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Strategies & Market Trends : Margin Calls - Share The Pain -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (133)	12/12/2000 10:22:13 AM
From: LPS5	Respond to of 158

That is exactly right; but while relative value strategies in and of themselves did not destroy LTCM (their collapse occurred for a myriad of reasons, as most collapses do), applying that strategy with both (a) high degrees of leverage, and in (b) illiquid securities which trade, as some put it, "by appointment," conceivable made the effect of that particular strategy worse than, say, numerous leveraged, singularly directioned (long or short) trades in illiquid securities. It also didn't help (again, the myriad of reasons) that all of Wall Street was pounding their positions against them when word got out that there was trouble in Greenwich. However, no one (perhaps) would argue that even without leverage, in securities which are liquid: a relative value strategy (simultaneously long/short) betting on a convergence, or narrowing of spreads, that experiences a divergence, or widening of spreads, results in losses on two positions, rather than one. (Again, as in my first message, risk management is key.) Among the many, a few of Long Term's mistakes were: 1. Giving back uninvested assets which would have served as a cushion as positions went against them; 2. Rather than liquidiating liquid and illiquid securities in even proportions, liquidiating only liquid ones, resulting in a portfolio of thinly-traded, highly leveraged securities positions; 3. As Mucho said, undertaking risk arbitrage and other information-intensive strategies whereby their capital strength was of little advantage; and, 4. Failing to realize where the models ended and real life stepped in. LPS5