THE dust has not yet settled. There may be horrors still to come. But Amaranth is thus far shaping up as the perfect hedge fund blow-up.

Not for the burnt investors, of course, who have lost 65 cents on the dollar, or $6 billion, and counting.

But it may prove to have a beneficent effect in the future on the rest of the hedge fund industry and the wider financial system.

The bloodbath has had just the right intensity — big and scary enough to teach a valuable lesson to other hedge fund investors, prime brokers and regulators, but not so far-reaching as to create systemic dangers.

Amaranth has met every margin call and closed out or sold enough of its positions to prevent its creditors calling time on the fund.

The tremors from Connecticut will have every investment bank polishing up their due diligence on hedge fund clients, improving margin call collections and ensuring they have sufficient collateral to cover liabilities.

Meanwhile, hedge fund investors and their advisers will do more homework on the funds they back and rightly demand more information and transparency from them.

In particular, they will be sceptical about the claimed diversification benefits of “multi-strategy” hedge funds. Energy trading was just one of six strategies at Amaranth, but still badly holed the overall fund.

And they will be more alert to danger signs. Extraordinary volatility in past performance and the relocation of a star trader away from the watchful eye of head office were two red flags, Standard & Poor’s said yesterday.

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