I am familiar with LTCM and how it crashed and burned. I don't think that people who ran it were morons or that they assumed returns will be normally distributed. LTCM's blowup is a prime example of "Markets can stay irrational longer than you can stay solvent" (which should be an interesting lesson for LW people who are convinced markets are efficient).
LTCM failed when its convergence trades (which did NOT assume things will be uncorrelated or that returns will be Gaussian) diverged instead and LTCM could not meet margin calls.
Hindsight vision makes everything easy. Perhaps you'd like to point out today some obvious to you morons who didn't blow up yet but certainly will?
I don't think that people who ran it were morons or that they assumed returns will be normally distributed.
An LTCM investor letter, quoted here, says
"…only one year in fifty should it lose at least 20% of its portfolio."
And of course, it proceeded to lose essentially all of its portfolio after operating for just a handful of years. Now if in fact you are correct and the LTCM'ers did understand things might be correlated and that tail probabilities would not be gaussian, how do you imagine they even made a calculation like that?
If it's worth saying, but not worth its own post (even in Discussion), then it goes here.
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