Russia / LTCM 1998
Russia’s August 1998 default and devaluation blew up leveraged relative-value books, culminating in the LTCM rescue — a reminder that ‘hedged’ can mean ‘short liquidity in every state.’
Definition
Russia defaulted on ruble debt (GKO) and devalued. Credit and EM spreads exploded; equity-vol and swap spreads moved in ways RV books had treated as independent. LTCM’s notional was huge versus capital. A Fed-coordinated creditor recap avoided a disorderly unwind.
Why it matters
It is the founding myth of modern hedge-fund contagion: correlations go to one, financing lines gap, and the Street’s own books are on the other side.
Case
August 17 default, LTCM’s September letters, and the 23 September consortium. The Fed cut in the autumn — a policy response to market function, not to Russian GDP.
How to read it
Gross vs net, repo haircuts, and whether the hedges are the same factor in a panic. A 25× levered ‘market-neutral’ book is a liquidity short.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- Hedge Funds and the Asian Currency Crisis of 1997Brown, Goetzmann, Park · 2000 · Journal of BusinessContext on HF positioning around the late-1990s crises.