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Barbara T. Dreyfuss in her book "Hedge Hogs",takes a close and well researched look at two 'gun slinging' gamblers strutting the walk under the guise of 'Natural Energy Traders' leading to a shoot-out which fatally wounded one and led to the death of the large hedge fund Amaranth founded by the charismatic but flawed Nicholas Maouni, and left standing the other alive to go on to become fabulously wealthy.
At one end of the street was Brian Hunter, a brash, highly self-opinionated, way over confident commodity trader from Calgary, and at the other end of the street was Hunter's polar opposite, Enron trained natural gas trader, John Arnold, quiet, studious, inquisitive but nevertheless with a steely determination to win the shoot-out. And this book follows the careers of these guys evidencing that as a consequence of making increasing profits from the casino-like world of energy trading for their respective firms, they were allowed to keep doubling up on their trading activities to the point where they dominated this precarious financial bazaar, and committed $billions of other people's money to this hazardous area of risk. These two heavy hitters effectively cleared the street of all other traders, leaving just the two of them, eyeball to eyeball in a fight to the death. Yes, you've probably guessed correctly that in the survivor in this tussle was John Arnold who is now a multi-billionaire dispensing some of his 'gambling' spoils on various good causes. Brian Hunter's mind-numbingly large losses caused the demise of one of the largest hedge funds, Amaranth and huge losses to it's investors.
Many view hedge fund losses as par for the course among the very wealthy, on the basis they knew what they were going in to and could probably withstand some losses without being wiped-out.However,
many hedge fund investors are Pension Funds, and the like charged with looking after the financial affairs of hundred of thousands of Joe Smucks, as in the case of The San Diego County Employees Retirement Association which invested $175 million in Amaranth of which $84 million was lost when Amaranth collapsed, posing the question of whether this sort of hedge fund investment should be treated with the same risk appetite that you treat George Soros' pocket money. It is fundamentally ridiculous. Reading this book leaves one with the conclusion that the improvement of the oversight of hedge funds and other private funds is vital to their sustainability, and to our economy's stability.
Barbara Dreyfus carefully and lucidly explains the various types of derivative trading undertaken by these two guys and their firms, but it is difficult to conclude anything other that it was a casino gambling exercise, not achieving any real or meaningful outcome in the stability of the marketplace - indeed some of the trades were so fraught with financial Armageddon that they had names like "Widow Maker". John Arnold attempted to justify this type of derivative trading when giving evidence to the Commodities Future Trading Committee claiming that without his and others involvement "would cause markets to become even more volatile." Many would I am sure take issue with this point of view but perhaps those involved in these 'unreal' financial sleights-of-hand transactions nurtured delusional belief in the purpose, usefulness' and positive contribution to the end price, supply, and availability of the commodity in a quest for self-justification of their actions.