The Truth about Hedge Funds

The highly publicized problems of Long Term Capital Management (LTCM) in 1998 have once again focused the attention of policymakers and the financial press on the hedge fund industry. LTCM’s sudden fall from grace has made for colorful reading, in part because its principals include Nobel laureates Robert Merton and Myron Scholes. Interest was heightened by the Federal Reserve Bank of New York’s involvement in coordinating LTCM’s short-term rescue by 15 large banks and security firms. The New York Fed later justified its participation on the grounds that “an abrupt and disorderly liquidation would have posed unacceptable risks to the American economy.”