Which hedge fund crisis in 1998 forced a Federal Reserve-organized rescue to protect financial stability?

The 1998 hedge fund crisis involved Long-Term Capital Management, or LTCM.

LTCM suffered enormous losses after Russia’s August 1998 debt default and the resulting flight from risky assets. The fund used highly leveraged arbitrage strategies, meaning relatively small price movements could create very large losses compared with its capital.

In September 1998, the Federal Reserve Bank of New York coordinated a private-sector rescue in which major financial institutions provided capital and took control of the fund’s portfolio. The Federal Reserve did not directly bail out LTCM with public money, but officials feared an uncontrolled liquidation could destabilize already nervous markets.

LTCM had prominent academic figures among its principals, including Nobel Prize-winning economists Robert Merton and Myron Scholes. The episode became a major example of how leverage, crowded trades, and opaque derivatives can create systemic risk even when a fund appears diversified.