Hedge Fund Profits Go Up In Smoke
They say those that forget history are doomed to repeat it. [They also say history never repeats, it only rhymes].
A hedge fund called Amaranth reportedly lost about 4.5 billion in 2 weeks when a 32 year old trader apparently bet the farm on natural gas futures. When you have a huge position in a shallow market, the rest of the market is bound to know. And just like the billionaire Hunt brothers who tried to corner the silver market and went BK, the market rallied against him and he lost big time. Also like Long Term Capital Management[Read the extremely interesting story here
What are the lessons we can take away?
- never bet against the market.
- never bet the farm.
- don’t put all your eggs in one basket.
- don’t forget history.
- use leverage with extreme caution
- don’t become arrogant just because you got lucky a few times.
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September 23rd, 2006 at 9:22 pm
Noticed your comments… Not bizzare, helpful dare I say…. normal and good. Here is a bit of advice. If the prospectus is more than a half inch thick…… Don’t buy it. How thick do you think Amaranths was????
Put it another way, with rare exception… Where is the smartest kid you ever knew in high school???? Is he rich beyond belief or off babbling in a corner writing code????
KISS (Keep It Simple Stupid) has worked for me. Also, how does a Convertible Bond Spread Hedger bet the farm on natural gas? I suppose a prospectus doesn’t really answer that either…;
September 24th, 2006 at 11:36 am
He was trading spreads between different months natural gas futures and then they went the opposite direction to what he expected.
Some of the people in high school who seemed even smarter than me
one became a social worker after getting a chemical engineering degree from Cambridge U. and a couple of others went into medicine. Another guy was working at the National Physical Laboratory last time I knew. He was te kind of guy who looked dumb rather than smart but was great at math.
Though not sure what Stealthbucks point is.