Share
Explore BrainMass

Long Term Capital Management

Considering the executive team, what were the problems with team inputs, processes and structures that contributed to the downfall of Long Term Capital Management? Were the members of LTCM simply unlucky (the victim of forces beyond its control) or were there more systematic, predictable (and, ultimately, avoidable) reasons for this financial debacle . What structures or processes could be put into place that might reduce the likelihood that a similar problem would emerge in Meriwether's new organization?

Solution Preview

Considering the executive team, what were the problems with team inputs, processes and structures that contributed to the downfall of Long Term Capital Management?

LTCM was a hedge fund floated by some of the biggest names in the investment world. However, it needs to be understood that hedge fund itself is an unregulated industry, unlike other investment vehicles like Mutual fund that are regulated by securities industry. Thus, the executive team of such hedge funds are allowed to operate freely without any restrictions. The unregulated nature of these hedge funds often proves to be too risky for the investors of the fund. For LTCM, its executive team's greed for securing higher returns motivated them to indulge into strategies that proved to be completely wrong when market conditions became adverse for the fund.

One of the main reasons for the demise of the fund was excessive leverage. The excessive leverage took by the hedge fund to earn higher returns proved to be dangerous for the fund. Further, it operates in illiquid markets. The combination of high leverage and illiquid markets proved to be fatal for the fund. The "star" status of the fund due to its high profile executive team allowed it to borrow so much funds, however, such excessive borrowing proved to be fatal.

Another critical reason for the failure of the fund was that it branched away from its traditional ...

Solution Summary

Long Term Capital Management

$2.19