Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster Hardcover – May 21, 2013

Before anyone makes an investment in a hedge fund, they should be required to read one book: Barbara Dreyfuss’ Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster. Whether you serve on an investment committee, a retirement board, or act as a sole fiduciary, you should not make another investment in hedge funds until you’re done with this book. Better yet, you ought to have your entire staff read it as well, and then schedule a meeting to discuss it. While you are getting folks to read the book, add your consultant, actuary, and custodial bank to the list of required readers.Ms. Dreyfuss chronicles the demise of Amaranth Advisers, a multi-strategy hedge fund that allowed its natural gas trader to build a series of investment positions that wiped out a majority of its investors’ capital. The book contains some dramatic scenes, especially when Brian Hunter, Amaranth’s star energy trader, desperately tries to trade out of his untenable position. However, the real value of this book comes in the details, and that is why Hedge Hogs is so important. Ms. Dreyfuss shows how Mr. Hunter slowly amassed the means to destroy Amaranth, despite all the risk managers and risk management systems deployed by the firm.There are times when you have to read this book slowly in order to grasp how Mr. Hunter and his competitors at other hedge funds are placing their bets on natural gas prices. However, it is important to understand what is going on, because this small group of traders made speculative bets that were much bigger than the physical market for natural gas. In other words, we get to see what happens when too much institutional capital swamps just one tiny niche of the investment marketplace. We also find out that these speculative excesses have consequences for the real economy. Ms. Dreyfuss details how Mr. Hunter’s trades distorted the natural gas market and made it nearly impossible for utilities, manufacturers, and other businesses to hedge their energy costs.I am not recommending this book because it will help investors avoid making mistakes. Rather, they need to read this book to help them prepare for dealing with the inevitable problems that will befall their hedge fund investments. As more and more money flows into these types of speculative investments, there will be more implosions. What happened to Amaranth isn’t the by-product of some cataclysmic event like the credit bubble. Instead, Ms. Dreyfus reveals that an ordinary, well-diversified investment can turn toxic, when too much money meets someone who is willing to gamble with it. For all of those investors who think that their investment checklists, scrupulous due diligence, and risk models will steer them clear of the next Amaranth, read the book and think again. There’s probably another Amaranth already in your portfolio; you just don’t know it.

In the opening pages, a sort of blunt claim of hedge fund risk and some unpecified need for regulation, without depth or counter-arguments(and something about the writer having a history with some one-sided progressive publications), almost put me off. But I read on, and I'm very glad I did. This book proved to be a readable, breezy, accessible walk through a lot of solid history. A broad audience can enjoy it; though highly financially specialized readers might well be bored. (I loved "When Genius Failed," and think this a fine entrant in that sort of genre.) I found in it a breezy review of things I already knew something about, with enough local color, personality and cultural history to keep the narrative moving. Technical terms (such as what a clearing broker does) were dealt with in short, clear explanations, without any technical complexities. And refreshingly, some new takes on events appeared, as when the story quickly moved from natural gas trading in Canada to pieces of the Enron story I had not seen, such as the firm's actual innovations in energy markets and trading, and some accomplishments of its traders. (The other Enron books I had read went straight to the popular "whodunnit" accounting scam story of the usual suspects, and breezed right by what the energy trading was actually doing.) So, in between familiar bits of story, gems appear. The language usage similarly struck me early on as very informal, at moments as if straight from dictation, very unlike some academic books I usually favor, but I quickly got in the swing of it. I like the brevity and pacing. I hope this book reaches a broad audience.

Hedge Hogs tells the story of how greedy Hedge Funds can move markets with their positions that can move prices to their own benefit of making millions daily. The majority of this book details Brian Hunter and his massive trading positions in Natural Gas and how he could push the markets up and down to benefit his positions, it also explains to America why the price of Natural Gas was too high in 2005-2007.To be able to trade on the NYMEX with its alleged position limits and the continued violation of these limits with one trader trading 25% to 40% of the volume many days is a sad case of our financial exchanges only looking for volume and not enforcing their own rules. Then with the ICE Exchange not having limits on positions makes the whole futures trading business even more of a big boys poker game.Millions of persons paid the price in higher natural gas prices in those years and a few traders made $100's of millions on the profits they had generated. Every business that used Natural Gas also paid the high price to operate their business's and undoubtedly increased their selling prices or had to let employees leave to deal with these higher costs.This is somewhat like Enron II as they had manipulated the Electricity market in California in the early 2000's and ultimately crashed and burned millions of users, investors and employees.The author Barbara Dreyfuss has done an exceptional job illustrating the Hedge Fund industry and the overwhelming greed in America by selected firms in the pursuit of outrageous returns in capital.Naturally JP Morgan Chase Bank is behind the scenes and makes a small $725 million profit in two weeks with the liquidation of Amaranth Hedge Fund.This is a great book to read on how some markets are pushed around by a few big guys with enormous egos and capital behind them to create the largest casinos in the world. Anyone who wants to know the real behind the scenes story of Hedge Fund traders gone wrong will enjoy this book.

This book shows what happens when laissez fairer is practiced in the energy markets of the USA. A few young traders get super rich (can't help feeling jealous of them) and countless pensioners lose their life savings. Many small mom and pop businesses on Main Street have to bear the brunt of higher gas prices.For all those of you who have nostalgia for the Wild West of old and its gunslingers, I have glad tidings- the wild east is alive and kicking and its epicentre is Greenwich and jock traders with their Bloomberg terminals are the new Cowboys with six shooters and they do plenty damage.This excellent book can also serve as a primer on the consequences of deregulation in a 24/7 digital world.

Surprised there are not more reviews for this. If you are interested in trading this book is for you. It really goes into detail describing the ups and downs of big traders and makes you realise how much luck is involved in the "art" of trading.

Hunter's trading blowup is a must read for those in the capital markets. This book does an excellent job recounting the events leasing up to the blowup and is well sourced. The hubris of Hunter and his team is quite remarkable.The major negative is that the author spews out the general misconceived notions about the financial markets as if she were a populist politician. And of course, more regulation is always the answer, because government regulators know all, see all and are beacons of moral superiority. If she cut this out, the book would be 4 stars.Overall worth your time, especially if you are or aspire to be a trader.

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.

Well written, the average person with no or little understanding of natural gas hedging will be able to keep pace