AMARANTH ADVISORS LLC

Laurent L Jacque

Chapter 5 in Global Derivative Debacles:From Theory to Malpractice, 2015, pp 49-72 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Hedge funds are often associated with Wall Street excesses and capitalistic greed. Indeed outsized compensations for hedge funds managers — in the billions rather than the millions as in the case of T. Boone Pickens take-home pay of $1.4 billion in 2005—routinely capture headlines in the financial press. When disaster strikes hedge funds, it is also of outsized magnitude as with the demise of Amaranth Advisors LLC, which announced on September 20, 2006 a loss in excess of $5 billion. Reportedly, the losses were due to massive bets placed on natural gas futures and they were incurred over a relatively short period of three weeks. When “margin calls” from the New York Mercantile Exchange (NYMEX) came knocking at Amaranth's door, only liquidation of the hedge fund $9 billion in assets could clear the slate. Unlike the much publicized debacle of Long-Term Capital Management (see Chapter 15), which reverberated throughout financial markets around the world, Amaranth's demise hardly caused any ripples and, in very short order, its losing portfolio was taken over by J.P. Morgan Chase and the Citadel Hedge Fund. It had set an all time record in the annals of global derivative debacles and yet the massive losses were absorbed painlessly by the global financial system. Was it the calculated yet daring risk-taking predicated on expert knowledge of the inner workings of the natural gas market which drove Amaranth to fail? Or was it foolhardy and reckless bets placed on the weather by ill-disciplined traders, who believed that they could repeatedly beat the market by taking mammoth futures positions in the natural gas market? From the perspective of the US consumer' best interests how could the NYMEX allow one player to dominate and therefore manipulate the market without enforcing position limits? More generally, should regulatory agencies control futures markets more tightly?

Keywords: Derivatives; Debacles; Options; Swaps; Futures; Forwards; Financial Engineering; Market Manipulation; Rogue Traders; Speculation; London Whale (search for similar items in EconPapers)
Date: 2015
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