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I must look into the LTCM meltdown, don't know the details of...

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AverageJoe

43,503 Posts.

1026

09/12/14

01:22

Post #: 14429880
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Originally posted by timber1956 ↑

"You do understand market neutral pairs trade strategy right?"

The strategies you talk of cost Long Term Capital Management (LTCM) $4 billion in six weeks.

Like Solomon Brothers (Where all the LTCM people came from) I was trading spreads late 1980s. The logic in the exercise was to take advantage of inefficient prices without taking exposure to correlated market shifts.

Most of the offsetting positions had something fundamentally in common to drive the pricing to arbitrage neutral levels (government bond rates and interest rate swap rates) so that it was relatively easy to calculate the size of each side to make the position Delta neutral.

I agree that the Nikkei and gold are correlated (negatively). But how to match the offsetting Deltas? And what is the efficient price of each relative to the other to determine the entry and exit levels?

LTCM did mad things with respect to the size of their positions. But they never did anything insane.

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I must look into the LTCM meltdown, don't know the details of that collapse.

Did you trade the spreads successfully back then?

I have only dabbled in the spread trading many years ago without much success. On paper it looked like a credible approach but I guess there is no free lunch in the end.
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