Long-Term Capital ManagementPrivate▼ Negative
Capitalrelevance
LTCM's high leverage (25-to-1) and return of capital left it vulnerable to the 1998 Russian default, causing catastrophic losses and a Fed-led bailout.
Long-Term Capital Management returned $2.7 billion to investors at the end of 1997 because it had more capital than it could deploy, but kept its positions unchanged by borrowing more, pushing leverage to 25-to-1. When Russia defaulted in August 1998, a global flight to safety blew out the convergence spreads LTCM had bet on, triggering catastrophic losses and forcing the Federal Reserve to organize a bank bailout. The fund’s partners, including Nobel laureates Myron Scholes and Robert Merton, had concentrated both upside and downside in their own pockets by retaining their capital while returning outside money. A 1% adverse move at 25-to-1 leverage destroys 25% of equity, illustrating that position sizing around survivable loss is the only protection arithmetic allows.
LTCM's high leverage (25-to-1) and return of capital left it vulnerable to the 1998 Russian default, causing catastrophic losses and a Fed-led bailout.