美国长期资本-管理公司操作对冲基金失败案例研究(英文.pdf

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1、A06-99-0020Copyright 1999 Thunderbird,The American Graduate School of International Management.All rights reserved.This case was prepared by Deirdre Brennan under the supervision of Professor Mark D.Griffiths for the purpose ofclassroom discussion only,and not to indicate either effective or ineffec

2、tive management.Long-Term Capital ManagementTechnical Note on a Global Hedge FundIntroductionTuesday,September 22,8:30pm,the Federal Reserve Bank of New York(Fed).It was a meeting at whichall of Wall Streets biggest power players were present.In attendance were Sandy Warner,chairman of JPMorgan;Davi

3、d Komansky,chairman,and Herb Allison,president of Merrill Lynch;Frank Newman,chairman of Bankers Trust;Jon Corzine,co-chairman of Goldman Sachs,and Robert Katz,the manag-ing director;Deryck Maughan,co-CEO of Salomon Smith Barney;Allen Wheat,chairman of CreditSuisse First Boston;Philip Purcell,chairm

4、an of Morgan Stanley;Jimmy Cayne,president of Bear Stearns&Co,and Warren Spector,deputy president.Unlike previous gatherings at the Fed for which festiveoccasions were celebrated,this meeting was a grim one.They were there to help rescue Long-TermCapital Management,an unregulated hedge fund which wa

5、s threatening to spin out of control,takingthe global capital markets with it.1BackgroundLong Term Capital Management(LTCM or the Fund)was founded in 1994 as an unregulated hedgefund.A hedge fund is defined as any pooled investment vehicle that is privately organized,administeredby professional inve

6、stment managers,and not widely available to the public.The primary investors inhedge funds are institutions and wealthy individuals.Hedge funds are usually organized as limitedpartnerships,or limited liability companies.2 These type of funds generally charge advisory fees based onperformance and ten

7、d to use short-term investment strategies.Another important aspect of hedge fundsis that they usually employ an aggressive level of leverage.Leverage allows hedge funds to magnify theirrisk,as well as increase their total asset holdings.LTCM was able to obtain greater leverage by investing in instru

8、ments such as repurchase agree-ments,derivatives and short contracts.The Fund was also actively trading in the traditional securitiesmarkets.The Fund built up accumulated assets of$125 billion,on a base of$4 billion over a four-yearperiod,mostly collateralized with high-grade securities.31 David She

9、rreff.“The Eve of Destruction.”Euromoney,November 1998.2“Hedge Funds,Leverage,and the Lessons of Long-Term Capital Management.”Report of The PresidentsWorking Group on Financial Markets,April 1999.3 Sherreff.2A06-99-0020The Management TeamJohn Meriwhether,chairman of the fund,was once a shining star

10、 on Wall Street.Known for his prowessas a fixed income trader at Salomon Brothers,he was one of the greatest traders that Salomon had everknown until the treasury-auction scandal of 1991,after which he was forced to resign.In 1994 heformed LTCM with some of the greatest traders and finance academics

11、.These included not only estab-lished traders from Salomon(earning up to$25 million per year),but also renowned academics,includ-ing Nobel prize winners Robert Merton and Myron Scholes,and a former vice-president from the USFederal Reserve Board.With such a dream team in place,there was little doubt

12、 in the market that thefund would be successful.Ironically,the star power of the Funds management team may have contrib-uted to its downfall.Trading StrategyLong Term Capital Managements strategy was to use complex mathematical formulas in order to iden-tify market abnormalities in the spread betwee

13、n different interest rate products as well as the volatilitiesof market prices.4 For example,LTCM made bets that based on historical relationships the spreadbetween corporate bonds and Treasury yields would narrow.To profit from this,they would buy corpo-rate bonds and sell Treasuries.Such strategie

14、s as well as other complex variations were used acrossvarious interest rate products,both in the US and international markets.LTCM then levered its capitalthrough repurchase contracts and derivatives transactions.As long as historical relationships held,LTCMwas making money.Their strategies appeared

15、 to be working;the Fund had a return on equity of 47%in1995,45%in 1996,and 17%in 1997.5Eventually,as their strategies became apparent to the competition in the market,others also em-ployed these strategies.With more and more firms using the same strategies,it was becoming more andmore difficult to f

16、ind these market abnormalities,and to profit from them.LTCM was actually makingthe markets more efficient by identifying its inefficiencies.LTCM was losing its opportunities to earn above average return for its investors.To combat thesediminishing returns,LTCM increased leverage by returning$2.7 bil

17、lion in capital to its investors.Bykeeping its positions at the same level while decreasing its capital base,the company was able to increaseleverage.In addition,LTCM began to take on large positions in markets where it did not have tradingexperience.These included positions in equity derivatives,to

18、tal return swaps,index options and bets ontakeover targets.Because these items are off-balance sheet,LTCM was able to engage in these positionswithout disclosing their activities to investors.These off-balance sheet instruments multiplied leverageof 30 x capital by 10 or 12x(on a notional principal

19、of greater than$1 trillion).6What really distinguished LTCM from other hedge funds at the time was the sheer volume oftrades on the books,the amount of leverage and the scale of activities.By the end of August 1998,theFund had over 60,000 trades on its books,its gross notional futures contract posit

20、ion was over$500bil-lion,swap contracts over$750 billion,and option positions,including over-the-counter OTC con-tracts,over$150 billion.Another issue was the size of positions in some markets.In some instancesthese positions accounted for 5-10%of the entire open interest on the exchanges.74 William

21、 J.McDonough,President Federal Reserve Bank of New York,Before the Committee on Bankingand Financial Services,U.S.House of Representatives.October 1,1998.5 Sherreff.6 Ibid.7“Hedge Funds.”A06-99-00203The companys gross position was alarming.LTCM had 36 swap counterparties.However,whenunwinding its tr

22、ades,LTCM found a new counterparty to trade with in order to avoid paying the spreadto the original counterparty(instead of reversing the trades with the original counterparty).Now,thenew counterparties would have to worry about the other side of the trade.If it were closed,there wouldbe a massive n

23、eed for rehedging.The problem with this was,the positions were so large that a massiveneed for rehedging could potentially affect the markets adversely.Market TurmoilDuring 1998,the Russian economy had been suffering greatly from a financial crisis resulting from thecrash of the Asian currency marke

24、ts.Russias gross domestic product was suffering from negative growth,and the government had already defaulted on massive overseas debt.Millions of its citizens spent hourswaiting in line for hard currency,of which the private banks no longer had sufficient supply.On August 17,1998 the Russian govern

25、ment announced plans for a new economic policy whichwas designed to breathe new life into a dying economy.8 Included in that plan was a devaluation of theruble and the placing of a moratorium on debt repayment.The Russian government felt that this planwould increase exports and encourage new foreign

26、 direct investment in Russia.Unfortunately,the de-valuation did not go according to plan;investor confidence was severely weakened,market volatilitygrew around the globe and there was ultimately more harm than good done to the Russian economy.The decreased value of the ruble incited a mood of panic

27、in the global marketplace.There was also a flight to quality that reduced the liquidity of many markets.Risk premiums andspreads between US Treasuries and higher risk debt instruments widened.Although the market correc-tion in stock prices was not entirely unexpected,what was unexpected was the wide

28、ning of credit spreadsglobally,for both corporate and emerging market sovereign debt.9Long Term Capital Management suffered great losses as a result.Since all the global markets weremoving in the same direction,the diversification upon which LTCM relied did not work.While LTCMwas diversified geograp

29、hically,it was not diversified as to their strategy.Because of the lack of offsettingpositions in different markets around the globe,losses were compounded.LTCMs problems were mag-nified by the fact that it was having difficulties trying to liquidate positions in thin markets.In additionto these los

30、ses,it also suffered losses in the equity and futures markets.In the beginning of September,LTCM sent a letter to investors indicating a 52%loss on the year through August 31.10 It was no secretin the market that LTCM was scrambling for a fresh injection of capital.Concern in the market over the sit

31、uation at LTCM eventually reached the ears of the FederalReserve Bank of NY.On September 20th,Peter Fisher,executive VP of the New York Fed,Gary Gensler,assistant treasury secretary,and two other NY Fed colleagues went to LTCM in Greenwich Connecticutto look at the books and records.The involvement

32、of the Fed was justified based upon two factors.First,if all of LTCMs counterparties rushed to close out billions of dollars in transactions at the same time,they would be unable to liquidate collateral or establish offsetting positions at the previously existingprices.If this were allowed to occur,

33、there would be a resulting sharp move in markets with exaggeratedlosses.This in turn would affect other investors not related to LTCM.Second,as the losses spread toLTCMs counterparties and other market participants,no one could say for sure exactly how far prices8 Ethan Brodie.The Devaluation of the

34、 Russian Ruble:A Blunder in Economic Policy.Social Science 41,November 21,1998.9 McDonough.10 Ibid.4A06-99-0020would move.These two factors combined led to the possibility of a situation where there could be a lossof investor confidence,leading to a rush of private credits,leading to a further widen

35、ing of creditspreads,leading to further liquidations of positions,and so on.11LTCM management had stress-tested trades only for a 10 basis point daily interest rate move,i.e.,what would happen to the value of the positions if interest rates moved by.001.Stress testing asks whathappens to the positio

36、ns of the Fund if a certain correlation between events occurs.Obviously,testingonly for a 10 basis point move in interest rates was not adequate enough.Management should havetested these trades for all adverse market conditions.In addition,LTCM only looked at the trades forthe 12 biggest deals with

37、the 20 largest counterparties.The losses were estimated at$3 billion,ignoringall other trades executed.Insiders say that losses were actually closer to$5 billion.12The question became,how could this situation be remedied?To unwind all of the positions con-tained in the LTCM portfolio,there could be

38、a sufficiently intense and widespread effect that it wouldseriously distort markets and elevate uncertainty enough to impair the overall functioning of theeconomy.13 This risk was exacerbated by the fact that LTCM had positions in so many markets,with somany maturities and currencies,that it traded

39、in instruments that had a very thin market.Due to thenon-liquid nature of these instruments,and the fact that they were not even continuously quoted,predicting the exact implications on the market of trying to close out these positions was difficult.The banks had helped to create this situation.Some

40、 of them had had such faith in the star powerof the LTCM management team,that they had pitched in their individual capital and the deferredbenefits of their employees.14 In many cases,the creditor banks were lending money to LTCM withoutexercising the due diligence that normally would occur before l

41、ending money to a hedge fund.As these events unfolded(see Exhibit 1),Goldman Sachs,Merrill Lynch,JP Morgan and UBS metin late September to discuss possible approaches to solving the problem.These included several options:1.purchase LTCMs fixed income position(these were basically spreads between hig

42、h and lowyield bonds)2.a“lifting”of their equity positions(index spread trades,total return swaps,bets on takeovertargets)Both of these possibilities were examined,but were deemed to be legally impossible.A thirdalternative was the recapitalization of the fund by its creditor banks.All of the major

43、creditors wereinvited to a meeting at the Fed the night of September 22,1998.A consortium of 14 banks gatheredtogether at the NY Fed building to determine an appropriate solution for saving the troubled hedgefund.AgreementAt one point,there appeared to be a big buyer on the horizon.Warren Buffet off

44、ered to take over LTCMfor$250m and recapitalize it with$3 billion from Berkshire Hathaway,$700m from AIG and$300mfrom Goldman.The terms of the deal included the following:11 Testimony of Chairman Alan Greenspan.Private-Sector Refinancing of the Large Hedge Fund,Long-TermCapital Management.Before the

45、 Committee on Banking and Financial Services,U.S.House ofRepresentatives.October 1,1998.12 Sherreff.13 Greenspan.14“Hedge Funds.”A06-99-00205the management team would be removedthe buyers would not take on the liabilities of the Fundthe current financing terms would remain in placethe offer would ex

46、pire at 12:30pm on the same day,90 minutes after it was madeThe offer expired unexercised.15 Legally,chairman John Meriwhether could not sell the Fundwithout polling his investors.The meeting resumed,and a deal was struck five hours later.A consortium of 14 banks agreed to an infusion of capital to

47、save LTCM.The conditions were thefollowing:11 banks investing$300m 1 bank investing$125m 2 banks investing$100m Total invested$3.625 billionIn return for investing this money,the consortium received a 90%equity stake in LTCM as well asassuming operational control.The principals and original investor

48、s were left with a 10%equity stake inLTCM.ConcernsThere are some important concerns which came to light as a result of the near failure of LTCM.The firstis the relative opaqueness of its activities.Even though the Fund was saved before it lost its entire networth,the individual counterparties of the

49、 Fund were never really aware of the seriousness of its liquid-ity problem.In addition,the balance sheet and income statement provided to investors did not revealthe true risk of the Fund or its concentration of exposures in certain markets.16 Due to the Fundsminimal disclosure,the counterparties on

50、ly exercised a minimal amount of scrutiny.Such limited dis-closure was overlooked largely due to the reputation of the Funds management team,and the highreturns evidenced by the Fund in the first few years.The combination of these two facts enticed manycounterparties into establishing relationships