Even if arbitrage opportunities are found in a statistical sense, they might not be exploitable due to unexpected widening of spreads.  This paper models such a case in the framework of a hedge fund.  Specifically, Long Term Capital Management is presented as a case study.  In particular, we calculate the likelihood of hedge fund failure and survival given different statistical arbitrage opportunities and hedge fund risk management decisions. Dynamic relationships between a hedge fund, dealer, and market (investor) are modeled.