Bloomberg has posted a piece which explains in wonderful detail the events leading up to the spectacular implosion of Amaranth several months ago. In many ways, it reads like a shorter version of When Genius Failed, Roger Lowenstein’s excellent account of the collapse of Long Term Capital Management.
I wrote earlier about my belief that the stellar performance of many hedge fund managers was the product of luck, which was bound to run out, and not skill which could be expected to persist:
There are 9000 hedge funds out there, and most of them are run by people who have had good track records- but how many of these track records reflect skill(and are reproducible), and how many reflect luck(which will run out)? Hedge fund managers are self-selected from those who have had success, but I suspect that many of them aren’t any more prescient than our scammer. They’re the coin flippers who’ve gotten 10 heads in a row, and given the huge amounts of leverage in use, I think we will continue to see additional falls from grace.
Much of this is a direct result of compensation policies which incentivize traders to take huge risks. Huge bonuses are to be had for big returns which don’t need to be returned upon future bad performance, but traders don’t share in losses. Which brings me to the most incredible part of the Bloomberg piece.
Brian Hunter, the trader responsible for the positions that brought Amaranth down made 15% of the profits from his trades. In 2005, he took home $75 million. What’s he doing now? Bloomberg reports:
In Calgary, Hunter is still building a new home for his family, and people familiar with his plans say he’s talking about getting back to trading. “He will find a way to get involved again,” says former Deutsche Bank colleague Stanziale. “Otherwise, it would be too much intellectual capital wasted to have him on the sidelines.”
Hunter, despite the billions of dollars of losses he caused, still has his $75 million and is building a new house. Worse, the lesson hasn’t been learned. He’s still thought to be so brilliant that if he weren’t trading other people’s money again, at least one person laments the terrible waste of intellectual capital. Might he find future success? Yes, but you’re just as likely to find it betting it all on black at your local roulette table.
P. T. Barnum famously noted that there’s a sucker born every minute. If so, Brian Hunter will have a fertile market from which to draw new investors.