Chapter 3
The First Trade: Treasury Bills
LTCM ki phli trades me se ek hoti hai, Treasury Bills ke spread pr
bet krna, Partner notice krte hai ki do Treasury Bills jo almost
same hai sirf dono ki maturity ke alawa jo ki sirf 6 mahine ka gap
hai, unme 0.12 percent ka gap hai, partners ispr bet kr skte hai ki
yeh kam hoga, lekin professor bet lene ke phle yeh pata lagana hoga
ki yeh gap kyun hai aur yeh kam hoga bhi ya nhi,
Fir partners leverage ke sath ispr bet krte hai, jaisa professor ne
socha tha, dono bills ka spread kam hota hai aur long term 15m$ book
krta hai,
The Italy Bet
Ab haghani ki sabse badi trade ati hai, ITALY. Italy recent
financial crisis se recover hone ki koshish kr rha hai, Bond Traders
ke liye perfect playground, Long Term Italy pe bet krta hai, Italy
ko acche se smjhne ke liye haghani Alberto Giovannini ko hire krte
hai, jo ki MIT se passout aur Italian Treasury mein ek official rah
chuke hai,
Long Term 1994 mein 28 percent earn krta hai.
Volatility Strategy and Growth
Partners aim krte hai S&P500 jitni volatility rkhne ki, agr fund ki
volatility kam toh borrow krte specific volatility ko match krne ke
liye aur agr jyada hoti toh leverage ko kam krte.
1995 mein fund 59 percent earn krta hai, phle hi do saalon mein Long
Term ne ab tk $1.6B earn kiye hai jisme italy ne isme 600m$
contribute kiye hai, Long Term 1B$ aur raise krta hai. Long Term me
ab 16 Partners aur 96 overall log kaam kr rhe hai, 1995 ke end mein
Long Term $102B ke assests hold kr rha hai $3.6B ki equity capital
se Leverage 28.
Bigger Than Wall Street
Spring 1996, Long Term ke pass $140B ke assests hain 30 times jyada
apni capital se, Long Term ab sabse bade (largest) mutual fund
Fidelity Magellan se 2.5 times bada ho chuka hai aur 4 times agle
bade hedge fund se. Long Term ab Lehman Brothers aur Morgan Stanley
se jyada assests hold kr rha hai, Fund ko do saal bhi nhi hue hain
aur ab woh wall street ki saalon purani institutions se jyada bada
hai. Fees Commision aur Returns ke baad, 1996 end tk, Partners ki
initial $150m ki investment ab kareeb $1.4B ho gyi hai.
1996: Record Returns
Long Term 1996 mein 57 percent earn krta hai. Fund 1996 mein 2.1B$
earn krta hai, Yeh kitna jyada hai agr iska comparison dekhe toh
jitna MacDonald ne puri duniya mein uss saal burgers sell krke earn
nhi kiye, Merill Lynch, Disney, Xerox, American Express, yeh sabse
popular aur acchi chalne wali companiyon se earn kiya hai Long Term
ne, woh bhi kuch professor aur employees se jo general public ko
pata bhi nhi. Aur wib bhi low risk ke sath, ek bar bhi 1996 mein
Long Term ne kisi month mein 1 percent ka bhi loss nhi kiya.
Salomon ke ek trader meriwether ko is staggering performance ke liye
congratulate krte hain, lekin meriwether reply krte hai, ki Long
Term ko kam se kam 6 saal ka result dekhna hoga yeh batane ke liye
ki long term ka formula kaam krta hai ya nhi.
Competition Rises, Secrets Fade
Arbitrage business me competitiors badh rhe hai aur jis speed se
fund ka capital grow ho rha uss speed se nyi trades nhi mil rhi,
Meriwether investors ko likhte hai ho skta hai 1997 ka net return
1996 se kam ho. Ab Long Term mane ya na mane bond arbitrage ka
secret ab secret nhi rha, ab har dusra rival bank MIT se PhDs hire
kr rha hai aur same strategy apply kr rha hai,
Entering the Stock Market
Long Term ke pass 5B$ capital hai isko kahi toh park krna padega,
Partners stock marker me enter krne ka sochte hai, Burton Malkiel
bolte hai 'upr wale ko bhi nhi pata ek common stock ka proper price
earning multiple kya hona chaiye' lekin sayad long term ko pata hai
ya kam se kam unhe lagta hai ki woh apne model stocks me bhi apply
kr skte hai, Haghani aur rosenfeld iss pr research kr rhe the kyoki
unhe laga isse unka risk bhi diverify ho jayega kyoki stock aur
bonds opposite move krte hai, toh net position cancel out ho jayegi,
Paired Shares and Arbitrage
Haghani shares ke pair pr reseach krte hai jispr arbitrage apply
kiya ja skta, jaise ki Volkswagen jiske do share hai, ek ordinary
share aur ek preference share jisme superior voting rights hote hai,
Bahut saare resaons ki wajah se yeh do share ek hi company ke alag
price pr trade hote hai, haghani ko lagta isme arbitrage apply kr
skte hai, Yeh paired shared perfect arbitrage nhi hai, aur isme
bahut saari uncertainties bhi rhti hai isliye aur players isko
moderate size me hi krte lekin long term moderation to bhul chuka
hai,
Partners 15 aise paired shares ki trades dhundte hai, jisme haghani
bahut size me unpr bet krte hai, haghani ka fav hai royal
dutch/shell, jispr haghani 2.3B$ bet krte hain, of course bina kisi
assurance ke ki spread kam honge ya nhi, kyoki stocks mein bahut
saari unceratinties rhti hai, Practically yeh position itni badi hai
ki yeh totally illiquid hai, illiquid hone me problem nhi jab tak
woh trade borred money se na li gyi ho, Yeh bahut badi position hai
'ridiculously big' goldman ne bhi same trade le rkhi thi, lekin long
term ki trade goldman se 10 times jyada badi hai.
Merger Arbitrage
Long Term merger arbitrage bhi kr rha hai, Suppose sportify ka stock
5$ pr trade ho rha hai, aur google annouce annouce krta hai woh
sportify ko 10$ per share se buy krega, toh instantly sportify ki
price badhegi, lekin 10$ tk nhi 8$ tk kyoki deal actual me close
hogi ya nhi isme time lagta hai aur iss bich kuch bhi ho skta hai
yeh ek risk hai aur woh 2$ waki ke risk pr hai, toh hedge fund iss
pr bet krte hai agr deal close hui toh stock 8$ se 10$ pahuch jayega
jisme long kiya hoga usko profit hoga aur agr deal close nhi hoti
toh price wapas 8$ se 5$ pahuch jayegi, aur jisne short kiya hoga
usko profit hoga, Basically bet krna jo deal annouce hui hai woh
close hogi ya nhi. Long Term bahut saari deals ki ek basket banata
hai jo usse lagta hai yeh safe bet hai,
Ignoring the Warning
Hilibrand ek ke baad ek aisi deal ke stocks buy krte hai, lekin
bahut badi size mein, Scholes aur Merton rokte hai aisa krne ko, ki
itne badi size mein bet krna woh bhi uss field mein jisme Long Term
ko koi expertise nhi hai, lekin unko ignore kr diya jata hai,
Capital Overload
Bahut saare partners ne fund me apni saari net worth laga rkhi hai,
Aur leverage ke liye LTCM ne 3 banks se 100m$ ki aur borrowing kr
li, aur yaha tk bhi kafi nhi tha, hilibrand aur 24m$ personally
borrow krte hai, Hans 15m$, Fund ke pass ab bahut jyada capital hai
kareeb 7B$ jo ki wall street giant Merill Lynch jitni hai, ek hedge
fund ke pass investment bank se jyada capital, Aur fund ko aur
trades nhi mil rhi itne saare capital ko deploy krne ke liye,
Meriwether kuch capital investors ko return krne ka sochte hai,
Scholes aur merton iske against the, scholes bolte hai yeh ironic
hai ki long term capital return kr rha hai jab nye competitor game
me aa rhe hai,
Salomon Sells, Nobel Prize Arrives
Meriwether investors ko inform krte hai woh capital return kr rhe
hain aur iske kuch din baad, Salomon ke losses badh rhe hai (need
fact check) aur buffett failing businesses me invest krne ke against
hain, buffett kaise bhi salomon ko sell krna chate hai jiske liye
woh travelers ke chairman Sandor Weill se baat krte hain aur 9B$ me
sell(need check) krdete hain,
October me fund ko ek positive news milti hai, Merton aur Scholes ko
Nobel Prize milta hai, Fischer ke sath Black-Scholes Equation ke
liye jo ki option pricing ke liye hai, Jaisa Meriwether ne sochta
tha, Long Term 1997 mein 25 percent earn krta hai,