The impact of the activities of
investors and speculators on financial
markets has long been of great
interest to academics and practitioners
alike.1 Since 2000, the amount of assets
managed by hedge funds has nearly tripled from
a total of $490 billion to $1,336 billion and
although still a small percentage of total assets
worldwide, hedge funds account for an even
larger part of the liquidity in certain markets
(HFR Industry Report [2006]). In September
2006, the activities of a Connecticut hedge fund
named Amaranth Advisors LLC2 significantly
impacted the natural gas market. Building up
large losses in trading natural gas futures, the
story of Amaranth bears all the hallmarks of a
near miss in terms of endangering systemic
financial stability. What happened? What went
wrong? And most importantly—perhaps—does
this strengthen the widespread call for tighter
regulation of hedge funds or the futures market?3
This article addresses these questions in more
detail. Furthermore, the article looks for answers
on whether the failure of Amaranth was just
“business as usual” in the natural rise and fall of
hedge funds or if standard risk management
practice could have signalled that something was
amiss
The impact of the activities of
investors and speculators on financial
markets has long been of great
interest to academics and practitioners
alike.1 Since 2000, the amount of assets
managed by hedge funds has nearly tripled from
a total of $490 billion to $1,336 billion and
although still a small percentage of total assets
worldwide, hedge funds account for an even
larger part of the liquidity in certain markets
(HFR Industry Report [2006]). In September
2006, the activities of a Connecticut hedge fund
named Amaranth Advisors LLC2 significantly
impacted the natural gas market. Building up
large losses in trading natural gas futures, the
story of Amaranth bears all the hallmarks of a
near miss in terms of endangering systemic
financial stability. What happened? What went
wrong? And most importantly—perhaps—does
this strengthen the widespread call for tighter
regulation of hedge funds or the futures market?3
This article addresses these questions in more
detail. Furthermore, the article looks for answers
on whether the failure of Amaranth was just
“business as usual” in the natural rise and fall of
hedge funds or if standard risk management
practice could have signalled that something was
amiss
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