Amaranth Maxed out

Lars Toomre has had a number of posts of late about the misfortunes of Amaranth Advisors, a multi-billion dollar mult-strategy hedge fund.

Per Toomre, per WSJ (subscription only):

>One of the mistakes that led to Amaranth Advisors’ multi-billion dollar losses
on natural-gas investments is a common one in fast-shifting energy markets: confusing paper trading gains with cash profits.

> The hedge fund’s chief energy trader, 32-year-old Brian Hunter, misgauged when to take his chips off the table, losing roughly $5 billion in a week for a hedge fund that boasted of world-class risk-management systems. While Amaranth had traded energy for several years, its roots were in convertible-bond trading, a different, less-volatile market that involved profiting from small discrepancies in stocks and bonds.

> According to natural-gas investors who traded alongside Amaranth, Mr. Hunter repeatedly used borrowed money to double-down on his bets. Buying more futures contracts of the kind his fund already owned supported their price by increasing demand, propping up paper gains, these traders say. But that support only lasted as long as Amaranth and its lenders were willing to spend cash to buy more contracts. Such trades may also have masked growing weaknesses in market fundamentals, his trading peers say.

And now we learn from the Insurance Insider (subscription only) that
> The $35mn third-quarter hedge fund investment reverse revealed by Bermudian reinsurer Max Re Capital yesterday (20 September) has been linked to heavy energy losses at Amaranth Advisors.

(You really ought to subscribe to The Insider, as it’s a mine of useful information).

I think more will emerge in days to come, but it is of particular note here for the close linkage between RI and the financial markets and possibly indicative of things to come.