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The Amaranth Debacle: What Really Happened

34 Pages Posted: 24 Oct 2007  

Ludwig B. Chincarini

University of San Francisco School of Management; University of San Francisco - School of Business and Management

Abstract

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.

Keywords: Natural gas, futures, options, hedge funds

JEL Classification: G0

Suggested Citation

Chincarini, Ludwig B., The Amaranth Debacle: What Really Happened. Journal of Alternative Investments, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1023810

Ludwig B. Chincarini (Contact Author)

University of San Francisco School of Management ( email )

San Francisco, CA 94102
United States

University of San Francisco - School of Business and Management ( email )

San Francisco, CA 94117
United States

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