It appears risk management went out the window at Amaranth, the giant hedge fund that lost $4 billion on a bad bet on natural gas prices.

The six-year-old hedge fund's big gamble that natural gas prices would keep rising paid off for much of the summer. At one point, the Connecticut-based fund was up 20% for the year -- boosting its assets under management at one point to a little over $9 billion.

But in a span of a week, all those paper gains, and more, went up in smoke. Last week's sudden fall in the price of natural gas meant that the hedge fund ended up losing nearly four times as much as it had gained.

Now, Amaranth is telling investors that it's 35% in the red for the year. The asset base has shrunk to about $5 billion. And that's before investors have had to chance to pull money out of the fund -- something that could happen in the coming months.

But what made Amaranth's gamble so disastrous is that it borrowed heavily from its brokers to bet on the spread between natural gas contracts. By one estimate, for every dollar of its own money that Amaranth put down, it used $5 in so-called leverage.

That ratio can produce a big payday if a trader makes the right bet. But when a bet goes awry, all that leverage only magnifies the losses.

Gambling with borrowed money may not have been the only risky thing Amaranth was doing. There's speculation on Wall Street that the hedge fund, led by Nick Mauonis, may have been trying to corner the market in long contracts on natural gas futures.

Michael Greenberger, a professor at the University of Maryland Law School and former director of the division of trading and markets at the Commodity Futures Trading Commission, says he's heard that Amaranth made many of its trades on the over-the-counter market -- away from the New York Mercantile Exchange, where trades could have been monitored by regulators. Greenberger says the natural gas market has become a pure speculators' market subject to potential manipulation.

He says he wouldn't be surprised if the Amaranth debacle spurs a closer look into the high-risk, speculative trading going in the natural gas market.

"I don't know if Amaranth is going to be the last straw," says Greenberger. "But Amaranth is not going to be the last problem."

Indeed, there's speculation that Amaranth's big move into long contracts on natural gas hastened the demise of MotherRock, a $450 million hedge fund that went bust in July after being overly short on natural gas prices.

Traders say Amaranth's big bet on gas prices going up may have squeezed MotherRock, which was betting on a sharp decline.

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