Larry Fink, founder of BlackRock, the New York-based investment management firm, asked a simple question:  “When you see aberrant success, you have to ask, “Did I take too much risk?’’

In spring 2006, Fink was “troubled by Amaranth Advisors’ huge profits the previous fall when the hurricanes hit,’’ and, because Fink was alarmed by the hedge fund’s earnings’ volatility, “(BlackRock) paid a 3 percent penalty fee to withdraw its holdings earlier than the date set in its contract,’’ writes Barbara T. Dreyfuss in Hedge Hogs: The Cowboy Traders Behind Wall Street’s Largest Hedge Fund Disaster.’

Other investors who didn’t act on their suspicions soon enough lost enormous sums. One was the San Diego County Employees Retirement Association, which saw its investment with Amaranth Advisors of $175 million swell to more than $244 million, and then, when the hedge fund collapsed in 2006, shrink to $84 million.

“At its height in September 2006 (Amaranth) managed assets of almost $10 billion and then imploded virtually overnight. Between the end of August and the end of September, more than $6 billion of its funds effectively disappeared. It was the largest hedge fund collapse ever.’’

What happened, Dreyfuss asks?

“The story of Amaranth’s demise is a cautionary tale of two reckless (natural gas futures market) traders’’ -- Brian Hunter, of Amaranth Advisors, and John Arnold -- and of executives who ignored or chose not to act upon dangerously reckless trading.

Hunter, who grew up poor in Calgary, Canada, was a math whiz and valedictorian of his high school class.  At times, he held 50 percent or more of all the contracts for the natural gas market, and, “(he) personally was managing between $2 billion and $3 billion’’ of the close to $8 billion that Amaranth was managing in January 2006, and,  “directing many billions more.’’

Arnold, who had been the now-defunct Enron’s chief financial gas trader, later set up his own hedge fund. He and Hunter were rivals who “waged a high stakes battle,’’ especially in the fall of 2006. When one would bet on gas prices to go down, the other would count on prices to rise.

At the end of their high stakes battle in August 2006, Hunter’s huge bets were disastrous, and the solvency of Amaranth Advisors was in peril.  He and his employer were in a bind: “If Hunter’s trading helped drive up the price of the spread, it also meant he was such a large part of the market that he couldn’t get out of his positions without moving prices against him.’’

According to another energy trader, Arnold possessed the discipline to not “overtrade,’’ while Hunter “seemed to believe every trade he did was a good one. He had a Master of the Universe, “I’m always right mentality.’’

His employers, especially Amaranth Advisors’ founder Nicholas Maounis, were classic enablers, Dreyfuss writes:  “Maounis was earning so much money from Hunter’s profits and the 1.5 percent management fee that “he didn’t want to be bothered with other things at the firm. He just wanted to sit on the desk.’’

Despite repeated assurances to panicky investors, like the San Diego retirement union, that Amaranth was reducing its energy holdings, the hedge fund actually increased its holdings.

“Part of the reason (Hunter’s) position got so big was that he had to have the price improve, go his way, and so he had to push on it harder,’’ explains a trader.
 
In the hellish last days of the hedge fund in September 2006, black moments persisted: Hunter and his fellow traders prayed for a natural catalyst, such as a hurricane, to drive prices back up. No storm materialized.

Panicked investors tried to pull their money out; it was too late. Over a chaotic three days, Maounis and his colleagues tried to sell the firm’s energy book to Goldman Sachs, JPMorgan Chase, Merrill Lynch and Citadel Investment Group. The serious offers required an upfront “concession fee’’ of nearly $2 billion.

But “crushing margin calls had largely wiped out Amaranth’s ready cash’’ and deals fell through because the hedge fund had “little unencumbered cash on hand.’’