The business news was awash with articles over the past couple of days about how Amaranth Advisors, LLP lost $5 billion or so by making wrong bets that natural gas prices would rise. Inasmuch as Monday morning quarterbacking is much easier than actually making money in placing such bets, it’s fairly clear what happened. As gas prices fell precipitously because of a storage glut, Amaranth increased bets that would pay off exponentially only if natural-gas prices rebounded in anticipation of a cold winter or as a result of a hurricane hammering natural-gas facilities. That hasn’t happened and so prices have continued to erode.
Meanwhile, Amaranth’s risk management systems apparently did not accurately measure how much downside risk the company faced and did not provide an effective mechanism for hedging that risk. Amaranth’s bets went bad because the company misjudged the spread, which is the movement of the difference between prices for different month contracts. The institutions and wealthy investors that invested with Amaranth knew about that risk, but they took it because of the potential for big gains if Amaranth bet right. Nothing too unusual about that.

So, with that backdrop, why is this necessary?:

Connecticut Attorney General Richard Blumenthal said on Tuesday he is investigating apparent large losses at Amaranth Advisors LLC, the Greenwich-based hedge fund manager, and stepped up calls for more industry oversight.
In a statement, Blumenthal said “particularly problematic are alleged representations made to investors in recent weeks by the management of Amaranth that may be contrary to apparent facts.” [. . .]
Blumenthal last year said he was investigating ways to make hedge funds safer for investors in the wake of the fallout from Stamford, Connecticut-based Bayou Management, which collapsed in the wake of a trading scandal. Two top Bayou managers pleaded guilty to federal fraud charges and are awaiting sentencing.
“The facts about mammoth losses by Amaranth offer additional powerful and compelling evidence about the need to reform disclosure and oversight requirements,” said Blumenthal.

As if those reformed disclosure and oversight requirements will — or even should — prevent the next Amaranth. Indeed, the fact that several Amaranth investors investigated Amaranth’s books personally and determined the extent of their exposure is an indication that the hedge fund market is working, not that it needs to be dipped into the criminal justice or governmental regulatory system.
By the way, this Ann Davis/WSJ article (no subscription needed) profiles Brian Hunter, the 32 year-old Amaranth trader who is largely responsible for placing the bad bets.