Unfortunately this model was based on normal markets and failed to weave in the intricacies of the global markets. But currently, the global markets have deflated and the hedge funds are losing out. For instance, LTCM's investments were mainly bets made the global bond markets. Not content with just owning bonds and collecting the interest amount, the fund hedged its bets by betting those bonds with credit risk on the premise that they would do better in terms of price when compared with the European government bonds and US Treasuries. The fund further hedged by buying stocks in emerging markets.
Stocks usually rise when the bond prices decline.
LTCM sought to make a profit no matter where the prices moved. But, when the Asian financial crisis occurred, emerging market stocks lost much of their value. And when Russia defaulted on its domestic debt, emerging market bond prices also fell against the US and European bonds. LTCM lost both ways. It was not the instrument which increased the risk.