The Crisis of Crowding

They asked a basic question of their portfolio: If we can find many different arbitrage or relative value strategies that all look individually attractive, might they look even better when combined in a certain way?

relative value trades and convergence trades.

Choosing low-correlation trades was a central feature of the firm’s risk-management system.

At that time the short U.S. swap spread, the European cross-swap trade, and the short volatility trade were by far LTCM’s largest trades.