But why? amaranth was over exposed to a nat gas calendar spread. They simply failed to account for the possibility of unexpected widening of month-to-month basis.  And it was a failure of risk management. 
 

From what I understand, this is completely orthogonal to that. This is retail Reddit traders shooting at a fund. 
 

Where is the similarity? 

 

I can't think of any legal reason. People bought stock/options based on information publicly available on a forum. 

Thankfully for the US market, there are not short disclosure rules like Europe above 0.5% of a company so most of the short bets in rthe US are not public, unless structured using options and disclosed in a 13F.

Melvin given its strong performance according to the article has its money locked up for three years and is taking in another $1bn in February of assets. I'd bet on them to bounce back from this. They've also made some great calls in recent times e.g. shorting CD Projket before Cyberpunk was a disaster. 

 
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LTCM was also a situation of unexpected widening of basis with immense amounts of leverage (in that case, in the UST market). I fail to see how Melvin is similar. 

 

If we are just naming hedge funds which disappeared, ok. But I can’t really see any meaningful similarity between Amaranth, LTCM and Melvin.

That’s like referring to Enron while Lehman or Bear was happening because it was another big bankruptcy you remember. Each one failed for their own reasons. 

 

LTCM had bets on that in the long run would be a guaranteed profit, but the dislocation in the short term was massive, and the market took advantage by pressing them harder and harder until they had to liquidate. Was it a different product? Yes. Were the margin calls because of leverage instead of borrow? Yes. Was it market micro-structure and mark to market losses that killed them? 100%. Melvin is lucky enough to have some form of backstop here, but that is the parallel I was drawing-- not just that they blew up. 

If anything Amaranth is the odd one out-- they actually lost all the money on speculation, where as Melvin likely wouldn't even need the money if they didn't need to cover. 

 

I don't think that's true. LTCM's failure was due to excessive leverage across a number of trades that all had the same fundamental risks (long carry, short gamma/convexity, short liquidity). Almost every strategy they had, with the exception of their dual-listed arbitrage trades, was not available to retail traders. Too much leverage killed LTCM, not retail. Amaranth was much the same; Brian Hunter (the PM who blew up the fund) had a fantastic 2005 being long natural gas spreads (Katrina took most production offline, driving prices up) but he doubled down in 2006 and the fund imploded. Again, nothing really retail-driven about Amaranth, just excessive leverage and really poor risk management. 

It wasn't a lack of short availability that killed these funds. If anything, LTCM went long the illiquid stuff and shorted the liquid options to capture the spread (think long off-the-run, short on-the-run).

Just remember: it's not a lie if you believe it.
 

I admittedly know less about Amaranth than LTCM, and all of my knowledge about LTCM is from reading interviews and listening to my old boss talk about what he was seeing as the head of a derivs desk back then. That being said, the parallel I am drawing is not in WHO was moving the markets, only that there were other market forces (outside of economic forces) that caused these funds to see significant mark to market loses. Per above, I agree Amaranth doesn't really fit into this bucket well, and they were just poor bets with even poorer risk man.

That being said, y'all likely have many more years in this industry than I do and I'd trust your opinion more than mine here haha. 

 

Given the leverage on the AUM at Citadel/P72, I'd simply view this as them potentially protecting their own P&Ls. If Melvin's portfolio went haywire then that is a lot of exposure to unwind on both sides of the book with WSB potentially trading against you and Citadel/P72 may have many of the same positions in their books. P72 is also an existing investor into Melvin per press articles I read so is further exposed to this thing going nuts. I doubt the prime brokers will pull the plug on Melvin given Citadel/P72 behind it now. 

This is simply a reminder that leverage can kill you, no matter how good the underlying analysis is. 

 

I'm not sure Citadel is "worried". I bet P72 is - prior articles said that Melvin has been the bulk of their returns in the past few years. I think this is Citadel just smelling blood in the water and pouncing. For a small amount of money (relative to Citadel), they can get a revenue share in a high-performing business undergoing temporary turmoil. Revenue share not disclosed but probably significant. And of course, Melvin needs it otherwise the business will collapse as the primes make margin calls.

 

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