Could Technology Have Prevented the Amaranth Blowup?

By Tim Clark, Wall Street & Technology

As federal regulators begin to investigate the catastrophic blowup of hedge fund Amaranth Advisors-whose $6 billion in losses resulted from bad bets on natural gas futures-the industry at large is scratching its head as to why the fund adopted such a risky investment strategy to begin with. This begs the question: Could technology, risk management or otherwise, have prevented the Amaranth debacle?Industry pundits believe the right technology and metrics could have prevented huge losses at Amaranth, even if the fund was comfortable with the high degree of risk it was taking.

"It does make us wonder what risk management measures were in place at the fund and what technology was being employed to oversee and control the risk," says TowerGroup analyst Matt Nelson. "But the truth of the matter is that there are some scenarios that you can't model for, and it's possible that they may have been comfortable with their risk exposure, based on historical data that indicated to them that the prices would converge." But those prices never did converge, thus draining Amaranth of more than 60 percent of its assets this month. Surprisingly, Amaranth is still standing and its founder, Nicholas Maounis, claims his firm will remain solvent. Maounis said in a Sept. 20 letter to investors that Amaranth has been able to meet its margin calls, which means that deposits with brokers haven't fallen below the minimum requirement to cover the fund's bets.

"Regardless, we do expect to see increased spending on risk management and derivatives technology, but we would honestly have expected that increase in the absence of a public fund blow up," says Nelson.

Tabb Group CEO, Larry Tabb says Amaranth's recent setback underscores a greater concern of the level of risk firms are willing to take and believes a sound set of metrics needs to be in place to keep investors aware of risk levels.

"The investing public needs to have a better understanding of the investment strategies of funds by being able to better analyze the risk that is involved," says Tabb.