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Comment Re:LTCM (Score 1) 323

No, the problem with LTCM was that they were playing spread arbitrage, a game similar to picking up money in front of a moving bulldozer. Every type of trading can be classified as a bet that some quantity will become larger or smaller. Traders who buy on dips are betting that the difference between the clearing price and the average price will get smaller. Arbitrageurs like LTCM bet that the difference in price between two similar instruments will become smaller. Even in a perfectly liquid world, the difference can only go to zero but it's unbounded in the other direction. Mandelbrot expressed this concept by saying that price changes have infinite variance. What that means in practical terms is that there is no limit to how far prices can deviate from what some model predicts, in other words, infinite risk and finite reward. Eventually, the bulldozer runs over this sort of model. Of course it's also possible to make money from such events as well. You just have to take the position opposite the arbitrageurs and dip buyers.

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