it suffered monumental losses the reverberations were felt across the financial landscape and nearly collapsed the global financial system in 1998 ultimately the u s government had to step in and arrange a bailout of ltcm by a consortium of wall street banks in order to prevent systemic contagion 2ltcm started with just over 1 billion in initial assets and focused on bond trading the trading strategy of the fund was to make convergence trades which involve taking advantage of arbitrage opportunities between securities to be successful these securities must be incorrectly priced relative to one another at the time of the trade 3an example of an arbitrage trade would be a change in interest rates not yet adequately reflected in securities prices this could open opportunities to trade such securities at values different from what they will soon become once the new rates have been priced in ltcm was formed in 1994 and was founded by renowned salomon brothers bond trader john meriwether along with nobel prize winning myron scholes of the black scholes model 3ltcm also dealt in interest rate swaps which involve the exchange of one series of future interest payments for another based on a specified principal among two counterparties often interest rate swaps consist of changing a fixed rate for a floating rate or vice versa in order to minimize exposure to general interest rate fluctuations due to the small spread in arbitrage opportunities ltcm had to leverage itself highly to make money at the fund s height in 1998 ltcm had approximately 5 billion in assets controlled over 100 billion and had derivative positions whose total worth was over 1 trillion at the time ltcm also had borrowed more than 155 billion in assets 13long term capital management ltcm demise