LTCM Is Back: One Hedge Fund Uses 25x Leverage To Beat The Market

Before we start, a little history lesson...

At the beginning of 1998, Long-Term Capital Managementhad equity of $4.72 billion and had borrowed over $124.5 billion with assets of around $129 billion, for a debt-to-equity ratio of over 25 to 1.


It was run by finance veterans, PhDs, professors, and two Nobel Prize winners. Everyone on Wall Street wanted a piece of their profits.


But by 1998, that firm was primed to expose America's largest banks to more than $1 trillion in default risks. The demise of the firm, LTCM, was swift and sudden. In less than one year, LTCM had lost $4.4 billion of its $4.7 billion in capital.


The disaster had all the players - the Federal Reserve, which finally stepped in and organized a bailout, and all the major banks that did the heavy lifting: Bear Stearns, Salomon Smith Barney, Bankers Trust, J.P. Morgan, Lehman Brothers, Chase Manhattan, Merrill Lynch, Morgan Stanley, and Goldman Sachs.


In desperate need of a $4 billion bailout, the crumbling firm was at the mercy of the banks it had once snubbed and manipulated.

And so, given all that, we would imagine lessons were learned, 'risks' were comprehended, and the fallacy of so-called experts (or as Taleb would call them Intellectual-Yet-Idiots) once and for all distinguished.

Which brings us to today... Meet Morten Mathiesen, 45, chief investment adviser at Copenhagen-based Moma Advisors A/S, whose Asgard Fixed Income Fund has delivered a 19 percent return in the past year.

As Bloomberg reports, the philosophy behind his success - the best returns are not in the riskiest stocks but in the least risky bonds. But you can’t get them without leverage.

“That’s the core of our strategy,”  said in a phone interview on Thursday. “The best risk-adjusted returns are actually the low vol trades.”


“We try not to speculate whether rates will go up or down,” he said. “We’re typically fully hedged.”

Bloomberg reports that Mathiesen uses a proprietary model to forecast and pick the best risk premiums in short-term, high-quality bond markets. Most of the fund’s bonds are AAA rated, such as Danish mortgage bonds.

“We’re long risk premiums in fixed income,” he said. “We have a strong bias toward the Nordics. We invest in anything that has a risk premium that doesn’t involve credit risk.”

The 600 million-euro ($670 million) fund bets on yield spreads, country spreads and money market spreads in the European fixed income markets.

The spread is usually small so the fund must borrow money to boost the return. Current leverage is about 11 times and has been as high as 25 times, according to Mathiesen. The volatility target is about 6 percent.

As Mathiesen concludes...

“We’ve been successful in providing alpha,” or excess returns, he said. “We’ve produced a higher risk-adjusted return than what the carry should justify in the positions we hold.”

By 'alpha' we suspect Mathiesen means massively-levered beta, but still, performance has been stellar... The fund has delivered returns of 14 percent a year since its inception in 2003 and is beating key bond indexes. Bloomberg’s government bond index has returned 5 percent per year over the past decade.

However, looking back we are getting an ugly sense of deja vu all over again.

"Almost unbelievable track record" - check


"Sophisticated proprietary model" - check


"Betting on small spreads with borrowed money" - check


"25x leverage" - check


"we're fully hedged" - check

What could possibly go wrong?


GUS100CORRINA JustPrintMoreDuh Sun, 06/11/2017 - 21:10 Permalink

LTCM Is Back: One Hedge Fund Uses 25x Leverage To Beat The Market"The spread is usually small so the fund must borrow money to boost the return... current leverage is about 11 times and has been as high as 25 times,"My response: I remember when LTCM went belly up shorting volatility!!! Authorities had to step in or America would face financial armageddon. UNBELIEVABLE!!!!!

In reply to by JustPrintMoreDuh

Overleveraged_… Sun, 06/11/2017 - 21:22 Permalink

Wow now this is a hedge fund that I can invest in!!! I've been recommending everyone go All In Long 3x Leverage. These guys clearly know the deal.They obviously know that the President's Working Group on Financial Markets has their back no matter what, and that stock market crashes are NO LONGER POSSIBLE.Honestly, I used to be bearish. Then I realized how stupid that is. There is $300+ Billion per month of NEWLY created money going directly into all markets, especially the stock market.There will be no big "crash", and honestly I don't even see a correction because prices are currently UNDERVALUED based on all the new money flowing in. 

flyonmywall Sun, 06/11/2017 - 21:23 Permalink

LTCM was a bunch of idiots, and they had to rescue it to "rescue" the financial system. They were run by the "smartest guys around", but were too stupid to deal with interest rates. Fucking pathetic.The people who invested in it where not some mom and pop investors, but were very sophisticated banks, other hedge funds, and some investment banks. Why did they not do their due diligence?The next time some hedge fund leverages up, they will probably need hundreds of billions to "rescue" the financial system. It's a big club, and you ain't in it (RIP Carlin). 

jmack Sun, 06/11/2017 - 21:26 Permalink

His "risk adjusted returns" only look good because he is not accounting for all of the risk he is taking, he is using the wrong risk model.  The question is, is he doing it knowingly, or is he just that stupid/arrogant.

Crawdaddy Sun, 06/11/2017 - 21:40 Permalink

LTCM/FCAT ; Fucking Crooks, All of Them and the shit show continues another generation. Step right up. Come on in. If you'd like to take the Grand Tour!

Harry Lightning Sun, 06/11/2017 - 22:37 Permalink

This is a very good investment model as long as the fund manager adequately hedges both capital risk on his long positions as well as his financing risk regarding the money borrowed to cover the cash liability caused by the leverage. Frankly, I am very surprised that they need 25 times leverage to produce the stated returns. I know a fund that employs almost an identical investment strategy and has delivered the same returns during the same time period but used only 4 times leverage. So my problem with this fund is not their stated returns or their strategy, its more their methods and mechanics. They should look into alternative investment hozizons, which will then adjust the amount of leverage that the horizon allows them to take in order to achieve the stated returns. Their engine presently runs at way too many rpm's and is creating a lot of heat that is sapping them of miles per gallon.

Ethelred the Unready Sun, 06/11/2017 - 23:09 Permalink

The idiots at LTCM were  long Russkie Bonds and were "hedging" themselves with shorts on Us treasury bonds.     DUh, apples and oranges.  These Danes  are at least arbing similar things.   

BobBercy Mon, 06/12/2017 - 05:39 Permalink

It's a 600m fund levered 11x so 6.6bn vs LTCM at 125bn. There are lots of reasons to be bearish on global financial markets. This is not one of them.

Soph Mon, 06/12/2017 - 07:06 Permalink

Hardly comparable to LTCM insofar as scope is concerned. Even worse case, 600M leverage 25x1 isn't exposure that's meaningful these day. Heck, the ECB has a running policy of bond purchases to bail out Europe's crippled economies, corporations and banks that is far larger in scale.