Long Term team off to another big year

NEW YORK — NEW YORK -- Bond trader John Meriwether and his colleagues at Long Term Capital Management earned investors 20.1 percent on their money in the first four months of 1996, putting them on pace for a third mammoth year, investors said.

At that pace, the Greenwich, Conn., firm could top its 1995 performance, when it generated a return of 42.8 percent after fees. Such huge returns are reaping a fortune for Meriwether and his 11 colleagues, who in 1995 collected more than $300 million in fees, investors said.


The firm's track record also is adding to Meriwether's stature among Wall Street traders. The former vice chairman and trading chief at Salomon Brothers Inc. is known for his skills at fixed-income arbitrage -- making bets supplemented with borrowed money to gain from price discrepancies between bonds in different countries and currencies.

"I don't know of any better," said Michael Holland, an independent money manager.


Meriwether, 48, was portrayed in Michael Lewis' book, "Liar's Poker," as the guru of Salomon's most profitable traders, some of whom are his partners at Long Term Capital. They include Eric Rosenfeld, the former government bond chief at Salomon, and Lawrence Hilibrand, who led Salomon's fixed-income arbitrage group and earned $23 million in 1991.

Meriwether, who left Salomon during the firm's 1991 Treasury auction scandal, founded Long Term Capital in 1993 and attracted $2 billion from investors.

Since putting the money to work in early 1994, the firm has trounced market indexes. J. P. Morgan's Global Bond Index returned 19.32 percent last year, and dropped 2.12 percent through April. The Standard & Poor's 500 index jumped 34

percent last year, and was up 6 percent in the first four months of this year. In the final 10 months of 1994, the firm returned 19.9 percent, compared with a full-year return of 1.28 percent for the J. P. Morgan bond index and a decline of 1.33 percent for the S&P; 500.

Currently closed to new investors, the fund has grown to more than $2.5 billion with reinvested profits, investors said. Last year's returns topped more than $1 billion and already this year the fund has risen by more than $400 million, they said.

One of Long Term's strategies has been to woo large global investors that can provide insight into their local markets.

Fixed-income arbitrage often boils down to borrowing money at low rates and reinvesting it at higher ones, or betting that the difference in prices between two securities is bound to change. Then, traders use futures, options and borrowed money to increase their bets.

Last year and earlier this year, many traders borrowed money in Japan at short-term rates of less than 1 percent, converted the money into dollars and bought higher-yielding U.S. Treasuries yielding more than 6 percent.


This year, investors sold U.S. Treasury securities and used the proceeds to buy German bonds because they expected the Bundesbank to cut rates faster than the Federal Reserve. In fact, rates rose in both counties. Yet investors still profited from the trade because U.S. rates rose more than German rates.

Meriwether may also be making some stock bets as well, wagering on companies targeted for takeovers, a strategy known as risk arbitrage.

Long Term Capital declined to comment on its trading strategies or its results. People familiar with Meriwether's practices said Long Term Capital hedges almost all of its trades, providing outsized profits if the bet is right and limited losses if they go wrong.

While Long Term Capital has enriched its investors, it's also rewarded Meriwether and his partners. They keep 25 percent of any trading gains and a management fee of 2 percent of the size of the fund, and the portion of the profits linked to their personal investments in the fund.

A 20 percent slice of the profits is typical for other funds.

Meriwether's other unusual demand on investors is that they can't remove their money for three years, which investors say helps them to make higher returns.


Pub Date: 6/02/96