Wise advice from LTCM chronicles

Long term capital management 

(Set up: 1993, Wound Up: 1998)

John Meriwether was his name,

And fixed income arbitrage was his game,

Time and again, he bet on a spread to converge,

Between a futures contract and an underlying bond,

Or between two bonds – spread convergences, such was his theme.

He believed in riding losses until they turned into profits,

He held his positions and stayed the course even if his trades made losses,

And eventually, the spreads did always came in and he made handsome profits,

Long term capital management (LTCM), his hedge fund, became the toast of every investor,

And so, he increased his firm’s leverage to pick up more and more nickels from the arbitrage trade,

For every dollar his firm had, they had borrowed 100 extra dollars to trade more arbitrage and make larger still profits.  

A quirk of fate it was to be, the idea that caught global investor frenzy in late 1998 was divergence,

Everywhere the spreads widened, and profits that were supposed to occur on convergence transmuted into debilitating losses on account of divergence,

Poor John Meriwether and his fabled investors, LTCM went down under and they bid farewell to a meagre short-lived dream,

Surprise! Surprise! The spreads came back on much latter through 1999 and 2000, and convergence again ruled the roost,

In the end the true lesson remains that while a losing trade may well turn around eventually, the turn could well arrive too late to do the trader any good,

Meaning he may truly go broke in the interim.