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Stellar results have lifted Long Term Capital Management into the top ranks of hedge funds and enhanced founder Meriwether's already legendary status. Can the firm sustain its momentum?
On his first day on the money market desk at Salomon Brothers in the 1980s, a young trader found himself with a trading book of $100 million. "Play with it for a while," the head of the desk told him after the tyro offered that he felt good about the market. After working the phones all day to build a several-hundred-million-dollar position paltry by Salomon standards - the neophyte trader felt his boss looking over his shoulder at his book. "If you felt good about the market," John Meriwether told him disapprovingly, "then get serious."
No one ever accused John Meriwether of a lack of seriousness. "The thing you have to understand about John," says David Delucia, the chief operating officer of the fixed-income division at Donaldson, Lufkin & Jenrette, who recalls the trading floor exchange from his days at Salomon, "is that once he's comfortable with the risk, he likes to trade in a very, very big way."
Meriwether, 50, pioneered fixed-income arbitrage at Salomon, building its arbitrage desk into one of the biggest money-spinning machines on Wall Street in the '80s (he became famous through a perhaps apocryphal tale, related in Michael Lewis's Liars Poker, of playing high-stakes liar's poker with Solly chairman John Gutfreund). After falling from grace following Salomon's Treasury bond bid-rigging scandal in 1991 (he was never charged with any securities violations), he started his own firm, Greenwich, Connecticutbased Long Term Capital Management, in 1994. Indeed, Meriwether assembled a veritable trading all-star team at LTCM. A number of former Salomon arb desk veterans, including Eric Rosenfeld, Lawrence Hilibrand, William Krasker and Gregory Hawkins; academic luminaries (via Salomon) Robert Merton and Myron Scholes; and former regulators, such as onetime Federal Reserve Board vice chairman David Mullins, signed on as partners.
LTCM has proved to be a powerful force in the world's markets. By wielding a leveraged balance sheet that can focus nearly $100 billion on perhaps a dozen trading strategies across the world's bond markets, LTCM has been producing extremely high returns on a relatively low level of risk. The result: LTCM...