Expert View: The young hedgies were jamming as Amaranth burnt

Being greedy is the easiest way to lose money. When I heard about the meltdown of the commodities hedge fund Amaranth, I thought about the significant paper profits I had in that part of my portfolio and nearly dropped the phone in my rush to sell. Amaranth is a useful reminder to us of the many unattractive aspects of the current hedge fund boom. It could also be a signal that the boom in commodities is coming to an end.

Shortly before the Amaranth debacle I hosted a dinner for young hedge fund managers, who chastised me for lampooning their tribe as "T-shirted geeks who read physics at college". Why was I always going on about how inexperienced they were, how rich they were, and how oh-so-risky their industry was?

Well, a mighty $6bn (£3.2bn) went up in smoke at Amaranth last week, thanks to convoluted bets placed by just one trader: Brian Hunter. He's 32, drives a Bentley Arnage and earnt nearly $100m last year (betting on the effects of Hurricane Katrina). He had been allowed to operate away from the main trading floor, in hedge fund wonderland Connecticut, where the young traders relaxed in Amaranth's private recording studio, jamming on the company guitars. Oh, and Brian's a major in physics.

At one point during dinner, one of the young hedgies said he believed in putting money in just five investments, thus maximising his "serious money return". When I used the "r" word, he told me he used complex risk analysis to ensure low correlation between his bets and thus low overall (concentration) risk.

What a load of baloney. All these complex strategies and risk analyses are so often based on laughably short-term data, and mask a basic over-concentration. Heard of eggs/basket?

Amaranth was meant to be running "multi-strategy" funds that "deploy capital in a broad spectrum of alternative investments" and in "a highly disciplined, risk-controlled manner". Really? While he may have been using some wonderful nuclear-physics financial model, it looks to me that Mr Hunter was really placing only one bet: that gas prices were going up. Toss a coin. One Amaranth apologist pointed out that the risk models didn't work this time "because gas markets are their most volatile since 2001". Oh wow, a whole five years of data.

A lot of people lost a lot of money last week (in the end, JPMorgan and Citadel stepped in to take over the energy investments). No wonder there were regulatory rumblings. The Connecticut regulator Ralph Lambiase warned that tighter controls might be called for. He also rightly questioned why there "are no standards to become a hedge fund adviser".

Markets too were shaken by the Amaranth saga, wondering if it were a meltdown like Long Term Capital Management, signalling a crucial inflection point in the global economy. Commodities have been the main driver of the current boom, just as tech stocks were 10 years ago. In the US, according to Hedge Fund Research, the number of commodity hedge funds has exploded in just three years from 29 to 68. The amount of money in commodity mutual funds has risen from $10bn to $56bn.

The crucial question is whether all these punters have put their money on the table just as the game is finishing. With the US economy noticeably slowing, and the additional risk that a housing slowdown will lead American consumers to pull in their belts, there is a very real possibility that we will see some softening in prices.

Personally, I remain a bull of markets in general, but the best of the commodity gains may be over for the present. This old history graduate has decided to take some money off the table using a very simple trading strategy. A profit's not a profit till it's in the bank.

Christopher.walker@tiscali.co.uk