For some, the Amaranth Advisors disaster was reminiscent of another high-profile meltdown, Long Term Capital Management. But unlike the 1998 debacle, the current catastrophe has caused little panic outside of the understandably upset investors. “Part of the reason’s there’s been no reaction” in the market, says Richard Gilhooly of BNP Paribas in a Dow Jones Newswires interview, “is that it has been delivered as a solved problem. Each party taking on some of the risk has done so on better terms.” It seems the bigger the hedge fund and its leverage, the harder the fall. Amaranth’s leverage ratio was 5:1, while LTCM’s was “significantly greater,” according to DJN. Another factor is that the hedge fund industry has grown up somewhat since that big bailout eight years ago. “The largest, most influential hedge funds and their creditor banks have an extremely sophisticated understanding of their market risk profiles and the market and have strengthened their ability to manage through a potential crisis,” Bradley Ziff of Mercer Oliver Wyman wrote in a recent report. Those longer lock-ups have also helped, according to Ziff, as it allows firms to hold on to more money to survive the storm. While it is sad that investors are bearing the burden of the losses, lenders seem safe for now, says DJN, indicating that their risk policies are working.
