What Was the LTCM Hedge Fund Crisis and Could It Happen Again?
Well, what exactly happened? In 1998, Long-Term Capital Management (LTCM) was a very large hedge fund that was heavily invested in foreign bonds. When Russia announced it was defaulting on its bonds, LTCM’s highly leveraged investments crumbled. Since so many banks and pension funds were invested in LTCM, its problems threatened to push most of them to near bankruptcy. Only the intervention of then-Chairman of the Federal Reserve Alan Greenspan convinced the banks to retain confidence. Nevertheless, the U.S. stock market declined 20% before it was all said and done.
Could it happen again? The recent demise of hedge fund Amaranth Advisors in September 2006 did not impact the stock market at all. However, since hedge funds' investments are unregulated, it is altogether possible that another crisis could occur.
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Hedge funds should be outlawed. That’s all I have to say about them. They impact the market too much and thus all positions invested in them. The two things that drive the market are fear or greed and more evident than ever.