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Amaranth Advisors - Energy (esp. Natural Gas)

2006-09

Count of distinct funds: 1
Capital base: $9 billion
Loss: $6.4 billion

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stories: wikipedia.org, wsj.com, usatoday.com, economist.com, nytimes.com, thestreet.com, salon.com, senate.gov

Within days Amaranth Advisors lost $4.5 billion in wealth, cutting its $9 billion in assets in half. The eventual losses were in excess of $6 billion. Amaranth's losing bets were on natural gas. Brian Hunter, head of Amaranth's energy trading desk, had been placing large bets on natural gas for quite some time making big returns amidst the booming natural gas prices after Hurricanes Katrina and Rita. According to a WSJ article:

Last December [2005], amid a cold snap, gas soared to a record $15.378 a million British thermal units on the New York Mercantile Exchange, or Nymex. This month, prices fell below $5 in the absence of major hurricanes and with forecasters talking about another warm winter. Yesterday, gas for October [2006] delivery settled at $4.942 a million BTUs on Nymex, off four cents.

Backed by borrowed money and a deep-pocketed fund, Mr. Hunter took on more exposure to certain futures contracts than do some big investment banks employing more than 100 energy traders, say several traders and ex-colleagues. He sometimes held open positions to buy or sell tens of billions of dollars of commodities.

He was up for the year roughly $2 billion by April, scoring a return of 11% to 13% that month alone, say investors in the Amaranth fund. Then he had a loss of nearly $1 billion in May when prices of gas for delivery far in the future suddenly collapsed, investors add. He won back the $1 billion over the summer, only to lose that and much more ...

Although Mr. Hunter had fared well, many traders say he was acquiring positions that were too large to get out of if the market turned -- including a bullish bet on winter gas. Amaranth won't detail its positions or his trading strategy, so it is unclear exactly what hurt Mr. Hunter so badly last week. In recent weeks, people familiar with the transactions say, Amaranth bought MotherRock's gas positions in an attempt to cancel some of its trades and reduce its market exposure.

Late September 2006 Amaranth sent out a letter to investors saying they were shutting down. USA Today reported:

The founder of a hedge fund that lost about $6 billion because of bad energy trades said in a letter to investors this week that the fund is preparing to shut down, according to a published report.

Nicholas Maounis of Amaranth Advisors wrote that the fund is suspending all redemptions for Sept. 30 and Oct. 31 so it could "generate liquidity for investors in an orderly fashion, with the goal of maximizing the proceeds of asset dispositions," ...

Regarding Amaranth's leverage, the Economist notes:

"I've never seen a hedge fund so highly leveraged in energy," says Peter Fusaro of the Energy Hedge Fund Centre. He reckons that the fund held about 10% of the global market in natural-gas futures. "Somebody was not monitoring this correctly."

Amaranth's closure marks the largest hedge fund implosion since LTCM in 1998. Note that Amaranth's website is still up and running.

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Important: This fund is on our list of hedge funds that have "imploded" (see also ailing lenders). However, please note that "imploded" is a somewhat subjective. The "imploded" list contains hedge funds (or other unregulated and autonomous speculative investment funds) which have gone through some sort of permanent adverse change. This is a somewhat subjective call, and does not necessarily mean total shutdown or bankruptcy. It can also mean steep and rapid mark-downs in net asset value; or abnormal "bail-out" by corporate parents or peers in order to avoid write-downs and provide liquidity. The funds are of any type and sector.