Hedge fund Long-Term Capital Management (LTCM) had all the ingredients to be the star of Wall Street: one of the most successful traders like John Meriwether, famous Nobel Prize winners - Myron Scholes and Robert Merton, and significant initial capital.

After the Asian crisis and Russian default on bonds and currency devaluation, flight-to-quality and liquidity in 1998 together with the high leveraged strategy of the fund, made it almost collapse. LTCM in 1997 managed around $7 billion when in September of 1998 this amount dropped to $600 million. As LTCM by the mid of 1998 was too big to fail, the Federal Reserve Bank of New York arranged a bailout of the fund, by banks that could be affected by the very likely collapse.

The numerous takeaways especially for risk management could be identified in aftermath of this story:

• Legal Regulations should cover more financial institutions despite the number of their investors and their net worth

• Models should have as input long enough historical data and their output should be taken deliberately and correctly interpreted

• Limitations and assumptions of the models should be considered (for example prices are not always reflecting economic changes immediately)

• Better stress-testing and "worst scenario" analysis

• Different types of risks should be considered