Alternative Investments: CAIA Level I, 3rd Edition

CHAPTER 29 Cases in Tail Events

This chapter examines cases involving unusual events, such as hedge fund collapses. The purposes of this review are to distill the events into underlying central causes, and to develop insights to better prepare for future events. This chapter lays a foundation for Chapters 30 and Chapter 31 on risk management and due diligence.

29.1 Problems Driven by Market Losses

This section begins with three examples of the impact of market forces in generating losses. Losses should be expected as a natural consequence of seeking profits with strategies involving risk. However, best practices require that prospective and current investors be provided with sufficient information to have a reasonable basis on which to understand the total potential risk. This section is not about problems driven solely by market losses. When a fund collapses during a period of market stress, the collapse is often attributable to a combination of external pressures from markets and internal failures due to conditions that predate the market stress. For example, a poorly constructed building that fails is most likely to fail during a stress such as a storm. In most cases, the true cause of the failure is the internal flaws in the structure, since storms are to be expected. Similarly, fund failures during market stress should be analyzed to see the internal mistakes that led to the weaknesses.

29.1.1 Amaranth Advisors, LLC

Amaranth Advisors, LLC, was a self-described multistrategy ...