Tuesday, October 03, 2006

Amaranth - Another Meteor Strikes Earth

An EDHEC study by research associate Hilary Till ,as reported in the FT, concludes that the natural gas market moves that decimated the Amaranth hedge fund were statistically less probable than those that ruined Long Term Capital, (similar to the probability of a meteor striking earth). However, the fund's "massive" position in natural gas derivatives virtually guaranteed disaster as the fund, without adequate capital, was forced to liquidate its holdings.

While the historical diversification and risk/reward opportunities in hedge funds can look attractive on a mean variance basis, as Jeremy Siegal points out, the risk in certain strategies can't be quantified regardless of the length of the historical analysis.

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