Editor's letter

Energy hedge funds grabbed the headlines once again last month with Amaranth announcing spectacular losses, the bulk of them occurring on the natural gas markets in September. As well as demonstrating how volatile and unpredictable energy markets can be, the losses put the issue of risk management, in particular capital-at-risk, well and truly in the spot light again. Amaranth asserted, understandably, that the stress testing carried out by its risk team indicated that the fund had allocated an appropriate amount of capital to the natural gas portfolio.

The losses bring home the fact that standard risk calculations, such as value-at-risk, are indicators that are subject to change, especially if things happen outside the well-measured area of price risk. Amaranth's losses were made far worse, the firm said, not because of the surprise downward movement of gas prices, but because of unusual behaviour in the marketplace, which led to a sudden and unexpected lack of liquidity.

Understanding that risk occurs outside the trading room is essential, but working out what exactly should be measured, and going about that is a huge challenge - and just one of the many challenges faced by risk managers. Our risk management survey on page 20 reveals what risk managers consider the greatest challenges, and what they would like to see the discipline tackling next. Conducted over the last three months, the survey makes fascinating reading. Risk managers reveal which methodologies they most commonly use, how risk management is viewed in their companies, and what they consider to be the greatest current-day risks.

Finally, this issue includes a Special Report on Asia, looking at the pertinent trends and opportunities in this increasingly key region.