Indeed, LTCM acknowledged this when returning $ billion of capital to investors at the end of 1997. To counter these diminishing opportunities, LTCM apparently reached further for return over time by employing more leverage and increasing its exposure to risk, a strategy that was destined to fail.
Unfortunately for its shareholders, LTCM chose this exposure just as financial market uncertainty and investor risk aversion began to rise rapidly around the world. In that environment - so at variance with the experience built into its models LTCM’s embrace of risk on a large scale produced stunning losses.