Amaranth Lessons Thus Far

Abstract

In September 2006, Amaranth Advisors, LLC collapsed under the weight of losses, which were reported as $6.6-billion. This collapse triggered a debate on current risk management practices as well as a major investigation by the United States Senate. There are many surprising aspects of this debacle. How could a well-respected hedge fund implode so quickly? Could this multi-strategy hedge fund really have become one big bet on winter natural gas prices? How could Amaranth have amassed such huge derivatives positions in natural gas without any regulators noticing? Given the scale of Amaranth's losses, why didn't this debacle lead to wider systematic distress in the financial markets? This article will provide some answers to these questions by reviewing and analyzing the publicly available information that is known as of this point. Specifically it will address, Amaranth's energy trading strategies, the fundamental rationale for these strategies, basic risk analyses and the U.S. government's response.

TOPICS: Real assets/alternative investments/private equity, commodities, risk management, financial crises and financial market history