Initially enormously successful with annualized returns of more than 40% (after fees) in its early years, in 1998 LTCM lost an estimated $4.6 billion in less than four months following the Russian financial crisis. The fund folded in early 2000. Niall Ferguson points out that the LTCM partners forgot their history vis-à-vis the 1917 Russian default during their glorious Revolution. Ferguson, in his recent book (“The Ascent of Money: A Financial History of the World”) refers to LTCM as “Short-Term Capital Mismanagement.”
The principles at LTCM parlayed their financial star power to protect clients and make tons of money until “genius failed” in 1999, and the New York Federal Reserve, in concert with 14 banks, bailed LTCM out so that the financial system (as we know it) would not collapse.
Prior to the crisis/collapse of LTCM, they had years where the partners charged a 2% management fee and received 25 percent of the annual profit. In some years the gross profit was $8 billion dollars; hence each partner “earned” an extra $250 million.
Roger Lowenstein, a well-known and talented business writer, artistically diagnosed LTCM as a band of geniuses in his prize winning book “When Genius Failed: The Rise and Fall of LTCM.” Some contend that genius is a body of work, not money made with marginal financial products, ultimately destined to fail because of a lack of a true understanding and appreciation of risk theory.