Arbitrage strategies became consensus trades as hedge funds imitated LTCM

Evidence

As a result of conscious and unconscious imitation, many of LTCM’s positions became, in the words of an arbitrageur who was not affiliated to LTCM, “consensus trades” (Kaplanis interview). Of course, the growing number of arbitrage traders in investment banks and hedge funds did not sit down together in a room to identify good arbitrage opportunities. Rather, “the arbitrage philosophy … had been disseminated, well disseminated by August ‘98; it was there in quite a few hedge funds, it was there in quite a few firms. So Salomon [and LTCM] lost their uniqueness in doing these things. There were many, many others that could do them.” (Kaplanis interview) There was some communication: “If you talk[ed] to another arb trader in the street, they’d say `Oh yes, I have this as well, I have that as well.”’ — Donald MacKenzie, An Engine, Not a Camera, 1029

Categorization

• XREF: connects to: Other traders imitated LTCM’s successful arbitrage models and strategy — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 155; LTCM’s visible profits pulled other funds into the same strategies, crowding the trades. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1022; LTCM’s public success spawned imitator funds with eager capital — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1025 (+5 more)

Broader Connections

• Imitation of LTCM created new correlations between unrelated arbitrage positions in 1998. #expands (0.90) — Donald MacKenzie, An Engine, Not a Camera, 1228