In a nutshell. All of LTCM's various bond positions/spreads/derivatives were priced off of the 30-year. Their models never anticipated the govt deciding to stop issuing new 30 year paper. It wasn't something they thought could happen.
Perhaps the nobel non traders were guilty of hubris. The traders knew what they were doing. Making bets on reversions to the mean and taking profits until they blow up. It seems to be a common them of people making porfits off others.
Or, you could take the opposite view and say they had no choice but to fail, the market wouldn't have backed off until they blew them out of the water. When individual traders think the market is out to get them, it's paranoia; in LTCM's case, I think that's exactly what eventually happened.
some times I feel that the other story about LTCM is how it gave people who have difficulty with math the conviction & courage to go into markets
Analyse these sort of big money losings closely and you will see that the "markets" and some key participants always make the big money when they know clearly what an opposing position is and when they can put certain large postion holder's balls in a vice. Do you think that some hedge funds didn't think there was free money to be made selling the GM common and buying the convertible debentures? Looking at it mathematically, it looks like free hundred dollar bills per second just lying there waiting to be picked up. But did their models anticicpate an 87 year old multi-multi billionaire that would act "irrationally"? Kerkorian could have simply bought the stock into the short sellers (which were the hedge fund(s)) and probably get the same number of shares at almost certainly a cheaper price. So why did he tender the shares at 31? Remember, he could have done that cheaper simply by doing it in the open market (which he initially did for serveral tens of millions of shares at 26.) Is it because he wants the common? Almost certainly not _just_ the common! He understood the trade well and knew what he had at least one hedge fund's balls in a vice that would have to liquidate BOTH sides of the trade under a margin call - and guess what - he is probably on the other side of those hedge funds that are forced to liquidate the bonds now too. LMAO There is ALWAYS a bigger shark in the water than you given a particular circumstance, and not adhering to that principle and blindly following math models without understanding that that shark _may_ act leaves open what happend with the hedge fund(s) and GM/Kerkorian, and what happened to LTCM and probably all the whole of the rest of Wall Street's players. Most of the time you win, once in ten years you give alot of it back with interest. This happens once in a while at our level too - just ask GE/HON merger arb traders and Europe acting "irrationally." nitro
Is there an article or a source that can verify that Kerkorian bought tens of millions of shares at 26 cause I didn't find anything out there. Usually when there is a big buyer or seller, they'll go through a big broker to get the shares which will cause some noise. Secondly there was a rumor that hedge funds got caught with GM bonds which seems ludicrous because those bonds were already priced at junk status before going junk. Any losses would've been on the books awhile ago. I wonder why you would call increasing one's stake in the auto giant "irrational?"
"Kerkorian's personal investment fund quietly bought up 3.9 percent of GM's shares in late April. " http://www.freep.com/money/autonews/gm5e_20050505.htm The fact that it was at around 26 was reported by CNBC's David Faber so I cannot link to that. However give me a little more time and I can probably find something. "Because Kerkorian's stake was below the 5-percent level that requires public disclosure of his investment, not even GM knew he had bought up millions of shares last month." - Form the same link above. In addition, if you knew you were going to tender shares later, why would you allow others so they can front run you? Also, if you are a hedge fund manager, and you tell your trader to sell the shit out of the common and use the proceeds from the short sale to buy the convertible debentures, unless you are completely blind, you can see that there is a buyer taking all you got at the other side of your trade. If that does not raise a red flag I don't know what would. They were trading as distressed bonds - that is not the same thing as trading at junk status as issued by a credit agency because until that happens, certain funds don't have to liquidate their holdings in them. Further, until they actually go junk, I believe they can still be included in the Lehman Index. I hardly think it is irrational. In fact I am slowly accumulating GXM. That is why I quoted it. The "irrational" part comes in as I explained above because in theory Kerkorian could have bought them cheaper on the open market than by doing the tender. The "rule of one price" was violated. nitro
LTCM is a story about a near perfect model brought down by an anomally. It'd be interesting to see how well it would work in today's markets.