DanLieb Wrote: ------------------------------------------------------- > Think more abstractly MO. He is incapable of that.
joemontana Wrote: ------------------------------------------------------- > Really? Here are 3 of LTCM’s core mistakes: > 1 - Dogmatic belief that previously observed > relationships (i.e US yields and foreign sovereign > debt yields) would persist in the future. > 2 - Overconfidence in models – they were > completely unprepared for “Black Swan” Events not > considered in their models. > 3 – massive leverage – their convictions were > overwhelmingly strong, so they took massive bets Meh. Strategically LTCM really only suffered from two problems. The primary one, leverage, you’ve identified. The second is that they were a victim of their own success. They kept increasing AUM despite running out of good trading ideas. By the end they were huge players in merger arbitrage and S&P vol.
Negative – they suffered massive losses when there was a flight to quality after the Russian default. The collapse was not caused by merger arb or the s&p 500 index arb – collapse was caused by leverage and the same convergence trades they had always used . Here is the breakdown of their losses • $1.6 bn in swaps • $1.3 bn in equity volatility • $430 mn in Russian and other emerging markets • $371 mn in directional trades in developed countries • $215 mn in yield curvearbitrage • $203 mn in S&P 500 stocks • $100 mn in junk bond arbitrage • no substantial losses in merger arbitrage BTW: They “strategically suffered” from one other MASSIVE problem – they were making the same trade a million times over and falsely believed they were diversified. They believed they were diversified because they took a bunch of seemingly unrelated, uncorrelated positions in markets and assets around the world. However, on almost every trade, they took the less liquid and/ or more risky side of the trade. In relatively normal times, they were diversified. But given a global flight to quality, all of their positions would drop en masse. Nice try. http://www.moneyscience.com/Information_Base/Long_Term_Capital_Management_(LTCM).html
joemontana Wrote: ------------------------------------------------------- > mo34 Wrote: > -------------------------------------------------- > ----- > > The same basic mistakes helped cause the credit > crisis. Few people considered that real estate > prices, mortgage default rates or correlations > could change dramatically in a short time. Models > were built based on bad assumptions. Banks and > HF’s had 30/1 or greater leverage ratios and got > slaughtered when actual outcomes differed from > predicted outcomes. Not sure what this has to do with quants. We all make assumptions at one point or another based on what happened in the past, sometimes they turn out true sometimes they don’t, what’s the big deal ? This is all too abstract for me 
I log into AF once in a while and laugh my arse off. Imagine if people talked and insulted each other like this in real life as the normal way of communication?
sublimity Wrote: ------------------------------------------------------- > I log into AF once in a while and laugh my arse > off. > > Imagine if people talked and insulted each other > like this in real life as the normal way of > communication? I think about this too sometimes. I wonder who actually walks around and talks like a BOSS and who is a BO pencil pusher with a rubber neck.
SuperiorReturn Wrote: ------------------------------------------------------- > Dr. Lieb, > You were in school for a really long time. Hence the reason why I want those $10Mil salaries… Need to turn that time into positive value.
Yes of course it was liquidity risk, I thought that went without saying… You fail to mention that LTCM was in trouble before the Russian default. They hit capacity and opportunity exhaustion problems in 1997, which you can see in their decayed returns (despite increased leverage!). Significantly negative returns in May and June of 1998 (still pre-Russian default) exacerbated the problem, causing their already-elevated leverage to skyrocket. At this point, LTCM was too levered to ride out a drawdown. LTCM’s positions were also too large to unwind without significant slippage. This is the perfect combination for a predatory death spiral. The Russian default (mid-August) put them out of their misery but they were going down anyway as other major players had been betting against them for months. If either they traded in smaller size or used less leverage, they would have been able to get out of their position or ride out the drawdown. Not unsurprisingly, after the crisis passed, most of their positions did revert to fair value and make money. joemontana Wrote: ------------------------------------------------------- > Negative – they suffered massive losses when there > was a flight to quality after the Russian default. > The collapse was not caused by merger arb or the > s&p 500 index arb – collapse was caused by > leverage and the same convergence trades they had > always used . Here is the breakdown of their > losses > > • $1.6 bn in swaps > • $1.3 bn in equity volatility > • $430 mn in Russian and other emerging markets > • $371 mn in directional trades in developed > countries > • $215 mn in yield curvearbitrage > • $203 mn in S&P 500 stocks > • $100 mn in junk bond arbitrage > • no substantial losses in merger arbitrage > > BTW: They “strategically suffered” from one other > MASSIVE problem – they were making the same trade > a million times over and falsely believed they > were diversified. They believed they were > diversified because they took a bunch of seemingly > unrelated, uncorrelated positions in markets and > assets around the world. However, on almost every > trade, they took the less liquid and/ or more > risky side of the trade. In relatively normal > times, they were diversified. But given a global > flight to quality, all of their positions would > drop en masse. > > Nice try. > > http://www.moneyscience.com/Information_Base/Long_ > Term_Capital_Management_(LTCM).html
Justin88, does the 88 in your name imply 1988? If so, you’re probably the most well versed person I have come in contact with, of your age, as far as financial history goes. I was born in 87 and I thought I had a good grasp of the LTCM crisis. However, I definitely cannot write about it the way you do!
Just picked this up. I’ll post my .02 as I progress.
you guys are a set of bytches trying to prove who has the biggest balls…well guess what…i’m asian so i’ll stay out of it however, i do remember reading somewhere that when they started losing money, they basically got off course with their arbitrage strategies and just started to make straight bets on things like russian bonds and other areas of weak expertise i’m out…you guys have fun with the measuring tape. Jersey Shore season 2 out in about a week.
I highly recommend reading Animal Spirits by Schiller and Akerlof about how our psychological biases ( called Animal Spirits by Keynes) drive global economy. A brilliant book, indeed. http://www.amazon.com/Animal-Spirits-Psychology-Economy-Capitalism/dp/069114592X/ref=sr_1_1?ie=UTF8&s=books&qid=1279550210&sr=8-1