I have friends at Amaranth, so I feel bad for them, but otherwise, what’s the big deal? A hedge fund blew up and lost most all of its value over the course of a few hours. At least it didn’t have enough magnitude to break the entire banking industry, like some of its predecessors. I’d say it’s about the best way a hedge fund can blow up, where the damage is localized to those willing to take the risk to invest in it.
Hedge funds are high risk alternative investments where the managers take educated directional bets using leverage and exotic instruments in order to maximize their gains. While they may think they are smarter than their peers, big hedge funds make mistakes, and little hedge funds make mistakes, and that’s why there are so many hedge funds disappearing every year. There is nothing special about Amaranth or its misguided (sure, I can point out that their trade was wrong in retrospect, but I’m tired of reading all the “if the trades were regulated, this mistake could have been spotted!” statements from the popular press) positions in natural gas.
Let me reiterate. Hedge funds expose their investors to a high amount of risk, in exchange for a high potential for reward. These are not T bills folks, they’re high risk investments. If you were an investor in Amaranth, I’m sorry, you lost your gamble, and you lost a lot of money. It sucks to be you, but not as much as it sucks to be back office support at Amaranth right now. You can enjoy the safety of knowing your millions placed elsewhere are still perfectly safe and accumulating value. If Amaranth was your only investment and you lost everything, then you are a moron.
Why do people get all outraged and cry for new regulatory measures when the astounding amount of risk they’ve voluntarily exposed themselves to suddenly blindsides them rather than providing the steady reward of past ownership? There are a bunch of rich people whining now, but give me a break. If you win 5 hands of blackjack in a row, go all in, and lose your sixth, you don’t suddenly demand that they change the rules for the game. You lost, the house wins, sorry.
Hedge funds make bets on the assumption that the 100-year event cannot happen, then they bring home a whole bunch of cash for their investors, often by playing very small margins with very high amounts of leverage. When somebody makes a bunch of bets on this premise, and then one of them gets nailed by the 100-year event or the 1 in a 1,000,000 event, well, shucks, all that leverage comes back to bite them. It’s like beating a dead horse, but LTCM made this obvious in its spectacular failure, and nothing has changed since then. Why? The same people that are all suddenly crying foul and complaining about the need for more regulations of hedge funds have in recent history been lobbying for exactly the opposite, so they can continue their phenomenal personal gains.