Another casualty of a rough year.

CNBC via MSN Video: Hedge fund blows $5 billion in one week.

NY Times: A Hedge Fund’s Loss Rattles Nerves.

CNBC via MSN Video: The man who lost $5 billion in one week.

CNBC via MSN Video: Mistakes at Amaranth.

This is the third hedge fund that I can recall that blew up this year due to bad commodity bets, the others being Ospraie Point Fund and MotherRock LP. In this case it was apparently a result of a bad bet on natural gas, which spiked up during the heat wave in the summer then turned around and plunged as the rest of the summer turned mild and no serious hurricanes threatened Gulf production. MotherRock also blew up due to natural gas, I believe they had been leaning bearish when the price shot up. In this case, the trader was playing spreads on natural gas futures, which turned on him. This has shades of the Long Term Capital Management situation, where they were also heavily concentrated, leveraged, and playing spreads between various fixed income instruments based on historical tendencies, which also turned on them.

I haven't recommended buying futures and options here for the simple reason that the volatility can be very intense, even for traders with years of experience, and when things go wrong money can disappear very, very quickly. Amaranth, according to the reports, had been up 22% for the year in August, and is now down something like 35%, which is a 57% turnaround in one month, with the worst damage suffered last week.

P.S. Brian Hunter - no relation.