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Amaranth Hit Death Spiral as Sycophants, Fools Cavorted

'Hedge Hogs'
"Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster," by Barbara T. Dreyfuss. Source: Random House, Inc. via Bloomberg

In September 2006, Greenwich, Connecticut-based hedge fund Amaranth Advisors LLC collapsed after losing more than $6 billion in the natural-gas futures market. In “Hedge Hogs,” Barbara T. Dreyfuss tells the story of the math-whiz traders whose risky dance with deregulation led to the collapse.

The star of Dreyfuss’s distressing tale is Brian Hunter, the Amaranth celebrity described by sycophants at the now-defunct Trader Monthly magazine as a top dog among a crop of “red-hot traders.”

Dreyfuss, a former securities analyst, rehashes a lot that we know about Hunter’s antics. And despite admirable efforts to explain the arcana of futures trading, she may lose the lay reader when illustrating the Amaranth drama with details of widening or narrowing trading spreads.

But she does a great job of putting Amaranth’s out-of-control trader into historical context, explaining the blitz of deregulation that set the stage for someone like Hunter to do maximum damage.

Dreyfuss also captures the juvenile culture of trading luminaries who battle like enemies in some twisted fantasy. Hunter and futures trader John Arnold, founder of the hedge fund Centaurus Advisors LLC, fight each other in trading duels more suited to the video game Halo than real life.

Destroy Someone

“‘If you want to succeed and make money, you want to destroy someone else,’ a trader tells Dreyfuss. “‘That’s just how it works. If I want to be successful in this industry, I’m going to want to destroy five guys.’”

Armed with degrees in physics and mathematics, Hunter started trading natural-gas futures at TransCanada Corp. in his native Calgary in 1998. He left for Deutsche Bank’s New York headquarters in 2001, where he worked in the global commodities markets division. By the time he left Deutsche Bank for Amaranth two-and-a-half years later, he’d been demoted by a supervisor who would say later in a deposition that Hunter couldn’t be trusted to “do the right thing for the bank.”

As is to be expected in the world Dreyfuss is describing, Hunter was “quickly scooped up” by Amaranth despite that rocky ending with Deutsche Bank.

A year later, he parlayed an offer from SAC Capital Advisors’s Steven Cohen into a sweetened deal to stay at Amaranth. Money was a factor in the new agreement, but not the only one.

No Oversight

Hunter demanded that he be allowed to move from Amaranth’s Connecticut headquarters to Calgary. He also wanted to be free from the oversight of a former Enron Corp. trader named Harry Arora who’d been keeping tabs on him. The star got what he wanted.

Arora later quit, warning on his way out that Hunter “could blow up the entire firm.”

By spring 2006, clients were seeing red flags in the sudden massive gains in Amaranth’s energy portfolio -- up $1 billion in April. What goes up in a dramatic spike, those clients correctly figured, must come down.

BlackRock Inc., the New York investment-management firm, was concerned enough that it paid a penalty to bail out. After that, Hunter’s bosses began making the first of several unheeded requests that he cut back on his positions. In May, Amaranth lost more than $1.1 billion, and a death spiral was in full force.

The book describes traders who manipulate markets and eviscerate pension-fund portfolios but don’t have a clue about the destructive roles they play.

In June 2006, when Amaranth was on its slide to oblivion, the clearly out-of-control Hunter observed to a colleague that other people in the markets “were getting out of control.” In another exchange, a trader who works with Hunter refers to the “fricken deviant market.”

It becomes clear to the reader pretty quickly who the deviants are here. Hint: They do not include “the market.”

“Hedge Hogs: The Cowboy Traders Behind Wall Street’s Largest Hedge Fund Disaster” is published by Random House (285 pages, $28). To buy this book in North America, click here.

(Susan Antilla writes for Bloomberg Muse, the arts and leisure section of Bloomberg News. She is the author of “Tales From the Boom Boom Room,” a book about sexual harassment on Wall Street. The opinions expressed are her own.)

Muse highlights include Ryan Sutton on dining and Lili Rosboch on art.

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