Factor Exposures and Hedge Fund Operational Risk: The Case of Amaranth

21 Pages Posted: 19 Nov 2009

See all articles by Raj Gupta

Raj Gupta

American College of Healthcare Trustees; American College of Healthcare Trustees

Hossein B. Kazemi

University of Massachusetts at Amherst - Isenberg School of Management

Date Written: November 19, 2009

Abstract

Hedge fund performance and risk measurement continues to present intriguing challenges to both academics and practitioners. Risk-return measures that are solely based on historical return series tend to provide limited information and the marginal new information revealed by another quantitative measure tends to be small, and approaches zero once three or more measures are considered. In this article we will examine the ris exposures and performance characteristics of Amaranth Advisors LLC. Amaranth Advisors LLC was created in 2000 as a multi-strategy hedge fund. Beginning operations with approximately $600 million in capital, it sought to employ a diverse group of arbitrage trading strategies particularly featuring convertible bonds, mergers and utilities. In 2002, Amaranth added energy commodity trading to its slate of strategies with JP Morgan Chase clearing its commodity trades. On August 4, 2006 NYMEX examined Amaranth’s positions and calculated that Amaranth held about 51% of the open interest in the September natural gas futures contract which would expire at the end of the month. NYMEX decided that this was too large and on August 8 NYMEX compliance officials notified Amaranth of their concerns. Amaranth complied with NYMEX’s directions and subsequently reduced its September and October positions. However, at the same time Amaranth increased its positions in September and October ICE contracts such that their overall positions in natural gas rose. The events that followed in late August and September led to huge losses with Amaranth losing significant value.

Suggested Citation

Gupta, Raj and Kazemi, Hossein B., Factor Exposures and Hedge Fund Operational Risk: The Case of Amaranth (November 19, 2009). Available at SSRN: https://ssrn.com/abstract=1509769 or http://dx.doi.org/10.2139/ssrn.1509769

Raj Gupta (Contact Author)

American College of Healthcare Trustees ( email )

PO Box 1714
Houlton, ME 04730
United States
04730 (Fax)

HOME PAGE: http://www.facht.org

American College of Healthcare Trustees ( email )

PO Box 1714
Houlton, ME 04730
United States
04730 (Fax)

HOME PAGE: http://www.facht.org

Hossein B. Kazemi

University of Massachusetts at Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
368
Abstract Views
1,706
rank
99,043
PlumX Metrics