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Pastimes : Ask Mohan about the Market

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To: John Hunt who wrote (16793)	10/19/1998 7:25:00 AM
From: John Hunt	Read Replies (3) of 18056

The risk business economist.com << Market-neutral strategies, Long-Term Capital's chosen field, were supposed to be the safest of the lot. One of the fund's main strategies was to exploit tiny differences between the price of a newly issued (“on the run”) 30-year American Treasury bond, and a similar one issued previously (“off the run”). There is little economic reason for these bonds to have different yields. Yet off-the-run Treasuries often trade slightly cheaper than on-the-run ones. LTCM bet that their yields would converge by buying off-the-run Treasuries and selling their on-the-run counterparts short. The potential profits were tiny—no more than a few basis points (hundredths of a percentage point). So the fund multiplied its bets by borrowing. LTCM sources say that such positions were leveraged some 30 to 40 times. In contrast, LTCM had much lower leverage on its bet that yields on Danish mortgage-backed securities would converge with those on American Treasuries—a far riskier speculation. >> More on-the-run, off-the-run comments (see referenced post) Message 6059666 It certainly looks like Greenspan was bailing out the hedge funds and their bankers again with the last 1/4 point move.

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