How do you lose $5 billion in one week?

being young and stupid
and having bigger idiots think you're special

 

Well look at it this way, the guy is young and must know a lot to get where he landed, correct? With all due respect it is obvious he messed up, no doubt. Lets say he has close to 100 million or even 1/2 that in safe bonds, money mkt fund etc. With this sound beating maybe this guy might have learned a valuable lesson and from this point on will be a different trader all together, it happens.

I took a 13 handle loss once in the ES from nothing less than just being a stubborn jerk. I decided that would never happen again, it has not, and it will not.


The funny thing was that as it was happening and the losses mounted i within myself KNEW i was being a moron for a reason. Ever hear where some of us need to get whacked in the head with a hammer before we "GET IT?" That was a wonderful loss for me in the long run, thus it actually was a winning trade, big time. happened about 4 years ago. thks for your indulgence. .............

 

start with ten billion!

 

I have no familiarity with Amaranth's structure - but I imagine that it was not exclusively a one man show. Hunter is not the only one responsible. Every investor/trader has some degree of weakness. That is where a hedge fund's risk management and team should come in. Investors at that level of commitment are sold on that - clearly this is another example of an across the board failure. It is just like placing on the credit or blame on the quarterback in football. Those that have the knowledge to see inside the numbers know that there is more to it than that.

One problem could be that risk management and operations, etc. are not aligned as directly with the big money upside as PMs, analysts, traders. And in the end here we have a case where risk management effective.

 

http://www.nytimes.com/2006/09/20/business/20hedge.html

... looks like they were doing calendar spreads out to 2009.

Beware, though, when LTC was bailed out in 1998 ... the prices kept moving against those positions for several weeks after the bail out ... finally recovered.

In Japan, this trader would have jumped out a skyrise window ... in the US, he probably sneaking out the back door.

 

Do we know where the $5 billion money has gone (within the week)?

If we know of that for sure, we could make some money by wisely investing to the right places right now.

 

Are there any technical/ quantitative analysis to back this huge loss that we could learn a valuable lesson?

How about the technical/ quantitative analysis based on the model/ strategy you're currently using/ developing when applying it to this scenario?

I would be quite intrigued to know your feedback here.

 

More on the hiccup in May and what they told investors then from NYT today -

Investor anger is directed not only at the fund’s loss of more than 50 percent of its value in just a week, but the fact that Amaranth — after having a bad month in May, with funds falling 9.5 percent to 10.5 percent in value — apparently reassured investors that it would better manage its risk in the future.

Still, the May losses alarmed some investors, even as the fund continued to show returns of more than 29 percent for the year. Nervous investors who called or turned up at Amaranth’s expansive offices in Greenwich, Conn., trying to determine if the traders were taking too much risk, got a simple message: No.

“After May there was a lot of concern and they spent a lot of time explaining and demonstrating that if the month had ended three days later, losses would be a lot less,” said one investor who spoke on the condition that he not be identified because he is trying to get his money back. “They explained why it wouldn’t happen again.”

Yet investors also knew that the fund’s stellar results were coming from aggressive energy bets. Monthly letters detailed the status of strategies including being long or short on stocks, merger arbitrage and credit products as well as convertible arbitrage and energy.

According to a letter sent to investors, 56 percent of the firm’s capital was invested in energy-related bets as of June 30, generating 78 percent of the fund’s 2006 returns. The firm had roughly 6,670 energy trading positions that were leveraged — or increased with borrowed money — about 4.5 times.

 

Thanks. In one word: Overtrading!

 

Exactly. It's a well-known issue that most traders at some point make a fuck-up and go on tilt, putting on way too large a position, or being stubborn as the market goes against them and adding size to excess. That is why risk managers are hired, to keep an eye out for that and to clamp down on it as soon as it happens.

So in this case, the trader was at fault, but the risk manager was even more at fault, and the head of the fund was most to blame out of all of them.