Financial Times FRIDAY SEPTEMBER 25 1998  

LTCM: Bailed-out fund plans to attract new investments

By William Lewis and Tracy Corrigan in New York

Long-Term Capital Management, the hedge fund that was bailed out early yesterday by a consortium of mainly Wall Street firms for $3.5bn (£2.1bn), is already planning to raise several billion dollars from new investors.

According to people close to the crisis-hit hedge fund, after a period of "stabilisation" it will seek to raise more than $1.2bn and possibly up to $3bn.

If successful, the investors would buy out several of the 15 financial groups that are taking control of Long-Term Capital.

Insiders insist that the positions the fund holds - mainly in sovereign bonds of G7 governments - will ultimately prove to be "exceptionally profitable" as market turbulence subsides.

Long-Term Capital declined to comment.

Under the terms of the settlement, agreed in principle with the consortium, Long-Term Capital will be able to request to buy the investors out as long as its net asset value is the same or more than at the time of the $3.5bn equity infusion.

The bail-out money is to be used to help the hedge fund avoid selling assets and being unable to meet margin calls. It is expected to remain highly leveraged, with its total market position described as being "in the tens of billions of dollars range".

Once the agreement is signed, the banks will own 90 per cent of the fund's equity for an initial three years, although most say they hope to be bought out before then. Furthermore, the banks have an option to get 50 per cent of the management company for a nominal $1. "The objective is to return capital to participants as soon as possible," said one participant.

The terms provide the consortium with full authority over the investment strategy, capitalisation structure, credit and market risk management, compensation and "all other significant decisions". No further unsecured indebtedness will be permitted.

Long-Term Capital does not intend to alter its trading strategy - buying one security while selling short (selling in anticipation of a price fall) a related security and hoping to profit as the spread between the two converge.

For example, LTCM would buy the relatively illiquid and undervalued 27-year US treasury, while shorting the more liquid and expensive 30-year benchmark bond.

Until recently these strategies proved successful. However, the emerging markets crisis triggered a flight to quality by investors who moved into the benchmark securities - the very investments that LTCM had shorted.