Un-hedged Hedge Fund Becomes Unhinged

Michael Giberson

Speaking of “hedge” funds, how about those folks at Amaranth Advisors LLC? As of a few weeks ago, they were up to about $9 billion in assets. One 32-year old trader alone was up $2 billion for the year. Who are these financial wizards? From the Amaranth web site:

Amaranth’s investment professionals deploy capital in a broad spectrum of alternative investment and trading strategies in a highly disciplined, risk-controlled manner. Our ability to effectively pursue a variety of investment strategies combined with the depth and strategic integration of our equity, credit and quantitative teams … are some of the key strengths that distinguish and define Amaranth.

At one time, those claims may have been true, but that was before their traders started making all that money in natural gas. As now described in numerous newspaper stories, on Monday Amaranth disclosed that “a disastrous bet on natural gas prices had produced losses of more than $3 billion” (New York Times). “The funds had been up about 26% through August, according to Bloomberg News” (USA Today), but were “down 35 percent for the year after the sell-off.” (Washington Post).

As a commenter noted on investment opinion site Seeking Alpha, “This must be a form of highly disciplined risk control that I am unfamiliar with, as it allows a fund to lose 45% of its assets in 2 weeks.” Or, as yesterday’s New York Times article noted dryly, “‘multistrategy’ seems to have been a misnomer at the fund.”