Comments on: Amaranth Advisors Hedge Fund Ruined by Ignoring ‘Risk of Ruin’ http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/ Stock market commentary & trading ideas. Stock market weblog (blog), swing trading, day trading, stock picks, technical analysis, stock charts, stocks. Fri, 25 Jul 2008 05:34:08 +0000 http://wordpress.org/?v=2.3.2 By: money fellow http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-4508 money fellow Wed, 25 Oct 2006 13:12:46 +0000 http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-4508 thanks a lot Mike;) thanks a lot Mike;)

]]> By: hammer http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3910 hammer Sat, 30 Sep 2006 02:15:16 +0000 http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3910 john, you're right, BUT there was no storage shortfall, instead this is year because of the previous warm winter and moderate summer and lack of hurricanes was in polar opposite to what Amaranth was betting on. They got into a roach motel position. It got so big and Hunter couldn't get out without suffering huge large losses. He had a good 2 years pushing the markets around. Now he'll live the rest of his life in infamy as the "6 billion dollar man." john, you’re right, BUT there was no storage shortfall, instead this is year because of the previous warm winter and moderate summer and lack of hurricanes was in polar opposite to what Amaranth was betting on. They got into a roach motel position. It got so big and Hunter couldn’t get out without suffering huge large losses. He had a good 2 years pushing the markets around. Now he’ll live the rest of his life in infamy as the “6 billion dollar man.”

]]> By: john http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3899 john Fri, 29 Sep 2006 19:10:12 +0000 http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3899 Amaranth pushed these spreads to over 2 std. over any mean estimate. Almost all hedge funds...including Citadel were short this so by taking over the positions they simply cover the short and go long. The real sh1t hits the fan in a hurricane season with major shortage in storage...thats what they bet on...the spread would have gone from 3 tro 10 plus...u cant even price it in! Amaranth pushed these spreads to over 2 std. over any mean estimate. Almost all hedge funds…including Citadel were short this so by taking over the positions they simply cover the short and go long. The real sh1t hits the fan in a hurricane season with major shortage in storage…thats what they bet on…the spread would have gone from 3 tro 10 plus…u cant even price it in!

]]> By: Alice http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3843 Alice Thu, 28 Sep 2006 13:46:03 +0000 http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3843 Risk of ruin was ignored because if you only bet 1% of your wad, even if you get a 100% return, it won't give the kind of return you want on the other 99% of your portfolio. 'Multi-strategy' seems to have been a misnomer. Accordingly, I don't see how Amaranth can hold investors to any applicable lock-ups, as the magnitude of losses means the promise of diversity of investor assets was ignored. Risk of ruin was ignored because if you only bet 1% of your wad, even if you get a 100% return, it won’t give the kind of return you want on the other 99% of your portfolio. ‘Multi-strategy’ seems to have been a misnomer. Accordingly, I don’t see how Amaranth can hold investors to any applicable lock-ups, as the magnitude of losses means the promise of diversity of investor assets was ignored.

]]> By: hammer http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3794 hammer Tue, 26 Sep 2006 16:19:29 +0000 http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3794 Kelley, your right the fund should have been advertised as a energy commodities fund with some minor focus on debt-trading. Maybe only 58% of the capital was allocated to natural gas, but on a risk adjusted Value at Risk it probably represented 80-95% of the firm's capital. Plus there were other commodities they could have traded such as oil, copper and gold which also had justifable fundamentals that warranted price increases. If Hunter was an orange juice or a pork belly trader would he have bet the ranch on that one commodity? What multi-strat firms have this strategy with combining large commodities business with tame debt markets. Investors should pay attention. Kelley, your right the fund should have been advertised as a energy commodities fund with some minor focus on debt-trading. Maybe only 58% of the capital was allocated to natural gas, but on a risk adjusted Value at Risk it probably represented 80-95% of the firm’s capital. Plus there were other commodities they could have traded such as oil, copper and gold which also had justifable fundamentals that warranted price increases.

If Hunter was an orange juice or a pork belly trader would he have bet the ranch on that one commodity? What multi-strat firms have this strategy with combining large commodities business with tame debt markets. Investors should pay attention.

]]> By: Michael http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3779 Michael Tue, 26 Sep 2006 13:26:17 +0000 http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3779 Kelley, I'm not sure whose focus you're talking about but I'm with you 100%. That's why I start off by saying "hedge funds" don't understnd basic principles like position sizing. And I also referred to the lack of oversight by the risk management team later. Kelley,

I’m not sure whose focus you’re talking about but I’m with you 100%. That’s why I start off by saying “hedge funds” don’t understnd basic principles like position sizing. And I also referred to the lack of oversight by the risk management team later.

]]> By: Kelley Ritchey http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3775 Kelley Ritchey Tue, 26 Sep 2006 13:20:19 +0000 http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3775 I'm surprised the focus is on the trader and not the risk management team. This was reportedly a multi-strategy fund. From their website: "Amaranth’s investment professionals deploy capital in a broad spectrum of alternative investment and trading strategies in a highly disciplined, risk-controlled manner." Maounis talks of the improbable move in natural gas as justification for the losses, but the thing that is most striking is that it appeared that there was a huge directional bet made. Were the risk managers on an extended vacation while trader Hunter put on trades from his Calgary base? Did Calgary experience a huge September snowstorm that wiped out all communication? I guess multi-stratgy means more than one strategy, so Amaranth meets the definition, but natural gas is a volatile commodity. Maybe it deserves some allocation, but 50% of a multi-strategy fund? You got to be kidding me! I’m surprised the focus is on the trader and not the risk management team. This was reportedly a multi-strategy fund. From their website: “Amaranth’s investment professionals deploy capital in a broad spectrum of alternative investment and trading strategies in a highly disciplined, risk-controlled manner.”

Maounis talks of the improbable move in natural gas as justification for the losses, but the thing that is most striking is that it appeared that there was a huge directional bet made. Were the risk managers on an extended vacation while trader Hunter put on trades from his Calgary base? Did Calgary experience a huge September snowstorm that wiped out all communication?

I guess multi-stratgy means more than one strategy, so Amaranth meets the definition, but natural gas is a volatile commodity. Maybe it deserves some allocation, but 50% of a multi-strategy fund?

You got to be kidding me!

]]> By: hammer http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3718 hammer Sun, 24 Sep 2006 17:47:12 +0000 http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3718 Amaranth told one story and did another thing. In May when they lost a $1 billion they said they were going to reduce their risk. From the looks of it they actually increased their risk with more size and less diversification. There's only so many ways they could trade natural gas. Either the price goes up or down, volatilty goes up or down, and spreads go up or down. These things often happen in the same direction. Although they said it wasn't a directional bet; it was really a directional bet on a spread. How was this infamous Mar/Apr spread goping to blow out instead of collaping like it did unless the market was moving up. The spread was definitely less risky than trading outright flat price. But given they had +250,000 spreads on every move was risky. The last guy who tries to corner the market, or "bully" the market was Bunker Hunt. He was the only guy in prior history who lost billions of his wealth in trading commodities. Normal trading strategies using sell stops didn't apply to them. They had on so much size on that they couldn't sell fast enough to get out of the way. The position took them 2 years to build up. There was no way they were going to unwind it in a day or a week. Amaranth told one story and did another thing. In May when they lost a $1 billion they said they were going to reduce their risk. From the looks of it they actually increased their risk with more size and less diversification. There’s only so many ways they could trade natural gas. Either the price goes up or down, volatilty goes up or down, and spreads go up or down. These things often happen in the same direction. Although they said it wasn’t a directional bet; it was really a directional bet on a spread. How was this infamous Mar/Apr spread goping to blow out instead of collaping like it did unless the market was moving up. The spread was definitely less risky than trading outright flat price. But given they had +250,000 spreads on every move was risky. The last guy who tries to corner the market, or “bully” the market was Bunker Hunt. He was the only guy in prior history who lost billions of his wealth in trading commodities.

Normal trading strategies using sell stops didn’t apply to them. They had on so much size on that they couldn’t sell fast enough to get out of the way. The position took them 2 years to build up. There was no way they were going to unwind it in a day or a week.

]]> By: Michael http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3699 Michael Fri, 22 Sep 2006 18:19:17 +0000 http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3699 Excellent points Jack. You make a good case for doing due diligence on funds as well as diversifying among several funds. Excellent points Jack. You make a good case for doing due diligence on funds as well as diversifying among several funds.

]]> By: Jack Doueck, Stillwater Asset Backed Strategies http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3697 Jack Doueck, Stillwater Asset Backed Strategies Fri, 22 Sep 2006 18:06:31 +0000 http://tradermike.net/2006/09/amaranth_advisors_hedge_fund_ruined_by_ignoring_risk_of_ruin/#comment-3697 As investors hurt by Amaranth this month sort through the damage, here are some principles they may want to have in mind: It goes without saying that a good hedge fund investor has to pick good funds to invest in. The key, though, to success in this business, is not to choose the best performing managers, but actually to evade the frauds and blowups. Frauds in this business can take on the form of a misappropriation of funds, as in the case of Cambridge, run by John Natale out of Red Bank NJ, or a misreporting of returns as in the case of Lipper, or Beacon Hill, or the Manhattan Fund, or a host of others. Blowups usually occur when a single person at the hedge fund has the power to become desperate and "bet the ranch" with leverage. The classic example of this week of Amaranth. Amaranth’s investors will be seeking answers to questions including: to what extent did leverage and concentration play a role in recent out-sized losses. With both frauds and blowups, contrary to public opinion (and myth), size does NOT matter: Beacon Hill was $2 Billion, Lipper was $5 Billon, Amaranth was $9 Billion). How do we avoid these two pitfalls of investing in hedge funds? The answer is long and complex. It takes years to walk on the high wire and not fall off. If you're a long term hedge fund investor and you haven't been burned by one or both of these, you've been either incredibly skilled or incredibly lucky. I should know, for I have been burned by both of these. We have invested billions of dollars in hedge funds over the last ten years in this business. We have done well despite our battle scars and thankfully we have been blessed with a lot of good luck from above. Suffice it to say that this should be the main question investors should be focused on as they interview and select hedge funds to entrust their dollars to. Jack Doueck Stillwater Asset Backed Strategies Stillwater Capital As investors hurt by Amaranth this month sort through the damage, here are some principles they may want to have in mind:

It goes without saying that a good hedge fund investor has to pick good funds to invest in. The key, though, to success in this business, is not to choose the best performing managers, but actually to evade the frauds and blowups.

Frauds in this business can take on the form of a misappropriation of funds, as in the case of Cambridge, run by John Natale out of Red Bank NJ, or a misreporting of returns as in the case of Lipper, or Beacon Hill, or the Manhattan Fund, or a host of others.

Blowups usually occur when a single person at the hedge fund has the power to become desperate and “bet the ranch” with leverage. The classic example of this week of Amaranth. Amaranth’s investors will be seeking answers to questions including: to what extent did leverage and concentration play a role in recent out-sized losses.

With both frauds and blowups, contrary to public opinion (and myth), size does NOT matter: Beacon Hill was $2 Billion, Lipper was $5 Billon, Amaranth was $9 Billion).

How do we avoid these two pitfalls of investing in hedge funds?

The answer is long and complex. It takes years to walk on the high wire and not fall off. If you’re a long term hedge fund investor and you haven’t been burned by one or both of these, you’ve been either incredibly skilled or incredibly lucky. I should know, for I have been burned by both of these. We have invested billions of dollars in hedge funds over the last ten years in this business. We have done well despite our battle scars and thankfully we have been blessed with a lot of good luck from above.

Suffice it to say that this should be the main question investors should be focused on as they interview and select hedge funds to entrust their dollars to.

Jack Doueck
Stillwater Asset Backed Strategies
Stillwater Capital

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