There is no better example of desire outliving performance than the trade that UBS did with Long-Term Capital Management (LTCM) in 1997. When LTCM was riding high and a 40% return each year seemed feasible, potential investors were clamouring for a privileged piece of the action.
Among them was Union Bank of Switzerland. During the course of 1997 it struck up a relationship with LTCM by taking a combination of equity and equity option positions in the fund. UBS, which on October 2 described the transaction as "exceedingly complex", has released only limited information on the deal.
In three tranches UBS sold LTCM the right to buy from UBS a fixed number of shares in LTCM's own fund. The [European-style] options with a premium value of $300 million could be exercised in seven years' time. To hedge its position, UBS bought shares in the fund to the value of $800 million.
This transaction was priced to approximate an $800 million floating rate loan. It earned UBS the much coveted opportunity to invest $266 million directly in the fund. Investors in LTCM were required to commit to an initial investment period of thre years.