From The Economist:
Full of hot air
A fund's collapse is a classic tale of trader hubris
We have quite a few posts on Amaranth:Hedge Hogs: The Cowboy Traders Behind Wall Street’s Largest Hedge-Fund Disaster. By Barbara Dreyfuss. Random House; 285 pages; $28 and £19.99. Buy from Amazon.com, Amazon.co.uk
THE amaranth flower is praised both in Aesop’s fables and John Milton’s “Paradise Lost” for its everlasting qualities. In the eyes of Nick Maounis, a bond trader, that made it a good name for the hedge fund he set up in 2000. Six years later, Amaranth Advisors looked an astonishing success, with a stellar investment record and assets under management of more than $9 billion. But by the end of the year, the group had been consigned to the compost heap.
The story of its collapse is clearly and entertainingly told in “Hedge Hogs” by Barbara Dreyfuss, a former Wall Street analyst who is now a journalist. It is a tale of hubris and nemesis, of traders who forgot about risk in pursuit of reward. Amaranth was brought low by energy trading, and by the outsized positions in the gas market of one man in particular, Brian Hunter.
Amaranth did not actually begin trading in energy until 2002 and did not hire Mr Hunter until 2004. As late as March 2005 a San Diego pension fund that invested in Amaranth was not aware of Mr Hunter’s importance to the fund. But the trader staged a spectacular coup that year when his options on the gas price shot up in value after Hurricane Katrina disrupted supplies; he rescued a difficult year for the group and received a bonus of $113m.
Taking big bets was a mark of Mr Hunter’s style. He had a tendency to increase his position when prices moved against him and was relaxed about revealing his positions to others. At his previous employer, Deutsche Bank, he had battled a superior who wanted him to reduce his risk-taking; when the bank lost $53m in a few weeks, Mr Hunter was demoted, denied a bonus and moved off the trading desk....MORE
"Case on Amaranth collapse gets class-action status"
Return with us now to those heady pre-fin-crisis days of Summer 2007 when the only thing you had to worry about was traders acting like traders i.e. "You get the downside while I take the upside and I'll be in clover before ye...".
...Through July and August of '07 I was using the Amaranth fiasco as an object lesson to show that the trade part of cap-and-trade was a government mandated disaster waiting to happen.
I could have used the California electricity market manipulations of 2000 and 2001 or any number of others but I kind of got a kick out of Brian Hunter.
Here's a post with links to a bunch of our other posts, "The man who lost $6 billion (Brian Hunter, Amaranth)" and which included a couple on a fund, Saracen, which had a strategy exactly opposite of Amaranth:
Attempting the Reverse AmaranthWhich, of course, resulted in:
Saracen Attempts the Reverse Amaranth and...Yes!... Sticks the Faceplant Landing!At least the traders had their prior bonuses.
Good times, good times.
