Ltcm

Harvard Business School

9-200-007

November 5, 1999

Long-Term Capital Management, L.P. (A)

In September 1997, the principals at Long-Term Capital Management, L.P. (LTCM) were considering the firm’s future. The fund that LTCM managed, Long-Term Capital Portfolio, L.P. (“the Fund”), had commenced operations with $1 billion of capital in early 1994, and had subsequently raised an additional $2 billion. After three and a half years of investment returns that far exceeded even the principals’ expectations, the Fund’s net capital now stood at $6.7 billion. The principals’ personal share of this capital had risen from $146 million to $1.6 billion. Due to the limitations imposed by available market liquidity, the principals recognized that it would be impractical to increase position sizes commensurate with the performance-induced increase in capital. Consequently, they believed it would be difficult to sustain high rates of return on the current capital base, and had to consider whether it was a prudent and opportune moment to return capital to the Fund’s investors.

Background on LTCM

LTCM was formed to engage in trading strategies that would exploit market pricing discrepancies. Because the firm employed strategies designed to make money over long horizons— six months to two years or more—it adopted a long-term financing structure designed to allow it to withstand short-term market fluctuations. In many of its trades, the firm was in effect a seller of liquidity—that is, many trades involved taking long and offsetting short positions, where the long positions were in instruments that were relatively less liquid than the short positions. LTCM generally sought to hedge the risk-exposure components of its positions that were not expected to add incremental value to portfolio performance, and to increase the value-added component of its risk exposures by borrowing to increase the size of its positions. The Fund’s positions were diversified across many markets....