LTCM – Long Term Capital Management. These guys were always the smartest guys in the room. Myron Scholes (of Black&Scholes fame) and Robert Merton who shared the 1997 Nobel Memorial Prize in Economics founded this Hedge fund.
It failed spectacularly in 1997. Up until recently Hedge fund collapses had been rare, now we are seeing increasing numbers fail. http://hf-implode.com/
LTCM analysis has been a staple of MBA programs for a number of years, there is HBS case study on it.
Here’s an excerpt,
“The company had developed complex mathematical models to take advantage of fixed income arbitrage deals (termed convergence trades) usually with U.S., Japanese, and European government bonds. The basic idea was that over time the value of long-dated bonds issued a short time apart would tend to become identical. However the rate at which these bonds approached this price would be different, and that more heavily traded bonds such as US Treasury bonds would approach the long term price more quickly than less heavily traded and less liquid bonds.”
