The Big Brains Behind LTCM — Where Are They Now?

 

When one of the financial world’s most unique and talked-about quant funds, Long-Term Capital Management (LTCM), closed in 2000 after a disastrous two-year downfall, the three famous brains behind it might very well have buried their heads in the FE sand. After all, the notorious hedge fund they oversaw there squandered away $4.6 billion in less than four months on the heels of the Russian financial crisis. It ultimately collapsed, forever branding it as a glowing example of the inherent risks associated the hedge fund industry. It proved such a fiasco, in fact, that it “prompted the US Federal Reserve to take the then-unprecedented step of orchestrating a multi-billion dollar bailout,” New York Times later reported.

A decade later, however, and the triumvirate behind LTCM is very much alive and kicking in the financial engineering sphere. Following are some of the quantitative endeavors Founder John Meriwether and Board of Directors Myron Scholes and Robert C. Merton have been up to since their Long-Term Capital Management departures ten years ago.

John Meriwether

LTCM founder, John Meriwether, wasted no time wallowing in self-pity. Shortly after the demise of that hedge fund, he opened a new one, JWM Partners LLC, which managed to increase its value by twelvefold over an eight-year period. Unfortunately, when the global recession set in in 2007, Meriwether found himself in the same uncomfortable situation he’d escaped from at Long-Term Capital. After the fund lost of 44 percent of its value, he closed JWM Partners on July 8, 2009.

Once again, he would not be down and out for long. On October 22, 2009, the DealBook reported that “Meriwether [was] setting up a new fund.” That supplement to the New York Times revealed, “Mr. Meriwether’s new venture, named JM Advisors Management, will, like both of his previous hedge fund management companies, be based in Greenwich, Connecticut.” While “not yet started accepting outside investments,” industry publication HFMWeek intimated that “the fund will open to investors in 2010.”

Have Meriwether’s previous failures prompted him to change his hedge fund ways? Not according to the article, which went on to point out, “The fund is expected use the same strategy as both LTCM and JWM to make money: so-called relative value arbitrage, a quantitative investment strategy Mr. Meriwether pioneered when he led the hugely successful bond arbitrage group at Salomon Brothers in the 1980s.”

Myron Scholes

The LTCM failure bore harsher implications for Board of Director Myron Scholes than it did Meriwether. In 2005, he found himself implicated in the tax-avoidance lawsuit Long-Term Capital Holdings v. United States.  It was ultimately decided that Nobel Prize-winning economist Scholes and his partners were “not eligible for $106 million in tax deductions it (LTCM) claimed from a tax shelter,” the Associated Press reported on August 28, 2004.

Admitting under oath that he was not an expert on tax law, Scholes emerged from the scandal unscathed enough to continue making his mark in the financial engineering sector. Today, he serves as the chairman of Platinum Grove Asset Management, which manages dynamic multiple-strategy relative-value investment vehicles.

Robert C. Merton

Merton Model and Intertemporal Capital Asset Pricing Model (ICAPM) developer and co-developer of the Nobel Prize–winning Black-Scholes-Merton model to determine the value of derivatives, Robert C. Merton, spent his post-LTCM days as Chief Science Officer of Trinsum Group, a financial advisory firm. When that company filed for Chapter 11 bankruptcy protection in January of 2009, Merton found himself once again in familiar territory—at the helm of another sinking ship.

As Quant Network previously reported, he accepted a professorship position at his alma mater, Massachusetts Institute of Technology, on June 17, 2010. In a press release announcing the appointment, MIT stated that Merton’s “current academic interests are in understanding and controlling the propagation of macro financial risk including designing financial instruments to implement automatic stabilization policies for central banks, and improving methods of measuring and managing sovereign risk.”

Having taught there for 18 years throughout the 1970s and 1980s, he has rejoined the MIT Sloan School of Management, teaching mainly in the Master of Finance (M.Fin.) program, which was launched last year. In the process, he’s rewriting the old adage, transforming it into ‘Those who can do … AND teach.”

As this dynamic threesome proves, you can’t keep a good quant down for long. If LTCM is one example, one may not look very far to see similar stories. Nicholas Maounis, the hedge-fund manager whose Amaranth Advisors LLC collapsed under a record $6.6 billion loss in 2006, is seeking to start a new firm, according to a note sent yesterday to his former investors.

Tags: hedge fund bailout, John Meriwether, Long-Term Capital Management, LTCM, Myron Scholes, Robert C. Merton

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