John Meriwether Planning on Opening Yet Another Hedge Fund

John Meriwether is going to give it another shot.

In October of 2009, multiple news organizations reported that John Meriwether, formerly of Salomon Brothers/LTCM/JWM Partners, would be forming his third hedge fund.

Now, this wouldn't normally be big news, but it is when you consider that Meriwether's two previous hedge funds both flamed out, one of which was in spectacular fashion.

John Meriwether founded LTCM (Long-Term Capital Management) in 1994. This fund, which included famous bond traders (John Meriwether), two Nobel Memorial Prize winners (Robert C. Merton and Myron Scholes) and a Vice Chairman of the Federal Reserve (David Mullins), was an instant success due to the incredible collection of talent that comprised the fund's team of partners.

LTCM was going to rely on complex mathematical models to take advantage of convergence trades. These small, steady gains were to be combined with a massive amount of leverage to generate an enviable stream of profits for the investors in the fund.

For a while, things were humming along quite nicely. The strategy was working to a tee, and investors in the fund were generating huge profits (as well as the partners, but their gains were mostly on paper as they chose to reinvest their money into the fund). Many brokers were dying to do business with LTCM, awed by their steady gains and unsurpassed brain power and prestige.

Then, as you probably are well aware, LTCM was caught off-guard (and in a massively over-leveraged state) by the Russian financial crisis. The fund, which had returned over 40% per year during the first few years of its existence, ended up losing over $4 billion in less than four months.

The Fed took the extraordinary step of helping to organize a bailout of the fund by bringing together Wall Street's biggest firms in one single room. A consortium of Wall Street companies (including Goldman Sachs, Morgan Stanley and JP Morgan) were able to organize a $3.6 billion bailout which saved LTCM from a certain collapse - a collapse that may have finished off an already extremely volatile market.

You would think that the partners at a hedge fund that had so spectacularly flamed out would slink off into the shadows, never to be heard from again? Not a chance.

Mere months after the collapse of LTCM, John Meriwether announced that he was forming JWM Partners LLC. Like LTCM, this fund would be based out of Greenwich, Connecticut. Like LTCM, this fund would include such names as Meriwether, Victor Haghani, Larry Hilibrand and Eric Rosenfeld.

And, just like LTCM, JWM Partners LLC would utilize the same basic strategies as its predecessor, without the unsightly 100 to 1 leverage that had finished off LTCM.

The demise of LTCM, JWM Partners LLC thought, was a freak occurrence. The result of a "black swan" event (Russian debt default).

LTCM had been humming along until this completely unexpected event had taken place, wiping the partners out in just four months. Surely it wouldn't happen again?

Proving that Wall Street has a short memory, the fund launched with $250 million in 1999. Things were good on Wall Street once again, and Meriwether and his gang of traders and quants were back in business.

By 2007, the fund had about $3 billion under management - by July of 2009, the fund had been shuttered.

The main JWM Partners LLC fund lost nearly half of its value from September 2007 to February of 2009, surely stung (once again) by another "black swan" event, this time the economic meltdown that occurred in 2008. What likely happened? Investors retreated to the safety of US treasuries, spreads widened and JWM Partners LLC was soon out of business due to convergence trades gone awry. Sound familiar?

Now - surely Meriwether was going to lick his wounds and retreat to an island somewhere, never to be heard from again? Not a chance.

According to reports, Meriwether will be opening JM Advisors Management in 2010. The fund (which will be based out of Greenwich, Connecticut as well) will be focusing on "highly leveraged value arbitrage".

Will Meriwether finally achieve long-term success with his JM Advisors Management venture, or is he destined for yet another flameout?

Filed under: Hedge Fund News