LTCM’s strategy exploited temporary price differences via swaps totaling $1.25 trillion notional.

Evidence

LTCM’s basic strategy was “convergence” and “relative-value” arbitrage: the exploitation of price differences that must be temporary or that have a high probability of being temporary. Typical were its many trades involving “swaps.” By the time of LTCM’s crisis, its swap book consisted of some 10,000 swaps with a total notional value of $1.25 trillion. — Donald MacKenzie, An Engine, Not a Camera, 978

Categorization

• DEFINE: Defines convergence and relative-value arbitrage — the conceptual core of LTCM’s strategy.
• BMF: The ‘must be temporary’ convergence logic — trading corpses of past price relationships — faintly echoes the reverent scavenging ethos of Meriwether Lewis handling others’ bones in Gore’s Eighteen Seventy: arbitrageurs make living money from dead positions, as surveyors made live maps from dead soldiers’ efforts.