The Oil Drum | Natural Gas - A Tale of Two Markets

169 comments on Natural Gas - A Tale of Two Markets

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Jack on September 27, 2006 - 6:28am

The Amaranath trader was 30-something, but you are basically right. The compensation structure of hedge funds encourages massive risk taking. I expect it will be reevaluated.

These guys roll the dice (with other people's money)and if they win they get rich. If they lose, they may need to find a new job (although after his $50mn payment last year, that may not be so urgent for the Amaranth guy).

Actually, technically, in finance the term risk applies equally to upside and downside - it is essentially volitility (or deviation from expected result). Your claim is that you can limit exposure to downside risk, while maintaining exposure to upside risk. I won't argue that it is not possible, but it is not an investment strategy for everyone.

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MicroHydro on September 27, 2006 - 6:39am

Definitely NOT for everyone. I advise most people to buy and hold real stuff without leverage or debt using dollar cost averaging. Whether bars of silver or a tank of LPG in the backyard or a farmette by the creek - real stuff owned outright is good. Commodity trading requires attention to technical matters, fundamentals, and sangfroid - not for the timid or adrenalin junkies either. It should also only be done with money one can afford to lose. However, a good technician can pick entry and exit points where the downside risk is less than the upside.

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Jack on September 27, 2006 - 7:46am

Agreed. Good point about being able to afford to lose the money. That doesn't apply only to commodities but to any risk bearing investment.

Any money that you are going to need to spend should be in a fairly safe investment class such as bonds or cash equiv.

It's OK to take risks with a portion of your equity, or if you are young and have time to earn it back.

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169 comments on Natural Gas - A Tale of Two Markets

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