I think isolating trading strategies would be helpful, actually. It increases the risk of any given fund, but it also allows more transparency for the LPs. If an LP knows that a fund is focused on energy trading alone, it can reduce its exposure to that fund and make sure that its other funds aren't following the same strategy. If funds are saying that they are doing a number of different things, it becomes harder for LPs to adjust the portfolio accordingly.

Of course, hedge funds may not want to isolate only on one strategy for fear that LPs will limit their investment to a lower amount.

I noticed (from the NYT article) that a lot of the money in Amaranth was from funds of funds. So it's not yet clear to me how many LPs really got hurt bad -- presumably investing through fund of funds bought them some diversification.

Vic, I hope no one misunderstands me -- I don't think that risky trading or risky vehicles for risky trading are bad. Derivatives, sector funds, name your brand of risk -- these are all strategies that have a certain level of risk. My interest was in why the media seems to suggest that the loss incurred here must signal a greater problem. If I bet $1000 on "00" on a roulette wheel and lose it all, I don't think that's a cause to alert the media (or the DOJ).

Futures is a zero sum game. The sum of all the winners and losers is equal to zero. It is worse yet since the winners and losers have transactional costs in order to execute the trades. Therefore, it is less than a zero sum game. Statistically over time given all things equal a traders ability to maek money is less than zero. There are consistent winners who have better information, more dollars at risk or have better technology. The marketplace catches up and finds what they are doing. Thus, the consistnet profits are arbed away. Amaranth's trading idea of buying winter and selling summer wasn't a bad idea. In Feb of 2003 the March/April spread moved three plus dollars in one day (each contract would have moved $30,000). Amaranth's trading error was the size of the bet. If it were 10,000 or even 20,000 contracts instead of the 300,000 over the counter contracts they would probably made some good money or anyways they could have escaped without serious harm. Also putting all their money in one basket was stupid. The could have put some money into heating oil, power and crude if they believed their trading strategy was proper. In a nutshell their problem was the size of the trade and the total lack of diversification.

All that has been said about them making money is bogus. They were paper gains on an illiquid position due to its size. They never could have converted the position from paper to cash without the marketplace stepping out in front of them. What a scam.

OK, Christine, I won't alert the DOJ about your putting 1000 on "00". I won't even rat you out to Paul. As long as you leave our fantasy football leagues alone.