Which U.S. hedge fund collapse in 1998 required a Federal Reserve-arranged rescue?

The 1998 U.S. hedge fund collapse that required a Federal Reserve-arranged rescue involved Long-Term Capital Management.

Long-Term Capital Management, or LTCM, was founded in 1994 and used highly leveraged trading strategies based on mathematical models and convergence trades. Its partners included prominent economists and financial experts, helping attract substantial capital and credibility.

The fund suffered severe losses after Russia’s August 1998 debt default and a worldwide flight from risk disrupted relationships that its trades expected to converge. Because LTCM had very large positions and numerous counterparties, regulators feared that a disorderly failure could destabilize markets.

The Federal Reserve Bank of New York helped coordinate a private-sector rescue in September 1998. A group of major banks and investment firms provided capital and took control of the fund; the U.S. government did not directly bail out LTCM with taxpayer funds. The episode became a widely cited warning about leverage, interconnected counterparties, and overconfidence in risk models.