Lessons learned from long term capital

long term capital management documentary

Regrettably, the fund was hit with significant losses during the Financial Crisis and was subsequently forced to close its doors in July In SeptemberWarren Buffett played a bit part in the bailout.

Academics are Not Practitioners: Theory does not always translate into reality, and academics rarely perform as well as professional practitioners.

The irony behind the collapse makes the story especially intriguing. It goes almost without saying that selling is extraordinarily difficult during a panic. And then you throw in the third factor that most of them had virtually all their very substantial net worths in the business.

In other words, as long as the overall security mispricings narrowed, rather than widened, then LTCM would stand to profit handsomely. Hundreds and hundreds of millions of dollars of their own money up, super high intellect, working in a field they knew, and essentially they went broke.

Ironically, LTCM was in the process of losing control. My partner says it should be autobiographical. High-frequency trading HFT is a modern example of this phenomenon, in which early players exploited a new technology-driven strategy, until copycats joined the fray to minimize the appeal by squeezing the pool of exploitable profits.

why long term capital management collapse

If you risk something that is important to you for something that is unimportant to you it just does not make any sense. As spreads began to tighten even further, the only way LTCM could maintain their profits was by adding additional leverage i.

Unfortunately, the risk profile of the fund worsened — not improved.

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Buffett's Lessons from Long Term Capital Management • Novel Investor