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Chapter 4. Big Events in Trend Following > Event #2: Long Term Capital Manageme...

Event #2: Long Term Capital Management Collapse

Long Term Capital Management (LTCM) was a hedge fund that went bust in 1998. The story of who lost has been told repeatedly over the years; however, since trading is a zero-sum game, we thought it would be educational to explore who the winners were. LTCM is a classic saga of the zero-sum game played out on a grand scale with trend followers as the winners.

“Trillion Dollar Bet,” a PBS special describes how LTCM came to be. In 1973, three economists, Fischer Black, Myron Scholes, and Robert Merton, discovered an elegant formula that revolutionized modern finance. This mathematical holy grail, the Black-Scholes Option Pricing Formula, was sparse and deceptively simple. It earned Scholes and Merton a Nobel Prize and attracted the attention of John Meriweather, the legendary bond trader of Salomon Brothers.


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