Editing Long-Term Capital Management (section)

=== Diminishing opportunities and broadening of strategies ===

LTCM attempted to create a splinter fund in 1996 called LTCM-X that would invest in even higher risk trades and focus on Latin American markets. LTCM turned to UBS to invest in and write the warrant for this new spin-off company.<ref>{{Harvnb|Lowenstein|2000|pp=95–97}}</ref>

LTCM faced challenges in deploying capital as their capital base grew due to initially strong returns, and as the magnitude of anomalies in market pricing diminished over time. [[James Surowiecki]] concludes that LTCM grew such a large portion of such illiquid markets that there was no diversity in buyers in them, or no buyers at all, so the wisdom of the market did not function and it was impossible to determine a price for its assets (such as Danish bonds in September 1998).<ref>{{Cite book |last=Surowiecki |first=James |title=The wisdom of crowds |publisher=Anchor Books |year=2005 |isbn=9780385721707 |location=New York |pages=240 |chapter=Chapter 11.IV |oclc=61254310}}</ref>

In Q4 1997, a year in which it earned 27%, LTCM returned capital to investors. It also broadened its strategies to include new approaches in markets outside of fixed income: many of these were not market neutral – they were dependent on overall interest rates or stock prices going up (or down) – and they were not traditional convergence trades. By 1998, LTCM had accumulated extremely large positions in areas such as [[risk arbitrage|merger arbitrage]] (betting on differences between a proprietary view of the likelihood of success of mergers and other corporate transactions would be completed and the implied market pricing) and [[S&P 500]] options (net short long-term S&P volatility). LTCM had become a major supplier of S&P 500 [[Vega (finance)|vega]], which had been in demand by companies seeking to essentially insure equities against future declines.<ref>{{Harvnb|Lowenstein|2000|pp=124–25}}</ref>