Prime brokers have come under fire for helping Amaranth amass a highly concentrated exposure to a single risk and for not preventing the fund's huge losses last week, but they have defended their role.
Fund of hedge fund managers said prime brokers, which finance hedge funds' positions, had shirked their responsibility. Isaac Souede, chief executive of Permal, one of the largest fund of hedge fund managers with $25bn of assets and which did not invest in Amaranth, said: "Prime brokers need to look more carefully at the liquidity of positions. Amaranth was invested heavily in illiquid markets." A rival fund of hedge funds manager said: "One of the lessons of the collapse of Long Term Capital Management in 1998 was prime brokers need to have a handle on the overall level of risk in the hedge fund they are dealing with. How can you judge how much financing you should extend to a fund in one strategy if you do not know the overall level of risk in the business?" Amaranth used as many as nine different prime brokers, including most of the largest investment banks. Its portfolios had 15,000 positions, according to an investment consultant â an unusually high figure. This made it difficult for each of its prime brokers to ascertain it's overall exposures to any particular risk. Prime brokers defended their part. One said: "Our margin calls have been met and I understand that is the same for all the banks. We make sure we have adequate collateral to cover our loans and can sell them if needed. This is the policy all banks follow and this is an example of the system working well." However, he said it may be impossible to obtain full value from selling assets held as collateral if a client had cornered the market and all prime brokers were trying to sell the same assets at the same time. Amaranth was forced to sell €1bn of its European loan portfolio to cover its margin calls, forcing the price of particular bonds to trade at a heavy discount. Investors said they were worried regulators would clamp down on hedge funds. One said: "Regulators have traditionally relied on the prime brokerage community to monitor the hedge funds they are dealing with as one of the quid pro quos of arm's length regulation."
