Amaranth Advisors, a multi-strategy hedge fund managing approximately $9 billion, suffered one of the largest trading losses in hedge fund history in September 2006. Trader Brian Hunter had built enormous positions in natural gas futures, betting on the spread between winter and summer contracts.
Hunter's positions were so large that they represented a significant share of the entire natural gas futures market. When natural gas prices moved against him — the winter-summer spread narrowed — the losses mounted rapidly. Amaranth lost approximately $6.6 billion in a single week, and the fund collapsed within days.
The case illustrated the danger of concentration risk: a single trader's positions in a single commodity, leveraged at roughly 10:1, created a bet that was too large for the market to absorb. When the trade went wrong, the fund could not unwind the positions without moving the market further against itself. Amaranth's risk management failed to limit Hunter's exposure, and the fund's investors lost most of their capital.
Amaranth's Hunter bet $6.6B on winter-summer spreads with 10:1 leverage; when the spread narrowed, losses mounted and the fund collapsed in a week.
Brian Hunter built positions so large they represented a significant share of the natural gas futures market.
The positions were leveraged at roughly 10:1, amplifying losses when the spread narrowed.
Amaranth's risk management failed to limit Hunter's exposure to a single commodity.
The fund could not unwind the positions without moving the market further against itself.
A position too large for the market to absorb is a hostage situation. Amaranth's Hunter couldn't sell without moving the price against himself. Concentration is the risk.
Amaranth Advisors collapsed in September 2006. Hunter was banned from trading by the CFTC and fined $750,000. The case prompted hedge fund investors to demand better risk reporting and position limits, and it influenced the CFTC's approach to monitoring concentrated positions.
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