Fri 22 Sep 2006
So the conspiracy nut inside of me wants to talk about Amaranth, and how they are the first domino in a long line of dominos…
Maybe pension funds and other less aggressive investors will realize that they don’t really want the added risk that comes from investing in hedge funds, and start to pull their money out of hedge funds, broadly and without any distinction… With decreasing assets in hedge funds, many have to start liquidating their positions and de-leveraging… Prices start to fall since most hedge funds have a long-only bias (a side effect of the Bernanke/Greenspan Put?), and their selling causes prices to fall despite the lock-up periods they have forced their investors into… and prices begin falling across the board with stocks and commodities (remember, pricing happens at the margin)… we see liquidity disappear more convincingly than a David Copperfield magic trick… spreads widen, and a sharp downturn begins…? The markets panic, and the bottom falls out… (The sky turns to fire, the sea turn to blood…)
But then I snap myself out of it, and realize, Amaranth was a HUGE fuck-up, but they still met their margin calls. Sure, they lost $6 billion or 65% of their assets, but their brokers cut them off before they presented a risk to the entire financial system… unlike LTCM where the brokers were blindsided by how much exposure they had, and had to have the Federal Reserve twist their arms until they dealt with the situation.
The risk of failure was born by those that could bear it. The failure wasn’t paid off by the public at large in the form of higher taxes like the Savings & Loan crisis back in the early 80s… The burden wasn’t hoisted on unsuspecting employees who had all their 401(k)s invested in the company stock (Enron)…
So, have we progressed to the point where we can survive the failure of a significant player in the markets? Can we rest easy knowing that we’ve learned a lot since 1998 when LTCM imploded?
Or maybe, just maybe, those who are currently bearing the risk will realize that it might be more risk than they originally anticipated… and then they start to pull their money out of hedge funds…
September 22nd, 2006 at 10:34 am
Interesting note… Wikipedia claims that LTCM lost $4.6 billion (100% of their capital), which means Amaranth has already posted bigger nominal losses than LTCM. Even adjusted for inflation (assuming 3%/year), LTCM lost $5.8 billion in 2006 dollars.
In contrast, LTCM was brought down by the Russian default on their sovereign debt, whereas Amaranth was brought down by warm weather…
September 27th, 2006 at 4:23 pm
Amaranth, Rosemary and Tears…
I assume?Nicholas M. Maounis named his fund Amaranth after the flowers of the same name that represent immortality in several literary and cultural traditions.? Pride goes before the fall.? Isn’t it ironic? Don’t you think?? It’s …