October 08, 2006

Amaranth to Downsize HR

The meltdown is taking its toll on the employees of Amaranth Advisors LLC. The hedge fund which lost as much as $6 billion in the course of a week on bad bets on natural gas, will sack 60 percent of its human resources this week. According to the firm’s CEO Charlie Winkler, at least 250 of its 420 strong work force will get their walking papers.

But its not all bad news for Amaranth’s employees; they have ample opportunities at other funds. The recruitment process has already begun, but Amaranth’s managing director for human resources, Stanley Friedman, is asking rivals to hold off offering them jobs until the fund is able to gain a modicum of control and sell $3 billion of its assets to pay back investors.

Amaranth is offering to find alternative employment for those who are laid off; the company is looking at options in more than 50 financial firms. Meanwhile, the Connecticut Department of Labor has stated that Amaranth has not filed a notice under the Worker Adjustment and Retraining Act as required 60 days prior to a lay off of more than 100 employees of a company.

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Dear Hedge Fund Reader, long time reader, first time poster, I work at Stillwater Capital, and was thinking about hedge funds and some of these funds blowing up, and thought that I would add my two cents and see if you had anything to add too -- many investors were hurt by Amaranth and I was thinking about the ways some of those affected are going to sort through the damage, here are some principles they may want to have in mind:

1. Sophisticated hedge funds apparently have no clue about should have basic concepts like money management, position sizing and ‘risk of ruin‘ knowledge, and should use stops or have a point where they know to exit.

2. Bennett McDowell once said that, “Money management in trading involves specialized techniques combined with your own personal judgment. Failure to adhere to a sound money management program can leave you subject to a deadly “Risk-Of-Ruin” exposure and most probable equity bust.”

3. The smaller the amount you risk for any one trade relative to your capital base the lower the risk of ruin.”

4. And of course it goes without saying that a good hedge fund investor has to pick good funds to invest in. The key, though, to success in this business, is not to choose the best performing managers, but actually to evade the frauds and blowups.

5. With both frauds and blowups, contrary to public opinion (and myth), size does NOT matter: Beacon Hill was $2 Billion, Lipper was $5 Billon, Amaranth was $9 Billion).

Suffice it to say that these should be some of the main points the main question investors should think about as they interview and select hedge funds to entrust their dollars to.

Do you agree with this?

Jack Doueck
Stillwater Asset Backed Strategies
Stillwater Capital

Posted by: john doueck | Oct 9, 2006 3:57:37 PM

What you said is absolutely true in an investment of any kind. Any high-risk investment can not only reap rewards but also boomerang into disaster. Big may be beautiful as long as you are raking in the dollars, but the bigger they are, the harder they fall. And take down their investors with them.
Hedge funds being volatile investments, there are times when they do well and others when they don't. Investors should choose wisely so that they minimize risks rather than go all out for profits.

Posted by: Pushpa | Oct 10, 2006 1:36:05 AM

I agree with you both, and as an investor in Amaranth since early 2002 I really feel some pain, although it was the smallest investment I have in amount, yet its the ego!
What keep Hedge Funds investors chasing returns these days is very simple (I am talking about sophisticated investors) is the lack of performance! after 04 and 05! to be clearer if you look at the growth of AUM in Emerging Market Hedge Funds you will be surprise, and these managers are known to use more leverage, running a hight net long exposure, less transparent that US, EU or Japanese funds at the same size and their books are full with small cap illiqiud stocks! and with all that investors keeps pouring money to them paying the 2&20 while they are technicly investing with a Long Only fund that short 2 to 10% if its NAV using ETFs!
The case of Amaranth, was really confusing..they start getting volatile in March, we looked at their positions and we saw a huge exposure to energy! which was weired for a multi-strategy..in April the head of Energy left, and the fund got even more volatile.. I spoke with some friends in the industry who have money with them and no one knows what was going on! in that case you submit your redemption request..but they have an annual redemption policy!! so what made the investors feels a little bit compfrotable are the returns!
What I learned from this is to spend as much time monitering my investment as much as I spend during the Due diligence process!

Posted by: HJ | Oct 10, 2006 8:41:04 PM

Dear all,
May I add, Amaranth fired 250 some employees according to the Newspaper. But it hired 4 highly qualified programmers, IT developers to tighten technological infrastructures and connectivities to exchanges and institutionals. The major problem with the industry is operational: mass employees performing manually duplicated work, inefficiently and inadequately, causing major gaps in operational infrastructures and insufficient risk pictures. This transluscent somewhat convenient way of gapping risks enables managers to gamble and take larger arbitrage opportunities to dislocate markets further. Some of the employees may or may be aware. In their scope and framework, employees, individually, don't get the big picture to warn about future downfalls and risky traps.

Posted by: armelle guizot | Oct 14, 2006 12:11:55 AM

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