Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster

by Barbara T. Dreyfuss

For readers of The Smartest Guys in the Room and When Genius Failed, the definitive take on Brian Hunter, John Arnold, Amaranth Advisors, and the largest hedge fund collapse in historyAt its peak, hedge fund Amaranth Advisors LLC had more than $9 billion in assets. A few weeks later, it completely collapsed. The disaster was largely triggered by one thirty-two-year-old hotshot trader Brian Hunter. His high-risk bets on natural gas prices bankrupted his firm and destroyed his career, while John Arnold, his rival at competitor fund Centaurus, emerged as the highest-paid trader on Wall Street. Meticulously researched and character-driven, Hedge Hogs is a riveting fly-on-the-wall account of the largest hedge fund collapse in a blistering tale of the recent past that explains our precarious present . . . and may predict our future.   Using emails, instant messages, court testimony, and exclusive interviews, securities analyst turned investigative reporter Barbara T. Dreyfuss charts the colliding paths of these two charismatic traders who dominated the speculative energy market. We follow Brian Hunter, the Canadian farm boy and elbows-out high school basketball star, as he achieves phenomenal early success, only to see his ambition, greed, and hubris precipitate his downfall. Set in relief is the journey of John Arnold, whose mild manner, sophisticated tastes, and low profile belied his own ferocious competitive streak. As the two clash, hundreds of millions of dollars in pension and endowment money is imperiled, with devastating public consequences.   Hedge Hogs takes you behind closed doors into the shadowy world of hedge funds, the unregulated wild side of finance, where over-the-top parties and lavish perks abound and billions of dollars of other people’s money are in the hands of a tiny elite. Dreyfuss traces the rise of this freewheeling industry while detailing the decades of bank, hedge fund, and commodity deregulation that turned Wall Street into a speculative casino.   A gripping saga peppered with fast money, vivid characters, and high drama, Hedge Hogs is also an important and timely cautionary tale—a vivisection of a financial system jeopardized by reckless practices, watered-down regulation, and loopholes in government oversight, just waiting for the next bust.Praise for Hedge Hogs  “Regulators, legislators and judges inclined to sympathize with the industry ought to rush out and buy a copy of Barbara Dreyfuss’s Hedge Hogs, a wonderfully instructive tale about Amaranth Advisors. . . . Dreyfuss, a Wall Street analyst turned investigative journalist, not only plowed through what turned out to be a treasure trove of official records and transcripts, but supplemented it with plenty of her own reporting. She manages to organize it all into a tight, riveting and understandable yarn.”—The Washington Post“Clearly and entertainingly told . . . a salutary example of how traders who believe they are super-smart might be nothing more than lucky, and how there is nothing so intoxicating as the ability to speculate with other people’s money.”—The Economist“[Dreyfuss] does a great job of putting Amaranth’s out-of-control trader into historical context, explaining the blitz of deregulation that set the stage for someone like Hunter to do maximum damage.

Genres: Finance, Business, Economics, Nonfiction, History, Biography

320 pages, Kindle Edition

First published January 1, 2013

About the author

Barbara T. Dreyfuss spent 20 years on Wall Street as a senior vice president and analyst for Prudential Securities, writing and speaking about government policy concerning health insurers, HMOs, Medicare, the Food and Drug Administration, and the hospital, drug and medical device industries. Her audience was the firm's clients, including large institutional investors such as mutual funds, pension funds and hedge funds. Her office,which covered policy making in Washington, D.C. , consistently won top honors in Institutional Investor magazine's investor surveys. After leaving Prudential in 2004, she became an independent investigative reporter, writing about such topics as the lobbying influence of drug makers and insurance companies, Agent Orange, PTSD and the controversy over privatizing Social Security. She was a senior correspondent for The American Prospect and contributed to Mother Jones, Washington Monthly and The Veteran.

Reviews

[Washington Post · Rating 3 out of 5]

In Washington, the Wall Street moneymen are at it again, waging behind-the-scenes battles against a host of new rules to prevent another financial crisis. Some of the fiercest fights are over limits on derivatives trading, including complex derivatives linked to commodities. Regulators, legislators and judges inclined to sympathize with the industry ought to rush out and buy a copy of Barbara Dreyfuss’s “Hedge Hogs,” a wonderfully instructive tale about Amaranth Advisors, a nearly $10-billion hedge fund brought down by the recklessness and arrogance of a single commodities trader. Read the review: http://wapo.st/11R6Bkq

[John · Rating 4 out of 5]

Disclaimer: I was employed as an oil trader in Los Angeles, San Franciso and Singapore from 1976 up until my retirement in 2012. I know one of the principal figures in this book. I currently lecture on oil trading and risk management and have previously cited the Amaranth case to highlight breakdowns in risk controls and the phenomenon of the Rogue Trader.
Amaranth is a classic tale of the spectacular rise and demise of a hedge fund. It kicks off in a blaze of glory as the self-made founder of the firm, Nick Maouis, builds up billions of dollars in assets, winning the trust and confidence of investors and pensions. He is portrayed as a hard-working and generous CEO, genuinely concerned with his employees who he is determined to recognize, reward and retain. The descriptions of company outings and parties are not your typical Wall-Street over the top excess but more family-oriented fun celebrations. Until Brian Hunter, a natural gas trader fresh from a hushed-up meltdown at another bank (which resulted in a contested lawsuit over a disputed bonus) appears on the scene.
This books tells the story of how one trader unilaterally manipulated the natural gas market and unleasehed a reign of terror on prices, trading and hedging. The Icarus-like career of trader Brian Hunter at the firm spanned just over two years. During that time he posted over $3 billion in trading profits during his first year after Hurricanes Katrina and Rita fortuitously blessed his mega-long trading book. Hoping to replicate and extend this success the following year, Hunter was promoted, granted more authority and better bonus incentives. His boss who was concerned about the magnitude of Hunter's bets and recommended more oversight was shunted to the side. While thousands lost their lives in that year's storms and many residents of New Orleans lived in squalor, Hunter took home a mega-bonus, convinced the firm to let him run his business from an office near his hometown of Calgary and started construction on a mega-mansion.
This is where the book really begins. We see the portrait of an extremely confident, egotistical trader who presumes superior intelligence and ignores sound advice. This morphs into severe hubris and arrogance, later denial and, finally, a monumental day of reckoning. The book deftly sketches the highly personalized feud and competition between Hunter and another leading natural gas trader, buttressing the narrative with excerpts from emails and messages that were released in subsequent investigations and trials.
The author also does a commendable job explaining the finer points of derivatives, spread trading, margin calls, hedge fund structures and in clear, non-technical language. She captures the emotions, fear, greed and irrationality of a trading floor.
Another very important thread is the appalling lack of control and oversight, not only from the hedge fund but from the futures exchanges and the energy regulators. His multi-billion dollar earnings won Hunter a special exemption from accountability and any form of risk management. The distance between Calgary and Amaranth's Greenwich headquarters exacerbated this.
Finally, as with the implosion of Enron and Lehman Brothers, the fight over the spoils and carving up of the assets warrants a separate book. Investment bankers and hedge funds come off as rapacious double-dealing vultures tearing at the flesh of a mutated carcass.
The Epilogue brings closure to the whole mess, tracing the consequences for both winners and losers. As with many Wall Street blowups, this one hit Main Street and Small America hard with a long list of victims including pension funds, small business and small investors.
When one thinks of Calgary, their annual celebration - the Calgary Stampede - comes to mind. Wild bulls running loose, cowboys kicking up their spurs, epic parties. This provides an excellent backdrop for this book.

[Kirsti · Rating 4 out of 5]

The lesson: Everybody loves you when you're winning.

I hope there are more women in hedge funds now than at the time this book was written. Women also deserve the chance to be careless/venal/reckless/borderline sociopathic.

[Jeffrey · Rating 4 out of 5]

Good account of what brought down Amaranth - the decade of 2000's LCTM, although it is debatable whether Hunter himself actually employed much risk management. Dreyfuss' account does a good job covering the intrigue and machinations at Amaranth and surrounding Hunter (the trader that brought down the hedge fund), as well as the energy and natural gas markets.

However she also does a good job of not just showing the drama of the trading, but also reminds us of where the losses sit. Speculators do not just profit off each other in a zero-sum game, but also end consumers and savers. As she notes: "But then suddenly there was excessive speculation. And that in turn caused excessive volatility, which in turn required more hedging..." (p189). Dreyfuss' account also highlights the cost of higher gas prices to small business and consumers as a result. Likewise, she reminds us that in an era where the push for small government is forcing pension funds into riskier activities, that this is where the savings pool for speculation is coming from - SDCERA pretty much halved their initial "investment" in Amaranth of $175m to $84m. Along the way, the fee structure ensures a perpetuation of the "Heads I win, tails you lose" phenomenon.

Overall a well research and balanced account.

[Paul Phillips · Rating 3 out of 5]

I think this book is pretty good, being in the same line of business it's pretty easy to follow, but I have qualms about some of the conclusions drawn. Otherwise a very well written and easy to follow story, she makes gas traders sound more interesting than they are in real life ;-).

[Bill · Rating 4 out of 5]

Good book to get your teeth into, fun read

[Marc Lafrance · Rating 5 out of 5]

To date my favourite finance related book. Good summary of market dynamics and (disregard of) risk management. Excellent Insight into trader hubris as well

[Scott Abbott · Rating 3 out of 5]

The rise and fall of Amaranth and the natural gas trader Hunter. Weird pacing in places

[Cheryl]

Too much money, not enough sense

[Emma Caterine · Rating 4 out of 5]

A great historical and material analysis of the collapse of hedge fund Amaranth by a trading war between Amaranth trader Hunter and Centaurus trader Arnold. A little hokey at times in its portrayal of the lives and personalities of the traders, the book does maintain an overall focus on empirically deducing what happened. Economists outside of the area and policy wonks alike will appreciate accessible explanations of the financial instruments while not getting bogged down in supply-demand basics.

[Kevin Mcclelion · Rating 3 out of 5]

Similar to barbarians at the gate. Amazing to think of one guy trading stocks worth billions of dollars. I could never do it. Pretty good read, and makes you question the amount of market manipulation that may be going on.

[Elizabeth · Rating 5 out of 5]

really good stories about individual hedge fund traders. didn't like when she went into the "average joe" sob stories, but that was only briefly near the end in one chapter, so it was easy to get over. but the personal background coverage of john arnold and brian hunter was fascinating.

[Mills College Library]

332.64524 D778 2013

[AllInStride · Rating 3 out of 5]

Not a lot of insight, but a good overview of the recent history of the hedge fund industry.

[Mark B · Rating 4 out of 5]

A middling book but the last fifty or so pages detailing the epic struggle between Hunter and Arnold resulting in the annihilation of Amaranth make it all worthwhile.

[Patti · Rating 3 out of 5]

Very complicated but interesting account of hubris and greed in the financial world.