LTCM was a hedge fund that failed in the late '90s after betting enormous amounts of money and losing to a few 'Black Swans', mainly an event overseas that they couldn't predict (Russian Ruble collapse) along with a loss of liquidity, massive declines in assets, and an increase in their leveraged investments. Apparently their competition got access to their positions too, which couldn't have helped them.
Since LTCM had an almost unlimited bankroll, they could easily put their funds 'all in' and scare off any competition. They could move markets, and even create new ones. Manipulation? Definately possible.
However, they couldn't win if there was no market left, and the loss of liquidity and value of the Ruble killed their Russian bets and ultimately the fund. Being large meant that they could not easily exit their positions without major losses. The very fact that they were selling some of their smaller positions caused the value to decrease. Plus their competition could snipe them as they went down.
This article talks about the Kelly criterion, which is really a way of position sizing your bets based on a given expectation of positive value, while keeping some money left in your bankroll. Perhaps LTCM used this type of formula in their quant-based system, along with some time-decay math?
It didn't work for them, because "the market can stay irrational longer than you can stay solvent."
The cold hard fact is that all progressive betting systems are nothing more than modified versions of the Martingale system. In the Martingale, you risk one unit, and if you win you keep risking one unit. If you lose, you double your bet, and if you lose again you re-double and keep re-doubling until you finally do win. Then you go back to risking one unit.
As any fool can plainly see, the Martingale can’t miss, so long as you win one more bet before you die you’re going to be a winner.
Well, yeah, if you lose12 bets in a row you’d have to risk $409,600 to win $100, but how often is that going to happen?
As it turns out, plenty.
Source: Debunking the Kelly Criterion - Sports betting picks, sports betting 'how-to' material, sports betting books, audio tapes, research material, sports betting computer programs on disks, gambling info, football, basketball, baseball picks, gambling money management, team stats, 'Professional Gambler' newsletter, tools for serious gamblers
One of the guys I used to work with bet on ProLine. His sports gambling habit one year paid off to the tune of $27,000 in just a couple of tickets. He went out and bought a brand new truck.
Less than a year later he hit a Black Swan - not literally, but he had the truck stolen from a parking lot near work. Along with his golf clubs.
Do you think he went out and bet $60k on Proline tickets? Could have, he was a pretty big gambler... but I doubt it.
At least he didn't somehow manage to borrow $7,950,000 against the truck like LTCM did.
If he did, I think the bank would have been willing to loan him another $60k to get their money back.