Sep 21 2006
Markets Undeterred by Hedge Fund Amaranth’s Plummet
The largest profile hedge fund implosion since Long Term Capital Management LP (LTCM) failed in 1998 has taken place this past month, but the commodity markets appear unphased.Amaranth, once a $12 billion hedge fund, dropped to $9.5 billion by last month. Today, Amaranth is left with less than $3.5 billion of investors’ assets thanks to massive losses in the energy markets caused when Amaranth’s hedged bets went wrong as natural gas prices fell 12% last week. The losses became staggering when they were forced over the past week to unwind trades to prevent the potential for margin calls that could not be met.
So far Amaranth is able to meet its obligations, but according to Bloomberg, they are shopping for a cash infusion to help keep the fund in business. Citigroup — a Fed friendly bank that helped bail out LTCM — is in line.
One wonders what could happen if the markets really took a swing the wrong way in unexpected fashion. Amaranth is alone in this situation. But, given the high volume of programmed trades, many are expecting to find the exits will work at reasonable valuations to support their risk models. Combined with the fact that derivatives continue to explode in volume, and have been written in amounts far exceeding the market value of what many of them have been written on, the concept of gridlock emerging should the markets encounter a repeat of something like the 1987 equity plummet, the nuclear meltdown of cascading defaults could become a reality.
I’d be dramatically less worried if the most of the market, the Fed, and anybody else who matters, were not so supremely confident that there is no chance of a serious problem thanks to all the geniuses residing in and around the Wall Streets of the world.
So, for now, Amaranth is contained. For those interested in what can happen, click on the book icon above “When Genius Failed.” Don’t forget, when The Fed bails these things out, you — the citizen who uses dollars — pays for it via inflated dollars issued from thin air by The Fed.
