Assignment on Comparing the demise of this hedge fund to the financial crisis of 2008

Hedge funds are related to the finance industries that are used to attract billions of dollars in the market by investors to get higher returns. But there are several issues that arise in the market and investors exit from the market due to loss and several firms got shut down. According to the analysis of the HFR, there are hedge funds of amounting $95 billion in the previous year that is available in the form of stocks, bonds and the commodities of currency. In 2008 financial crisis, it is the largest decline in the market for the investment (Ben-David, Franzoni, & Moussawi, 2012).

There were many investors who left the market and firms shut down as they could not survive the loss of global market and the unexpected steps to fight with this demise. There were undefined strategies deployed by the hedge funds to purchase the equity of the firms who were going to shut down. While the features have been emotional, marketing choppiness so far this year has not arrived at a similar level as late 2008, when Lehman Brothers crumbled, the last time the business experienced such a major crumble. This has provoked some analysis that speculative stock investments, which were initially intended to shield speculators from extremely large swings in the market, are not carrying out their responsibility.

Long term capital management LTCM was considered largest hedge fund that was led by Nobel Prize in the street of economists and worked successfully from 1994-1998 and attracts more than $1 billion investors to take the benefits of the market and reduce the risk at the 0. But the fortune could not go so long with the LTCM and it collapsed in 1998 due to high leverage trading strategies in the Wall Street banks. There was small set up of LTCM but leverages were high money market that reach on the peak in 1998 and its worth become over $1 trillion that could not handled by the situation. It took the world’s economy to the bottom in 1998 (Reinhart & Rogoff., 2008).

Government leaders could not learn from the mistakes by the LTCM crisis that was early alarming sign with the same threat but due to negligence in 2008 world face global crisis in the financial market. Financial crisis of 2008 is largest crisis of financial market in 21^st century that crash several economies. The unconditioned event happened with the association of subprime mortgages, excess of leverage, reckless credit and lending limits and many other speculative events in the market. Ten years before the financial crisis in 2008, there was another critical occasion which could have conceivably carried the economy to a stop the disappointment of LTCM (Long term Capital Management), which was an massive versatile investments working out of the United States. There is discussion about the demises between the breakdown of LTCM and the occasions prompting the money related financial crisis of 2008, drawing how the budgetary emergency could have been moderated if the correct exercises were found out from the breakdown of LTCM.

One of the largest reasons of the collapse of LTCM was using excessive leverage and exposure to the derivatives. It had balance sheet leverage of assets that were worth of $125 billion and equity was just $5 billion and the reserves of the company were also limited to maintain the derivatives market. Due to high credit rating company was able to take trade discount from brokers and could use leverage largely in the market. In the list of lenders there were included the famed investments banks and commercial banks of America such as JP Morgan, Lehman Brothers, Morgan Stanley, Goldman Sachs, Chase Manhattan and Merrill Lynch.

In 1996 portfolio was swaps with the different used of the common forms of derivatives. Before the finish of 1997, LTCM had an expected measure of OTC subsidiaries worth more than $1 trillion in the financial market. For each dollar in value, the firm had places of $200 or more in subordinates without the information on its counter-gatherings or government regulators. Furthermore, LTCM had small part of capital that could cover the repayment of the counter parties in the collateral trade. The funds lost 80% of the capital of 5% billion which was under huge debt of $120 billion and became insolvent.

The failure also cause due to systematic risk for all the firms that were associated with the LTCM and they face problem of liquidity crisis that was huge part based on the commercial banks and investment banks. In the financial crisis of 2008, excess leverage and huge exposure to derivatives become cause of losses to the companies. In the 10 year gap between crisis of LTCM and world economy, it was surprising that no company learn from the state of LTCM, there were no check and balance on the derivatives as well as on the exposure limit and collapsed like LTCM in just ten year after it.

In any case, rather than taking any preventive measures in 1998, the Federal Reserve pushed for additional deregulation of the subordinates advertise after the rescue of LTCM, which from various perspectives fuelled the 2008 crisis. Financial organizations over utilized, presented themselves to extraordinary dangers, making a huge issue of good risk which demonstrated amazingly discouragement during the 2008 crisis (Hall, 2010).

References of Comparing the demise of this hedge fund to the financial crisis of 2008

Ben-David, I., Franzoni, F., & Moussawi, R. (2012). "Hedge fund stock trading in the financial crisis of 2007–2009.". The Review of Financial Studies , 25, 1-54.

Hall, R. E. (2010). Why does the economy fall to pieces after a financial crisis?. Journal of Economic perspectives , 24 (4), 3-20.

Reinhart, C. M., & Rogoff., K. S. (2008). Is the 2007 US sub-prime financial crisis so different? An international historical comparison. American Economic Review , 98 (2), 339-44.