How do you lose $5 billion in one week?

Discussion in 'Trading' started by OddTrader, Sep 20, 2006.

  1. How do you lose $5 billion in one week?


    Amaranth Advisors has violated a cardinal rule of investing: Never make a trade that could put you out of business.

    The Greenwich, Conn.-based hedge fund was scrambling today to sell holdings after a wrong-way wager on natural gas cost it roughly half of its $9.5 billion portfolio.

    Amaranth's brokers -- including Goldman Sachs and other big financial firms -– stepped in to help the hedge fund raise cash by liquidating some of its assets.

    Amaranth made about $1 billion last year, when energy prices were going up. But its energy desk failed to predict the extent of the recent downturn in natural gas prices, the fund told investors in a letter that went out on Monday.

    The trade that led to the huge loss was attributed to 32-year-old Brian Hunter, an experienced energy trader who headed Amaranth's energy desk for the past five months. His trades brought in $800 million for the firm last year, and Hunter pocketed at least $75 million in compensation, according to Trader Monthly magazine.

    Hunter's downturn was as sudden as it was shocking. He was up about $2 billion as recently as the end of August, The Wall Street Journal reports. Then Hunter's trades lost $5 billion in about a week.


  2. Its easy, you let the e-mini S&P go against you by 1 point.

    Then you do it 49,999,999 more times.

    Actually I didn't account for commissions, so the number should be a little less.
  3. In one week?
  4. lkh


  5. Ouch. That's gonna leave a mark.

    I'm guessing that Hunter gets to keep the $75 million he "pocketed" last year. I wonder if most people realize the apparently irresistible incentive that unscrupulous traders have, to take exorbitant risks due to the relatively limited personal downside risk associated with trading other people's money.
  6. pv150


    Same way you lose 500 or 5000 in a week... :eek:

    I've heard that their trade was profitable. Illiquidity was the problem...more specifically GREED.
  7. Dogfish


    I like the last line of the article, "they prided themselves on their risk management"
  8. Actually...
    It's almost as hard to lose $5 billion in one week...
    As it is to make $5 billion in one week.

    People do not easily realize...
    That if you can deliberately lose money ** via a trading strategy **...
    Then you can just flip it and make money.
  9. cvds16


    It's much easier to lose money then to make money. Once you start losing heavily some people can't keep their emotions in check and then it's just a snowball rolling. You get more narrowsighted as things progress under stress which makes you make even more stupid decissions. Making consistent clever decisions is much harder to do.
  10. I don't think that it necessarily works that way. Depending on risk parameters, etc., both sides can get shaken out of a poorly timed trade. Also, I don't think that your comment is meaningful in this particular circumstance. Anyone can say after the fact in which direction someone should have taken a stupid flyer.
    #10     Sep 20, 2006