Looking back at the debacle known as LTCM, Long Term Capital Management for those who aren't involved daily in the 2.4 trillion hedge fund universe, the numbers are simply hard to fathom in how much leverage the firm employed.
Hedge funds are not and probably should not be for Mom n Pop in America.
Wall Street wants Mom n Pop to have access to the hedgies so they can "hide" the big commissions and fees. Just ask any broker honest enough to tell you the truth.
LTCM was a hedge fund that engaged in many pure arbitrage and highly mean-reverting speculative arbitrages. Most of their positions were in the bond and swaps market, where it is possible to create highly leveraged positions. Almost eight years ago this week, LTCM had approximately 125 billion dollars in assets from an equity capital base of only 4.1 billion dollars. The gross notional amounts of its contracts on futures exchanges exceeded 500 billion dollars, it swaps contracts exceeded 750 billion dollars, and its options and other OTC derivatives exceeded 150 billion dollars. Of course, the risks inherent in most of these positions substantially offset each other.
I believe there is carnage in the hedge fund universe. I think the gunslingers have shot themselves. I can almost smell the blood.
Just wait and see.
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