A person familiar with Amaranth says the fund lost about 60% of its value in a single week because of the bad natural gas bets. The losses were magnified by the fact that Amaranth's bets were leveraged, using borrowed money. This source says the natural gas trade was levered at a ratio of 5-to-1.
They were considered a conservative hedgefund. It sure doesn't sound like a very conservative move IMO. I know there are many on here that disagree, but to me, if you don't have the money in your account then it is just a matter of time before the market turns against your highly leveraged postions and takes that big chunk out of your account.
actually from what top energy traders say is that these traders had the right idea.....they just made their position to big and when they went to exit to take their profit they were so big that their sell off caused others to join their selling bandwagon and that extra selling cause their winning position and money trade turn into a massive loser........thats how they lost so much money so fast...their 1.5 billion dollar profit turned into a 3-4 billion dollar loss so they were neither thieves and gamblers....they just made a mistake when they made their position to big. Making a mistake makes you neither a thief or gambler...just means you made a mistake....we have all done it...they just made a big one.
i dont mean to contradict you - but i respectfully disagree with your assessment. i understand the need to post big gains in the fund world. However, there fund is positioned as a conservative fund and even if it a high risk fund - putting yourself in that kind of situation is reckless. had they been risking 2-3 % of their capital in this position and got blown out (loss beyond their control) - maybe they lose 6-10%. This would be 600-800 million bucks on a 8 billion dollar fund.... say they bought the lid on nat gas at 15 bucks or whatever and it got cut in half before they bailed - that means they owned 8 billion dollars worth of natural gas in a conservative 8 billion dollar fund????? does make me wonder if nat gas is a good long at these levels though.... such a liquidation....
Just goes to show you how the smartest guys in the business can still put 50% of their equity in one trade. Thats why this business is so difficult, that old hubris is always lurking around the corner, ready to destroy. :eek:
Your explanation makes little sense. If their idea was right, then natural gas would either stay stable or go up, regardless of the selling. Liquidition of a position can cause a down day, but the trend overall would be up. Putting that aside, how stupid do you have to be to not consider market impact & slippage when you liquidate a huge position? Bottom line, these guys were on the wrong side with a huge overleveraged position. If it was on the right side, they could have either sold off slowly or at least allow a large enough margin where a heavy liquidation would still leave them with big profits. The only way these guys were on the right side is if their original buying up of natural gas is what caused the up move which made them think they were on the right side.
This offers a good lesson for novices: This is yet another one of those things that would never turn up in a simulation. Simulated trades do not impact the market. -Raystonn