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

This document summarizes a hedge fund called Moma Advisors that is achieving high returns through the use of significant leverage, similar to Long-Term Capital Management (LTCM) in the late 1990s. Moma uses 11-25x leverage on AAA-rated bonds to bet on small yield spreads. While the fund has delivered stellar 14% annual returns, it takes on comparable risks to LTCM by using large amounts of borrowed money. There are concerns the strategy could face similar problems to LTCM if financial markets experience stress.

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

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LTCM Is Back: One Hedge Fund Uses 25x

Leverage To Beat The Market

by Tyler Durden
Jun 11, 2017 9:10 PM
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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 cant get them without leverage.

Thats 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. Were 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 funds bonds are AAA rated, such as Danish mortgage
bonds.

Were 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 doesnt 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...
Weve been successful in providing alpha, or excess returns, he said. Weve 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.
Bloombergs 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.