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Money managers under the microscope

Lessons from LTCM

January 20, 2009

As the hedge fund industry faces its biggest challenge to date, it could do worse than learn some lessons from one of its biggest disasters, the 1998 blow-up of Long Term Capital Management. 

Victor Haghani, a co-founder of LTCM later involved in its liquidation and now a private investor, was opining at a LSE conference on Monday that simply cutting back funds’ borrowing after the carnage of last year may not be a strong enough lesson for the industry to learn.

 

rtrhw6d1“Almost any amount of leverage can be too much,” he says.

 

Another lesson is that while many managers see plenty of tempting bargains in areas such as credit, just because something is cheap, it doesn’t mean it can’t get a lot cheaper, he adds.

 

 This has already been seen in some credit instruments, where funds dived in after price falls, only to find there was still further to go.

Finally – the most sobering lesson – Haghani admits that LTCM’s portfolio managers were too confident and didn’t diversify their own personal investments sufficiently. 

 

“As managers we were overconfident,” he admits. “How a group of relatively experienced people got together and basically invested more or less all of our money into our fund … that was really the craziest thing of all.”

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