Amaranth hedge fund
Amaranth's Brian Hunter was paid well for just riding energy beta. Unfortunately the luck ran out with $6 billion lost through his incompetent speculation on natural gas prices. "Multistrategy" turned out to be a big bet on a very volatile spread. There never was any skill even in the good times. Highly concentrated gambles was not what Amaranth's marketing materials said. Though I was repeatedly pitched by Amaranth, I always avoid them. Yes you can detect non-skill in advance. Just like skill. Sadly some so-called alts consultant "experts" loved Amaranth.
What kind of investment process is "Many hurricanes last year so lots this year. Let's bet the fund"? Or "I gamble the next five winters will be colder than the market expects"? What happened to the basic rules of trading? Diversification, hedging, risk management, position sizing. Even rookie traders know not to have more than 2% of NAV at risk in any one position no matter what their level of intelligence, conviction or brashness. Brian Hunter's earlier "profits" were just random luck. Ask Deutsche Bank as anyone doing REAL due diligence on Amaranth did.
Who was conducting due diligence on Amaranth? The FIRST question I'm asking funds of hedge funds is "Were you in Amaranth?". This bizarre bet was detectable ahead of time yet how many investors questioned it? Was anyone else reading the monthly reports and asking where the money was being made? There was plenty of time to redeem from a fund that was not remotely diversified. Maybe box-ticking manager research types even thought natty Mar/Apr was market neutral!
Amaranth plants were used in Aztec human sacrifices. Why did clients willingly step up to the altar to get their hearts ripped out? This exposure was knowable BEFOREHAND with a thorough examination of performance attribution statistics. If investors are bullish on natural gas they can easily buy NG futures themselves; no need to pay Brian Hunter $100 million lose money for them. Spreads in commodities can infamously be as volatile as the outright position, as any competent futures trader knows. Alpha - the transfer of capital from the unskilled to the skilled.
In a recent interview Steven Cohen, founder of SAC Capital, said he was worried by crowded trades. Of course he is. That's his job, as it is of every hedge fund manager. Nobody wants to be in trades that everyone else has on. No-one should be in positions they won't be able to exit in an orderly fashion. Risk must be evaluated, hedged and diversified away as much as possible. You can run $100 billion with a very wide spread of bets but not $9 billion wagered on a single horse. Some say Steven Cohen dodged a bullet not hiring Brian Hunter; nonsense, he would never have permitted such a clueless concentrated bet dominating the total portfolio.
Whilst providing ammunition for hedge fund critics, the Amaranth debacle has little to do with proper hedge funds and will have NO affect on industry growth. Predictions of a hedge fund bubble have been around for decades. Asset classes can form speculative bubbles but the hedge fund industry, managing strategies NOT assets, cannot. Many bona fide hedge funds have made good profits out of Amaranth's bizarre bet.
Highly diversified REAL hedged funds should be immune to market shocks. The tools and techniques of modern, sophisticated risk management ensure this. Short selling, appropriate use of derivatives and diverse holding periods eliminates the possibility of a hedge fund bubble. The conditions that might hurt, say, equity long biased funds will benefit short sellers, CTAs and global macro, for example. The variety of strategies available to invest in reduces exposure to implosions in any one asset class or security. Provided a real multistrategy fund is diversified across low cointegrated trades, downside risk is minimal. Especially considering the MINIMUM number of hedge funds ANY investor needs in their portfolio is at least 20.
One great strategy is to identify and take the other side of popular trades. This is not easy as such positions tend to get more crowded first, making good timing mandatory. Short squeezes and the lesser known long squeeze which killed Amaranth can be very lucrative. The zero-sum game dictates that the most money will be made when most other traders will lose it but such situations take skill and experience to regularly implement.
While there will be hiccups along the way in particular strategies, the hedge fund business is not in a bubble and WILL continue to grow longer term. But investors need to invest in true hedge funds NOT unskilled speculators whose luck runs out.
What kind of investment process is "Many hurricanes last year so lots this year. Let's bet the fund"? Or "I gamble the next five winters will be colder than the market expects"? What happened to the basic rules of trading? Diversification, hedging, risk management, position sizing. Even rookie traders know not to have more than 2% of NAV at risk in any one position no matter what their level of intelligence, conviction or brashness. Brian Hunter's earlier "profits" were just random luck. Ask Deutsche Bank as anyone doing REAL due diligence on Amaranth did.
Who was conducting due diligence on Amaranth? The FIRST question I'm asking funds of hedge funds is "Were you in Amaranth?". This bizarre bet was detectable ahead of time yet how many investors questioned it? Was anyone else reading the monthly reports and asking where the money was being made? There was plenty of time to redeem from a fund that was not remotely diversified. Maybe box-ticking manager research types even thought natty Mar/Apr was market neutral!
Amaranth plants were used in Aztec human sacrifices. Why did clients willingly step up to the altar to get their hearts ripped out? This exposure was knowable BEFOREHAND with a thorough examination of performance attribution statistics. If investors are bullish on natural gas they can easily buy NG futures themselves; no need to pay Brian Hunter $100 million lose money for them. Spreads in commodities can infamously be as volatile as the outright position, as any competent futures trader knows. Alpha - the transfer of capital from the unskilled to the skilled.
In a recent interview Steven Cohen, founder of SAC Capital, said he was worried by crowded trades. Of course he is. That's his job, as it is of every hedge fund manager. Nobody wants to be in trades that everyone else has on. No-one should be in positions they won't be able to exit in an orderly fashion. Risk must be evaluated, hedged and diversified away as much as possible. You can run $100 billion with a very wide spread of bets but not $9 billion wagered on a single horse. Some say Steven Cohen dodged a bullet not hiring Brian Hunter; nonsense, he would never have permitted such a clueless concentrated bet dominating the total portfolio.
Whilst providing ammunition for hedge fund critics, the Amaranth debacle has little to do with proper hedge funds and will have NO affect on industry growth. Predictions of a hedge fund bubble have been around for decades. Asset classes can form speculative bubbles but the hedge fund industry, managing strategies NOT assets, cannot. Many bona fide hedge funds have made good profits out of Amaranth's bizarre bet.
Highly diversified REAL hedged funds should be immune to market shocks. The tools and techniques of modern, sophisticated risk management ensure this. Short selling, appropriate use of derivatives and diverse holding periods eliminates the possibility of a hedge fund bubble. The conditions that might hurt, say, equity long biased funds will benefit short sellers, CTAs and global macro, for example. The variety of strategies available to invest in reduces exposure to implosions in any one asset class or security. Provided a real multistrategy fund is diversified across low cointegrated trades, downside risk is minimal. Especially considering the MINIMUM number of hedge funds ANY investor needs in their portfolio is at least 20.
One great strategy is to identify and take the other side of popular trades. This is not easy as such positions tend to get more crowded first, making good timing mandatory. Short squeezes and the lesser known long squeeze which killed Amaranth can be very lucrative. The zero-sum game dictates that the most money will be made when most other traders will lose it but such situations take skill and experience to regularly implement.
While there will be hiccups along the way in particular strategies, the hedge fund business is not in a bubble and WILL continue to grow longer term. But investors need to invest in true hedge funds NOT unskilled speculators whose luck runs out.
© posted by Hedge Fund on 4:41 AM
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