The Commodity Futures Trading Commission and the Federal Energy Regulatory Commission have filed formal legal complaints against Amaranth Advisors, the largest failed hedge fund in history, for allegedly profiting from market manipulations.

Senator Levin, a Democrat of Michigan, is seeking increased regulation of commodities futures markets to prevent such alleged manipulations.

The government is saying investors who lost $6 billion actually profited too much. Does that make any sense?

Last year, Amaranth Advisors had more than $9 billion under management. But in September 2006, it lost more than $6 billion on futures contracts for natural gas, and it liquidated its remaining assets.

Individuals and institutions invested in Amaranth for the same reasons they invest in other hedge funds: insights into markets, adequate risk management, and opportunities to make money. Amaranth failed because it lacked these abilities.

Amaranth’s alleged wrongdoing, according to federal regulatory agencies, was not that it lost investors’ money but that it profited too much by way of market manipulation.

Yet if Amaranth or any other fund had truly profited too much or had successfully manipulated markets, Amaranth would still be in business. Indeed, if the simplest reading of the allegations were true, investors would be lining up to invest in Amaranth today; they are not.

Without specifying fines or penalties, the CFTC filed charges against Amaranth and two of its traders for allegedly manipulating natural gas prices in 2006. The FERC announced that it would seek more than $200 million in penalties and $59 million in disgorgement of profits from at least three trading days in the same case. The disgorged “profits” would represent less than 1% of the Amaranth losses.

A CFTC official reportedly stated that a yearlong probe did not demonstrate that Amaranth succeeded in manipulating prices, but the investigation disclosed both intent and actions to manipulate prices.

All of this is of little comfort to investors. Nearly a year after the collapse of Amaranth, federal investigators conclude that it intended to manipulate markets but cannot conclude that it succeeded. The investors know all too well that it failed.

The story of Amaranth is eerily similar to that of Barings, Long-Term Capital Management, and Enron, firms that failed as a result of hubris and a lack of risk management. The larger problems were not market manipulations, whether successful or merely intended.

Hedge funds succeed by trading a wide array of assets with interrelated risk and outcome characteristics. The downside risk of the entire portfolio of assets — and the portfolios of individual traders—is usually tightly guarded to prevent extraordinary losses. When a trader believes a particular investment cannot lose and when risk management is not in place to limit losses, firms fail.

Not to be outdone, last month t h e Senate Permanent Subcommittee on Investigations under Mr. Levin issued a report on Amaranth. The subcommittee alleged market manipulation in natural gas futures markets and the failure of current regulation to stop such manipulation.

The committee brushes aside problems of failure and chronicles Amaranth’s extraordinary activity in natural gas futures markets in 2006. The report alleges that Amaranth’s activities resulted in higher natural gas prices to consumers last winter.

Yet according to the Department of Energy, delivered residential prices were lower than the year before. Hypothetically, even if Amaranth were to have succeeded in driving up natural gas futures prices during the summer of 2006, how could a firm with such market power have immediately failed?

The subcommittee report recommends expanding regulation by CFTC to all futures markets to monitor possible manipulations. But Amaranth failed under the current regulatory system. If a different firm could profitably manipulate a market such as natural gas futures where Amaranth failed, little stops other firms from imitating it and bidding down profits. Competition, rather than regulation, is the surest way to discipline anticompetitive behavior in a market. In the competitive financial services market, a poor performer like Amaranth did not survive.

Increased market regulation alone would not likely have changed the salient result: Amaranth lost billions. Amaranth collapsed not for want of more regulation but for want of better risk management. Obviously, something went very wrong at Amaranth last year, but market manipulation is a curious place to look.

A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott – Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.