What lessons can traders draw from Amaranth blow-up?

[globalarbtrader]

Brian Hunter is the trader. Surely for every trader, there will be a risk manager who will look over his shoulders to make sure the trader does not make the classic mistakes like excessive leverage, excessive large position size relative to liquidity etc. Furthermore, Hunter was not the boss of Amaranth. The boss was Nicholas Maounis. Why didn't the boss and risk manager stop Hunter when it is in their absolute interest to do so? This part puzzles me.

Yes in every one of these cases (LTCM, Amaranth, London Whale, Amaranth, Hubler) there were risk managers guys who spoke up and were ignored and/or overruled (watch the film Margin Call). But as JackRab says:

You overestimate the power of a risk manager. Traders push the limits all the time... they rather mouth off the risk department and see it through... and if they are making money, the risk manager will get bypassed by the boss. Boss sees money, likes it... says go with it and overrules risk.

Risk will try to contain, but that's not always possible. And in this case, it would be like he was very committed to the trade. Reducing would quickly start to become liquidating.

In the end, traders make the money... risk managers usually partly prevent them from doing so. And sometimes, risk managers would/should prevent failure... but wheels motion etcetc...

I do think that the power of risk managers and compliance type people has increased significantly over the last few years. When I was an investment bank trader in the early 2000's the risk management department was a joke; I only saw a risk manager once, and he was easily 'snowed'. By the time it got to 2013 the chief risk manager at the hedge fund manager I was working at had an enormous amount of power.

Looking again at https://en.wikipedia.org/wiki/List_of_trading_losses it seems like the frequency and size of these large losses has decreased since the 2008 crisis, and especially in the last 5 years as compliance and risk departments have been beefed up. Probably in a few years the wheel will turn back and we'll start seeing major blow ups again. I think the outright fraud cases like Kerviel / Adoboli / Leeson will be less likely however.

GAT

 

[777]

Yes in every one of these cases (LTCM, Amaranth, London Whale, Amaranth, Hubler) there were risk managers guys who spoke up and were ignored and/or overruled (watch the film Margin Call). But as JackRab says:



I do think that the power of risk managers and compliance type people has increased significantly over the last few years. When I was an investment bank trader in the early 2000's the risk management department was a joke; I only saw a risk manager once, and he was easily 'snowed'. By the time it got to 2013 the chief risk manager at the hedge fund manager I was working at had an enormous amount of power.

Looking again at https://en.wikipedia.org/wiki/List_of_trading_losses it seems like the frequency and size of these large losses has decreased since the 2008 crisis, and especially in the last 5 years as compliance and risk departments have been beefed up. Probably in a few years the wheel will turn back and we'll start seeing major blow ups again. I think the outright fraud cases like Kerviel / Adoboli / Leeson will be less likely however.

GAT

Yes.. voices of reason are sometimes ignored and sometimes for percieved selfintrest that goes against fiduciary responsibilitie and job obligations.

I traded pairs in a fully backed group where the head trader took crazy risk when he was losing and blew everything up (very large amount) in three days.

I left shortly before the debacle after issuing numerous warnings and having heated arguments about position sizing. The fellow overseeing risk back on Wall Street was mostly conflicted about how the head trader traded because of precieved selfintrest and perhaps even a touch of not really understanding.

One amazing fact about the situation was that the sole trading experience of the head trader was that he had blown up his account at a prop firm and went on to lose hundreds of thousands of the firm's money after talking the firm owner into letting him trade in the red- "on makeup".

 

[globalarbtrader]

Read this book:

Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster Hardcover – May 21, 2013
by Barbara T. Dreyfuss (Author)

It goes over the blowup in detail. Basically John Arnold took Brian Hunter down. This blowup was entirely in the natural gas market. So there was no spillover to other risk assets. And as much money as Hunter lost, Arnold made. Net net it was a wash.

Thanks, just ordered this book to add to the schadenfreude section of my library.

GAT

 

[ThunderThor]

Read this book:

Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster Hardcover – May 21, 2013
by Barbara T. Dreyfuss (Author)

It goes over the blowup in detail. Basically John Arnold took Brian Hunter down. This blowup was entirely in the natural gas market. So there was no spillover to other risk assets. And as much money as Hunter lost, Arnold made. Net net it was a wash.

I read "When Genius Failed" and enjoyed it immensely. Would you say "Hedge Hogs" is just as good as "When Genius Failed" ?

Thanks

 

[Maverick74]

I read "When Genius Failed" and enjoyed it immensely. Would you say "Hedge Hogs" is just as good as "When Genius Failed" ?

Thanks

The books are a little different in format. What I liked about Hedge Hogs is they spent a lot of time talking about the personalities and backgrounds of both Arnold and Hunter. It was more personal. It spent less time explaining the natural gas market (most would find that boring) and more time on the main characters. When Genius Failed gave a more broader approach. Often getting technical in terms of explaining the fixed income markets, the structure of those markets, and less on the characters. Partly because there were a lot of people involved and to be honest, they were not terribly interesting.

I think traders will find Hedge Hogs more fun to read as they will be able to see more of themselves in general in these two characters. There has been very little written about Hunter and he is actually a very interesting person in terms of his background and personality. I enjoyed both books.

If you enjoy Hedge Hogs, I also suggest you read "Short" by Cortright McMeel. It's a fictional book but very entertaining. It's about the energy market as well and how a bunch of traders from different parts of the industry are trying to score a huge trade. Their storylines intersect with each and it makes for a very entertaining read and very accurate as it pertains to energy trading as it was written by a former trader.

 

[toc]

It also seems in institutions many a times "a trade" is a result of single man i.e. superstar's initiative like Brian Hunter at Amaranth. It should rather be a committee initiative where analysts from different "trading disciplines" fundamental, technical, other quantitative, seasonal, astrological, maths etc. etc. etc. should chime their views in and a very thorough trading decision is "finally taken". This would also virtually negate the "excessive risk" taken by a single trader due to personal emotions or ego.

Despite earning 100s of millions each year, many/most institutions are "bastardly cheap" in spending on the manpower to support and sharpen their research and trading ops. They would rather spend on private jets and hooker parties for client to get more AUM and feel giggily.......for a little while, till the returns sink and assets implode in many a cases.

 

[ThunderThor]

The books are a little different in format. What I liked about Hedge Hogs is they spent a lot of time talking about the personalities and backgrounds of both Arnold and Hunter. It was more personal. It spent less time explaining the natural gas market (most would find that boring) and more time on the main characters. When Genius Failed gave a more broader approach. Often getting technical in terms of explaining the fixed income markets, the structure of those markets, and less on the characters. Partly because there were a lot of people involved and to be honest, they were not terribly interesting.

I think traders will find Hedge Hogs more fun to read as they will be able to see more of themselves in general in these two characters. There has been very little written about Hunter and he is actually a very interesting person in terms of his background and personality. I enjoyed both books.

If you enjoy Hedge Hogs, I also suggest you read "Short" by Cortright McMeel. It's a fictional book but very entertaining. It's about the energy market as well and how a bunch of traders from different parts of the industry are trying to score a huge trade. Their storylines intersect with each and it makes for a very entertaining read and very accurate as it pertains to energy trading as it was written by a former trader.

WOW.. thanks for such a chock full of info reply,appreciate it !

As for me ,I like when they delve into all the characters (personalities/quirks) and technical mumbo jumbo

I'm going to order Hedge Hogs and Short,hopefully both are available for Kindle,if not I'll just order the paperbacks.

Thanks again.

 

[Maverick74]

WOW.. thanks for such a chock full of info reply,appreciate it !

As for me ,I like when they delve into all the characters (personalities/quirks) and technical mumbo jumbo

I'm going to order Hedge Hogs and Short,hopefully both are available for Kindle,if not I'll just order the paperbacks.

Thanks again.

Alright. Since your so damn appreciative of my suggestions, I'll offer one more. Usually I get my fingers bitten off trying to help people around here.

Street Freak: A Memoir of Money and Madness Paperback – September 11, 2012
by Jared Dillian (Author)

This is a great book written by a trader for traders. It tells the story of a very average, mediocre, plain vanilla kid from a state school that was fortunate enough to land a trading gig at Lehman. This book tells his story from 9/11 all the way to the collapse in 2008 and there is plenty of trader porn for the home gamers on here. Enjoy!

 

[murray t turtle]

Nice thread. I'd never heard of Amaranth before though LCTM is always the text-book case.

Sounds like they made every critical mistake they possibly could -
over-leveraging
following a big star trader
buying into a trendless market
no stop-loss
doubling down on a loser
trusting in rational markets and price reversion to the mean
failure to bank gains and get out
........and then they started cheating

Great lessons for traders no matter their scale.
%%

Good points; sounds like they did not do that much cheating , do to the small 750K CFTC fine. Sounds you know more about that big star trader than i do, mainly because i have enough stuff on my plate.

Even though i seldom use the word gamblers/gambler in markets;
Maverick's book link used ''lone star gambler'' She must mean stupid risk, or double down on a loser, markets are not gambling.

Personal note reminder; try not to argue with a policemen; or if federal regulators ever warn not to trade last half hour, obey a lawful order.LOL I assume her info is accurate?? [except her bet words/gambling confused with markets ]

 

[ThunderThor]

Alright. Since your so damn appreciative of my suggestions, I'll offer one more. Usually I get my fingers bitten off trying to help people around here.

Street Freak: A Memoir of Money and Madness Paperback – September 11, 2012
by Jared Dillian (Author)

This is a great book written by a trader for traders. It tells the story of a very average, mediocre, plain vanilla kid from a state school that was fortunate enough to land a trading gig at Lehman. This book tells his story from 9/11 all the way to the collapse in 2008 and there is plenty of trader porn for the home gamers on here. Enjoy!

This sounds like something I will enjoy,I love these types of stories. I'll get this too and read it first!

Hey,don't let em bother you ,just think of those that who do appreciate your help.

Keep em coming...Thanks so much !