Hedge fund blowups fascinate me. You may have heard about the latest: Amaranth Advisors and Brian Hunter. It’s the biggest blowup since Long Term Capital Management in 1998. The markets barely blinked this time. The difference is that LTCM traded in bonds, and with bonds, banks give you much greater leverage – ie they lend you more money on margin. LTCM had 5 billion in equity, borrowed up to $125 billion, and leveraged up via derivatives to $1.25 trillion. LTCM borrowed about 20x-25x their equity. Hunter borrowed about 5x his equity. Assuming Amaranth let him run 1/3 of their portfolio, or $3 billion, Hunter borrowed about $12 billion off that $3 billion equity, for a combined $15 billion bet. With 5x leverage, a 20% decline wipes you out. Leverage kills if you get it wrong.