The Amaranth Debacle: What Really Happened
Ludwig B. Chincarini
University of San Francisco School of Management
Journal of Alternative Investments, Forthcoming
The speculative activities of hedge funds are a hot topic among market agents and authorities. In September 2006, the activities of Amaranth Advisors, a large-sized Connecticut hedge fund sent menacing ripples through the natural gas market. By September 21, 2006, Amaranth had lost roughly $4.35B over a 3-week period or one half of its assets due to its activities in natural gas futures and options in September. Shortly thereafter, Amaranth funds were being liquidated. This paper presents a brief investigation of the possible causes behind this spectacular hedge fund failure and draws lessons by assessing Amaranth's trading activities within a standard risk management framework. Even by very conservative measures, Amaranth was engaging in highly risky trades which (in addition to high levels of market risk) involved significant exposure to liquidity risk - a risk factor that is notoriously difficult to manage.
Number of Pages in PDF File: 34
Keywords: Natural gas, futures, options, hedge funds
JEL Classification: G0
Date posted: October 24, 2007
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