Re: LTCM and Low-Probability Events

From: John Conover <>
Subject: Re: LTCM and Low-Probability Events
Date: 22 Jan 1999 19:59:17 -0000 writes:
> conover wrote:
> >
> > I would suspect, although I really don't know, that the reason Europe
> > and North America were not hit harder by the Asian Contagion, (which
> > spread to about half the world's economies last year,) is that the
> > derivatives and hedging folks did a reasonable job-and had some good
> > financial engineers spinning their numbers. Large scale hedging and
> > derivatives tend to be a western industrialized tradition at this
> > point in the history of economics.
> >
> Now I am all confused. I thought I had the bad guys spotted. (The John Wayne
> syndrome - you bad - me shoot.) <:)
> Before, the bad guys were the currency traders, LTCM, Soros,  bank currency
> trading offices. I agreed with Malaysia PM Mahathir - we must stop hot money.
> Slap on controls, taxes on currency trades - get them buggers. Now I am not so
> confident, not so cocked and ready to fire.  Are you sure?
> "In a capitalist system capital flows to the point where it can make the most
> profit"...... Author unknown. (And currency traders, like LTCM,
> aid that flow?). Regards, George.

Hi George. Well, like I said, I'm not sure, and kind of guessing,
since I bet that no one has the real numbers. Although hedge and
derivative funds are used by investors as a speculative venture, a lot
of the hedge and derivative funds are used for hedging and
derivatives-a strange set of circumstances.

For example, a global manufacturer-since it takes time for work in
progress, inventory building, distribution, etc.-will take a
derivative on a currency to hedge currency fluctuations between where
the products are made, and sold. As kind of a rough number, relative
currency fluctuations will be about 2X over 4 years, or so, (for
example, in 1995 the US dollar/yen was about 80, and last year, about
140.) In commodity products, with profit margins that run in the few
percent range, currency fluctuations can make a company very
profitable, or vary unprofitable, very quickly-depending on the whims
of the market.

So, providing some kind of insurance against relative values of
inventory, etc., is an important service of the hedge and derivatives
folks. It is doubtful that the global economy could work efficiently
without them.

The international currency exchanges run about a trillion bucks, each
and every day. (Kind of makes one wonder what the IMF can do to for
relative currency values with a few tens of billions of bucks, here
and there.) There are about 50 institutions that do the vast majority
of the trillion bucks. The likes of LTCM, Soros' Quantum Fund, etc.,
are at that smaller end of the spectrum-usually in the few 10's of
billions of bucks under asset management.

However, such things can be used as a speculative venue, also. To
invest in a hedge fund, (at least in the US,) the regulations require
that the hedge fund verify that the investor is a "high net worth
individual," which means be worth millions, etc., and the minimum
investment is a good chunk of change. Such investments are considered
risky-so there are regulations as to who can invest to protect the

However, one can invest in hedge funds from outside the US-just call
your friendly banker in the Cayman Islands.



John Conover,,

Copyright © 1999 John Conover, All Rights Reserved.
Last modified: Fri Mar 26 18:53:07 PST 1999 $Id: 990122115934.391.html,v 1.0 2001/11/17 23:05:50 conover Exp $
Valid HTML 4.0!