...as Amaranth blows up.
It appears to the Recapitulator that Amaranth decided to corner the market and got subsequently (in video gamer parlance, of which the Recapitulator is a member) "pwned".
Its difficult to tell the positions initially, but was is known is that they were "very" long on Nat. gas spreads (betting that spreads of spot and future Nat. gas prices would continue to widen). Nat. Gas fell by 11% or so last week alone, and with (at least) 5-1 leverage, the fund basically blew up.
Ramifications have ALREADY effected the credit and convertible markets, but global financial markets are so deep and liquid that this debacle has already been well-contained...although some investment banks (Morgan among them) may feel some pain as creditors to the fund.
There will be the usual calls for more regulation and "trasparency" (as if Hedge Funds did not have enough problems protecting their positions from their prime brokers who front run them every chance they get) amongst an extremely valuable asset class...to no avail as cool heads realize that secrecy is paramount if Alpha is to ever exist in investment land.
There are the usual lessons to be learned regarding hubris...the trader, Brian Hunter, is the latest physics/math wunderkind to learn that linear trends are not necessarily predictive of future outcomes (a slight understatement, yes). The Recapitulator has informed you about the commodity cycle being old...when the public starts investing, the exit door should beckon.
There will also be extensive discussions concerning the agency problems associated with someone like Mr. Hunter who is basically incented to take massive risk (and hope his risk management division continues to play the "hot hand") for the hopes of outsized profits. This is very much a lesson in risk management.