Which 1998 hedge fund collapse threatened financial stability after Russia’s debt default?

Long-Term Capital Management was the hedge fund whose 1998 collapse threatened financial stability after Russia’s debt default.

LTCM used highly leveraged trading strategies based on mathematical models and the expectation that price differences between related securities would narrow. Its partners included prominent financial scholars, including Nobel Prize-winning economists Myron Scholes and Robert C. Merton. The fund initially produced strong returns, which encouraged it and its counterparties to maintain large positions.

Russia’s August 1998 default and devaluation helped trigger a worldwide flight to safety. Instead of converging, many supposedly related prices moved farther apart, causing heavy losses. LTCM’s leverage meant that relatively small price changes produced enormous losses relative to its capital. The Federal Reserve Bank of New York helped coordinate a private-sector rescue in September 1998; the U.S. government did not directly provide the bailout money. The episode became a warning about leverage, crowded trades, model risk, and the possibility that a supposedly sophisticated institution could transmit stress through many banks and markets.