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LTCM talks raise eyebrows
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February 4, 1999: 12:54 p.m. ET
Hedge fund consortium meets Thursday, topic is subject of speculation
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NEW YORK (CNNfn) - The consortium of banks and brokerages that bailed out Long Term Capital Management in September reportedly is meeting Thursday in New York to discuss the status of the hedge fund that nearly collapsed from bad market decisions.
Those following the industry say it could be just a regularly scheduled meeting to keep investors apprised of LTCM's growth and to brief them on the retirement Wednesday of two of its key founders.
But it could also be more serious.
Hunt Taylor, executive director of Tass Management, which tracks hedge fund activity, said some of the consortium members could be looking for an exit now that the fund has regained its footing.
That, he said, could spook the remaining members, which potentially would threaten its newfound stability.
"If the banks don't work in concert in this instance they can really turn a bad situation into a disaster," Taylor said, acknowledging he has no inside information on the topics being discussed at today's meeting. "I don't think this is a disaster now, but there is that risk if members of the consortium start jockeying with each other to get paid first, or more."
On Wednesday, two of the hedge fund's original partners, William Krasker and Nobel Laureate Myron S. Scholes announced they are retiring, leaving the fund with 14 partners.
The news comes at a vulnerable time for LTCM, which is looking for new investors to pump money into the fund. Without the clout of Scholes and Krasker, it may encounter difficulties.
Taylor said their departure alone, could also have triggered the meeting.
"Anytime you have a key principal in a high-profile fund like LTCM leave, that's reason enough to get together and discuss what's going on," he said. "It's not good for LTCM because you are losing one of the core constituents to the organization and it's hard to imagine that being a positive. It also leads to speculation as to why he's leaving."
Taylor said it could be that Scholes "lost his appetite" for risk following the LTCM debacle, or maybe he lost faith that the fund will "ever earn it's money back."
"Under no case can you view his departure as a positive," he said. "The only question is, to what degree is it a negative?"
LTCM, the Greenwich, Conn.-based hedge fund headed by former Salomon Brothers trading legend John Meriwether, had assets of $4.7 billion as of Jan. 1, according to reports.
The fund was forced to seek a bail out in September after suffering huge losses in the market turmoil that followed Russia's debt default. It ran into trouble by spreading into equities and emerging markets when bond yields declined amid low inflation in most developed countries - the equivalent of a market meltdown.
Since its bailout, LTCM's performance has been so good that the financial institutions that put up the money, including Merrill Lynch and Goldman Sachs, could see some of their capital returned to them next year, according to London's Financial Times.
They may, in fact, demand it.
The Times said there had been efforts to sell the portfolio in recent weeks and that preliminary discussions were held between the Saudi investor Prince Alwaleed bin Talal bin Abdulaziz and Goldman Sachs.
Hedge funds are private investment partnerships that invest in a variety of securities.
The funds, usually reserved for the very rich, are designed to maintain consistent, if not aggressive growth, in both bear and bull markets, by betting on stocks and currencies the investment manager believes are heading down.
At the same time, the fund buys into securities believed to be moving up -- thereby mitigating their risks in all types of market conditions. 
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