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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Worswick who wrote (996)	11/25/1999 8:22:00 PM
From: Thomas M.	Respond to of 2794

James Grant dug up a little gem - a prospectus from LTCM's initial placement! grantspub.com Grant's on LTCM The meltdown of the leverage artists at Long-Term Capital sent us to the archives. We dug up our contemporaneous account of the fund's startup, which we reprint below. We found something else in or files which looks ominous in retrospect (not to mention a little rough around the edges; sorry for the quality of the scan). You'll need Adobe Acrobat to download the document ( grantspub.com ), and it may take a while to print. Take note of the fee structure, of course, as well as the investment overview. And notice the section on Tax Advances. Living Large Grant's Interest Rate Observer November 5, 1993 Five traders, mostly one-time Salomon Brothers employees, and a pair of award-winning, market-wise college professors, are seeking $2.5 billion with which to buy low and sell high in almost any market under the sun. The founders of the new fund (who include John W. Meriwether, a former vice chairman of Salomon, and James J. McEntee, the former chairman of Carroll McEntee & McGinley) are putting up the first $100 million. The risk of loss for the principals is mitigated by the structure of the fund: To them goes 25% of the upside on top of an annual 2% management fee, payable no matter what. Two percent of $2.5 billion would come to $50 million. Indeed, almost any percentage of $2.5 billion would come to a lot of money, before or after tax. The fund is called "Long-Term Capital, L.P.," and the hyphenated phrase speaks to the length of the capital lockup: Investors must commit three years. Minimum investment: $10 million. Merrill Lynch, which is raising the money, is said to be working for $35 million. "Long term" connotes patience, and it is understood that Long-Term Capital Management will patiently trade derivatives, options and futures (among other caffeinated financial instruments) on high leverage. Indeed, the fund must almost necessarily be leveraged. Operating in the Treasury market, for instance, one is hard-pressed to produce 40% rates of return (as the fund is understood to be pointing toward) except by placing large bets on a relatively small number of basis points. Unlike the common day-trader, the principals expect to hold on to a position for between six months and two years. They say they mean to buy or develop the best trading software and to "form strategic relationships with organizations with strong presences in targeted geographical locations throughout the world" - to build a network, in short, that sounds a little bit like Salomon Brothers. It will not be Salomon Brothers, of course, so the $100 million men will not be privy to the Salomon order flow. Nor, in executing their orders, will they enjoy the relative anonymity of the Salomon organization. If Long-Term Capital wants to go long the Romanian five-year note against the Albanian long bond, for example, it must give the order to somebody, and that somebody may infer that its valued customer knows something. All brokers talk, and the mere sound of their voices has been known to cause markets to change. A leveraged $2.5 billion fund may be many things, but it will not be anonymous. Which way do the principals think interest rates are going? One sure sign of their collective discernment and intelligence is that they seem not to have an opinion.

To: Worswick who wrote (996)	2/22/2000 3:44:00 PM
From: Thomas M.	Read Replies (1) \| Respond to of 2794

From Edward Chancellor's Devil Take the Hindmost : <<< Richard Thompson observes that a great deal of activity in the derivatives market is otiose: "the effect of it is to chop up risks that people are familiar with and understand quite well, only to repackage them into new risks that are at best poorly understood." >>> <<< When Proctor & Gamble sued Bankers Trust to recover derivatives losses of $102 million incurred in 1994, it produced a recorded transcript of a Bankers Trust derivatives salesman stating that he aimed to "lure people into the calm and then just totally fuck 'em." >>> <<< Soros and others have argued that many new derivatives serve no purpose other than to fuel speculation - in particular, enabling fund managers to circumvent prudential restrictions on their investments. What conceivable risk exposure, it has been asked, is a "LIBOR-cubed swap" - a security that multiplies by three times changes the in the London Interbank Offered Rate, the rate of interest in the wholesale money market - designed to hedge? >>> I thoroughly enjoyed the book, and recommend it to all. Tom