September 23, 2006
Amaranth : Lessons on Hedge Fund Failures
The difficulty of Amaranth has three notable features. First, there was no market panic. It caused barely a ripple. Those who believe a hedge fund failure could take down our financial system are... well... silly. Second, investors are learning and getting education on the effects of lock ins. Those investors who are trying to leave Amaranth with what is left are finding their redemptions penalized in the fine print of their investment contracts. With many funds, it costs .24 to 2% to get out before a two year lock up period expires. If too many ask to redeem the fund can stagger repayments and so. Moreover, investors are discovering that some negotiated for better redemption terms than others (called "side agreements"). The problems with Amaranth redemptions will not be lost on a very intelligent group of investors; risk assessments will factor in redemption terms. Third, investors are a bit surprised by Amaranth's COO's appearance at two "beauty shows" hawking his funds, claiming a 25% return, during the two days when the fund was starting to lose big. Investors have hired lawyers and are looking into lawsuits based on misrepresentation. Hedge Funds, who often use the law to attack management, are going to find that their investors know how to do this too.
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The lack of panic may be a product of the new hedge fund rules in bankruptcy. The whole point of these rules was to prevent panic in the face of relatively minor hedge fund collapses.
Posted by: ohwilleke | Sep 25, 2006 3:34:07 PM