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Former LTCM Guru Sets Up New Hedge Fund

By Dan Weil   |   Wednesday, 28 Oct 2009 08:26 AM

Try, try, try again. That’s the motto of hedge fund manager John Meriwether, who has blown up two funds and is now setting up a third.

You undoubtedly remember his first fund, Long-Term Capital Management, whose failure in 1998 sparked worries that the entire financial system would collapse.

Three months ago, Meriwether closed his second firm, JWM Partners, after it racked up losses of more than 44 percent during the financial crisis.

Now news reports say that Meriwether is setting up a new venture called JM Advisors Management. Sources told the Financial Times that the fund hasn’t taken on outside investors yet.

Meriwether will probably use the same strategy as in his last two funds: relative value arbitrage, the FT reports. An example of that strategy would be to buy junk bonds and sell Treasuries when the yield premium of junk over Treasuries hits levels higher than historical norms.

Investors in the new fund will probably hope that Meriwether uses less leverage this time around. LTCM at its peak borrowed 25 times its capital, and JWM 10 times.

The industry average is two to three times.

Some experts express concern at the risks financial institutions are now taking with interest rates so low.

“All of this is facilitated by the Federal Reserve and the government, who really want financial institutions to get back to lending,” Gary Richardson, a research fellow at the National Bureau of Economic Research, told The New York Times.

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