Abstract
The speculative activities of hedge funds have generated considerable interest among market agents and regulatory institutions. In September 2006, the activities of Amaranth Advisors, a large-sized Connecticut hedge fund in the natural gas market resulted in serious losses. By September 21, 2006, Amaranth had lost roughly $4.35B over a 3-week period or one half of its assets due to its activities in natural gas futures and options in September. Shortly thereafter, Amaranth fund was liquidated. This article presents a brief investigation of the possible causes behind this spectacular hedge fund failure and draws lessons by assessing Amaranth9s trading activities within a standard risk management framework. Even by conservative measures, Amaranth was engaging in highly risky trades which in addition to high levels of market risk involved significant exposure to liquidity risk—a risk factor that is seemingly difficult to manage. <b>TOPICS:</b>Real assets/alternative investments/private equity, commodities, risk management, financial crises and financial market history
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