"Being greedy is the easiest way to lose money," says Chris Walker in The Independent. It's a principle that hedge fund group Amaranth Advisers should have taken on board. Its star trader Brian Hunter made over $2 billion in the year to August on bets that natural gas future prices would rise. Amaranth allowed the Calgary-based trader to hike their natural gas holding from 7% of their exposure to half all the while still claiming to be a "multi-strategy" fund.
In less than two weeks Hunter's bets unravelled, losing Amaranth more than $6 billion, over 65% of the fund's assets. The group had borrowed money to amplify returns on its bets. In the natural gas portfolio alone, for every $1 of its own equity invested, it was borrowing $5. While borrowing in hedge funds is common, "I've never seen a hedge fund so highly leveraged in energy", Peter Fusaro of the Energy Hedge Fund Centre told The Economist.
You might think ordinary investors have been shielded from the ensuing financial disaster but pension funds including that of 3M, the Post-It Notes maker, had bought into Amaranth. And London-listed fund of hedge funds, Goldman Sachs Dynamic Opportunities had 5% of its funds in Amaranth, which it said will cut returns for September by 2% to 3%. Both Schroder S&P Cautious Managed Distribution Portfolio and one of Clerical Medical's pension funds had bought into the Goldman Sachs fund, says David Budworth in The Sunday Times, "though both say their exposure was small."
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The sorry debacle shows just how "much of the wheeler-dealing that takes place in the capital markets these days is built on debt", says Jeremy Warner in The Independent. The global markets have so far treated the Amaranth debacle as no more than a hiccup, but as Warner points out, "as commerce becomes ever more leveraged with debt through private-equity and hedge fund ownership, it gets ever harder to know where the risk really lies". But at least one thing is clearer, says the FT: what hedge funds are really for. "Making or losing a lot of money on risky trades."
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