Long-Term Capital Management, Lp. (a)

My company is a Canadian company called TD Bank. Yes banks are mega-glutinous, self-serving machines and TD has these characteristics similar to what we expect and perceive of such institutions. However, I like the leaders of this bank. They play the big boys game but over the years, their community support initiatives, programs, education and financial funding have proven their backing for various communities and entrepreneurial efforts. The following describes how TD Bank has embedded an element of long-term wealth creation into their enterprise.

Mutual Funds are a pool of funds collected from many investors in order to purchase stocks, bonds, and other investments in greater amounts. Mutual funds are shares of ownership in a group of companies.

think of a mutual fund as a company that brings together a group of people and invests

Once you have read the case, answer the questions that follow the case text. I have reprinted the questions below to assist you in your answers.

As the manager of Morningstar Incorporated, I would advise against dropping stocks and bonds from the business. Owning stock is buying into what the company has. That covers everything within the store. An example would be holding stock in Wal-Mart and reaping the benefits of everything they sell. Stock owners own a portion of the company’s assets and its profits. An investors goal is to make money, and people invest in businesses that they believe will do that (Capital One, 2017).

From holding bic lighters underneath other traders pants to emptying suitcases before businesses trips and filling them with wet paper towels to convincing a trader that the SEC is investigating him for stealing from the cafeteria, the traders display a talent for pranking that would impress even the most sophomoric frat boy. The constant flow of fascinating anecdotes combined with frequent humorous quips from Lewis make the book hard to put down. In describing Henry Kaufman, the head of bond research at Salomon when he arrived, Lewis writes that “He was so often right that the markets made him famous if not throughout the English-speaking world then at least among the sort of people who read the Wall Street Journal.” Lewis employs that sardonic writing so effectively that the dry subject of mortgage bonds becomes captivating.

LTCM’s board of directors included many geniuses in from the financial world, who collectively created complex models allowed them to calculate risk of securities much more accurately than others. LTCM’s trading strategy was featured by the divergence in price between long-term U.S. Treasury bonds. It shorted the more expensive “on-the-run” bond and purchased the “off-the-run” security at the same time to exploit the price divergence. In order

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain The company Long Term Capital Management was founded by geniuses. The founder John Meriwether managed to attract two Nobel Prize Laureates, the original, most profitable team on Wall Street, and the vice president of the Federal Reserve Bank. Boasting these big names, the company attracted so many investors and banks all over the world. With a magnificent start-up equity of $1.25 billion dollars and practically the safest investing strategies in the world, LTCM saw over 40% annual profit in the first 4 years of the company with only 1 month of losses. However, one day in 1998, it all came crashing down. Its failure was sudden, and fatal, and threatened to bring down the whole world’s financial markets. Long Term Capital Management is financial company whose failure is an important lesson to later governments and funds.

There is no such thing as an average hedge fund. Because of different strategies, along with various management styles, there is an extremely wide array of hedge fund returns. Although they have potential for large profits, hedge funds are exposed to a number of risks. Factors such as leverage, portfolio concentration, and liquidity may make hedge funds riskier than other investments like bonds or mutual funds. The name hedge fund was thus derived to avoid, or hedge, some of these risks. This can be done, for example, by shorting stock or selling put options.

In 1949 Alfred Jones created the first hedge fund in the United States with $100,000 and a strategy to off set the riskiness of holding long position in stocks by shorting other stocks. Since then hedge funds have grown to control over $2.4 trillion in assets in over 11,000 different funds. Today hedge funds employ many different techniques and strategies to gain a positive return that actually do not involve hedging but instead taking a more risky stance in the market to obtain higher returns. Hedge funds are predominately funded by wealthy investors and pensions but does this mean that they are a safe investment to make? If I had the ability to invest in a hedge fund I would decline to do so. My reasoning for this is that while some risky investors believe the high risk high return, lack of regulation, illiquidity, and fees associated are the advantages of hedge funds that allow them to generate high returns, from a conservative investor viewpoint these are all disadvantages and risks that aren’t compensated for making investments in hedge funds an unwise decision.

My experience at Villanova, both as a research fellow and a student was formative of my fascination with investments, hedge funds, and mutual funds. My original interest sparked while working with Dr. Velthuis and performing literature reviews on effects of corporate activism on stock prices, and size effects on hedge fund returns. Since then, classes in Portfolio Theory and

Hedge funds feature returns different from those of mutual funds. The different trading strategies and investment styles are amongst a few factors that explain the difference (Boyson, 2010). The institutional and individual investors create a common pool of funds and employ professional managers to manage the fund. Ideally the manager is compensated from two sets of fees: management fee and performance fee. They impose a management fee based on the size of the asset managed, usually at the rate between 1-2%. A performance fee will be imposed at the rate between 20-30% of the returns on the investments made (lecture notes).

Hedge funds are investment vehicles that explicitly pursue absolute returns on their underlying investments. Hedge Fund incorporate to any absolute return fund investing within the financial markets (stocks, bonds, commodities, currencies, derivatives, etc) and/or applying non-traditional portfolio management techniques including, but not restricted to, shorting, leveraging, arbitrage, swaps, etc. Hedge funds can invest in any number of strategies. Hedge fund managers typically invest money of their own in the fund they manage, which serves to align their interests with

A trust who share a common financial goal which pools the savings of a number of investors.

Mutual funds are an easy, convenient way to invest, without having to worry about choosing individual stocks. A mutual fund can be defined as a single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors. The investment company manages the fund, and sells shares in the fund to individual investors. When one invests in a mutual fund, they become a part-owner of a large investment portfolio, along with all the other shareholders of the fund. The fund manager invests the contributions when shares are purchased, along with money from the other shareholders. Every day, the fund manager counts up the value of all the fund's holdings, figures out how many shares have been purchased by