Which hedge fund collapse in 1998 became a symbol of systemic risk after the Russian financial crisis?

Long-Term Capital Management became a symbol of systemic risk after its 1998 collapse. The hedge fund, commonly abbreviated LTCM, was founded in 1994 and used highly leveraged trading strategies based partly on mathematical models.

Its partners included prominent traders and economists, including Nobel Prize-winning economists Robert Merton and Myron Scholes. LTCM often sought small price differences between related securities, but it borrowed heavily to enlarge potential returns. Those strategies depended on markets behaving in historically familiar ways.

Russia’s August 1998 default and ruble devaluation produced a global flight from risk. Prices moved in directions and by amounts that LTCM’s models had not anticipated, causing enormous losses. The Federal Reserve Bank of New York organized negotiations that led to a private-sector rescue consortium, rather than a direct government bailout of the fund. The episode alarmed regulators because forced liquidation of LTCM’s positions might have spread stress through already fragile financial markets.