Widow Maker

There are two meanings of the phrase widow maker. The first meaning is financial and refers to the investment that is likely to turn out to be a greater loss rather than profit. Or the other financial meaning describes the situation in which a trade becomes a loss for almost every part of it. The second meaning is more colloquial, it portrays something that probably ruins someone’s life extremely quickly and leads to death. The collocation originated in medicine and forestry.

Widow Maker related risks

In the financial sector the collocation refers to the kind of investment that is exposed to the risk or brings giant losses of money. In forestry the term can be rephrased into fool killer and refers to the case when a detached or broken limb or tree top may fall and lead to death of a worker. In medicine field the phrase describes a blocked artery, which leads to a heart attack and eventually to death.

High risks play an essential role in the deals that are described as widow maker. By accepting that risk a trader also accepts a potential high earning as well as potential large losses. Usually, investors use the risk/reward ratio, which is a measure of return and helps to estimate all risks they want to take in order to give a particular amount of returns.

However, sometimes this kind of deals appears to be reasonable, rational enough and not risky at all. In such deals they refute the established opinion and defies precedents.

Widow Maker examples

Japanese government bonds. The most famous example of a widow maker is JGBs (Japanese government bonds). Even though the Japanese central bank gradually decreases the interest rate, the popularity of these bonds isn’t eager to fall. On the contrary, bonds whose yield fell minus and that turned their holders into a widow attracts many investors.

Amaranth. Another notorious case happened in 2006, when the hedge fund Amaranth decided to apply a financial strategy called leverage and made a trade on natural gas futures in order to achieve the same great returns they got a year ago from quite the same trade. However, it didn’t go well. As soon as the natural gas market dramatically fell, it turned out to be a giant loss (more than 5 billion dollars) for Amaranth.

The current situation in the natural gas market may seem unstable as well. Usually the most successful period in the natural gas market is defined by the spread of futures contracts. During winter there are more futures contracts, the reason is that gas is a necessary tool for heating. Thus, the high spread means a great demand for natural gas, the low spread, in turn, means a low need for natural gas. Generally by the end of the first quarter (March) companies cease to provide natural gas and beginning from the second quarter (April) the companies start to move natural gas back into storage. Investors are highly interested in the futures contracts that are spread within these two months, thus they’re trying to make use of these futures contracts. As this is an unstable time for natural gas, this kind of trading is called a widow maker.