Amaranth Advisors

Amaranth Advisors LLC was an American multistrategy hedge fund managing US$9 billion in assets. In September 2006, it collapsed after losing roughly US$6 billion in a single week on natural gas futures. The failure was the largest hedge fund collapse in history.Fact|date=October 2007

History

The company was founded by Nicholas Maounis and based in Greenwich, Connecticut. "Amaranth" means "unfading" in Greek. The fund was actually named after an exotic Pool Table (http://www.billiard-antiques.com/tables/amaranth.html) , that visitors were shown when touring the office.

Throughout much of the firm's history, convertible arbitrage was the firm's primary profit center. As more and more capital began flowing into the convertible arbitrage strategy during the early 2000s, trading opportunities became more difficult to find.

Energy Trading

By 2004-2005, the firm had shifted much of its capital to energy trading. Amaranth’s energy desk was run by a Canadian trader named Brian Hunter who placed "spread trades" in the natural gas market. Hunter had made enormous profits for the company by placing bullish bets on natural gas prices in 2005, the year Hurricane Katrina had severely impacted natural gas and oil production and refining capacity. Hoping for a repeat performance, Amaranth wagered with 8:1 leverage that the price of the March '07 and March '08 futures contracts would increase relative to the price of the April '07 and April '08 contracts (i.e., they were "long" the March contracts and "short" the April contracts).

Unfortunately for Amaranth, they did not. The spread between the March and April 2007 contracts, for example, went from US$2.49 at the end of August 2006 to US$0.58 by the end of September 2006. The price decline was catastrophic for Amaranth, resulting in a loss of US$6.5 billion. [ cite news | title = Betting on the Weather and Taking an Ice-Cold Bath |url = http://www.nytimes.com/2006/09/29/business/29insider.html |publisher = New York Times |date=2006-09-29 ] . Historically, the spread in future prices for the March and April contracts have not been easily predictable. The spread is dependent on meteorological and sociopolitical events whose uncertainty makes the placing of such large bets a precarious matter.

Downfall

The fund had over US$9 billion under management and reports indicate "losses may exceed 65 percent [ cite news | title = Goldman, Morgan hit by Amaranth losses |url = http://money.cnn.com/2006/09/20/news/companies/goldman.reut/index.htm?postversion=2006092012|publisher = CNNMoney |date=2006-09-20 ] ." On September 20, 2006, Reuters reported that Amaranth would transfer its energy portfolio to a third party, eventually revealed to be Citadel Investment Group and JPMorgan Chase [ cite news | title = Amaranth says to transfer energy portfolio |url = http://today.reuters.com/news/articleinvesting.aspx?type=mergersNews&storyID=2006-09-20T174910Z_01_N20404893_RTRIDST_0_FUNDS-AMARANTH-FUNDS-UPDATE-1.XML |publisher = Reuters |date=2006-09-20 ] . The losses were not as threatening to the financial system as were the losses of Long-Term Capital Management, but it has led to increased pressure on the SEC to regulate hedge funds. On September 29, 2006 the founder of Amaranth sent a letter to fund investors notifying them of the fund's suspension, and on October 1, 2006, Amaranth hired the Fortress Investment Group to help liquidate its assets.

Aftermath

In 2007, Hunter founded a new hedge fund, Solengo Capital Advisors. The firm received attention in April 2007 for suing Dealbreaker.com, a website which had published Solengo's prospectus.

On July 25th 2007, the Commodity Futures Trading Commission (CFTC) charged Amaranth and head energy trader Brian Hunter with Attempted Manipulation of the Price of Natural Gas Futures including making false statements to the New York Mercantile Exchange (NYMEX) [ cite news | title = U.S. Commodity Futures Trading Commission Charges Hedge Fund Amaranth and its Former Head Energy Trader, Brian Hunter, with Attempted Manipulation of the Price of Natural Gas Futures |url = http://www.cftc.gov/newsroom/enforcementpressreleases/2007/pr5359-07.html |publisher = CFTC |date=2007-07-25 ] . The Federal Energy Regulatory Commission has also charged Amaranth and traders Brian Hunter and Matthew Donohoe with market manipulation [ cite news | title = Commission Takes Preliminary Action in Two Major Market Manipulation Cases|url = http://www.ferc.gov/news/news-releases/2007/2007-3/07-26-07.pdf |publisher = Federal Energy Regulatory Commission|date=2007-07-26 ] . The CFTC and the FERC have different, conflicting, versions of what Brian Hunter did, and are currently fighting over jurisdiction [http://money.cnn.com/2008/07/07/news/companies/The_man_who_lost_6B_mclean.fortune/index.htm] .

Amaranth filed a lawsuit against JP Morgan claiming US$ 1 billion in damages, on the grounds that the bank interfered in the company's efforts to strike a better deal with Goldman Sachs and Citadel. [ cite news | title = Amaranth Sues JPMorgan for Disrupting Transactions (Update2) : Bloomberg |url = http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axS.FCBhb4uw |publisher = Bloomberg |date=2007-11-14 ] .

References

External links

* [http://www.amaranthllc.com Amaranth webpage]
* [http://www.thestreet.com/_googlen/newsanalysis/wallstreet/10309899.html?cm_ven=GOOGLEN&cm_cat=FREE&cm_ite=NA "IPO Blank-Check Bounce"] , September 19, 2006, thestreet.com
* [http://www.washingtonpost.com/wp-dyn/content/article/2006/09/19/AR2006091900996.html Washington Post article]
* [http://www.thefirstpost.co.uk/index.php?menuID=2&subID=931&WT.srch=1 "Hedge Fund, a Gamble Too Far"] , "First Post"
* [http://www.economist.com/opinion/displaystory.cfm?story_id=7950137 "Flare-up"] , "The Economist", September 21, 2006.
* [http://www.thestreet.com/_googlen/newsanalysis/wallstreet/10309655.html "Amaranth's Risky Business"] , TheStreet.com, September 18, 2006
* [http://select.nytimes.com/gst/abstract.html?res=F7061FFA3B550C7A8DDDA00894DE404482 "A Hedge Fund's Loss Rattles Nerves"] , New York Times, September 19, 2006
* [http://www.edhec-risk.com/site_edhecrisk/public/features/RISKArticle.2006-10-02.0711 "The Amaranth Case : early lessons from the debacle"] , Hillary Till, EDHEC Risk & Asset Management Research Centre, October 2, 2006.
* [http://www.riskmetrics.com/research_monthly.html?article_id=84 "The Lights Are On - October 2006"] , Chris Finger, RiskMetrics Group
* [http://www.salon.com/tech/htww/2007/07/06/amaranth/index.html "The Long Arms of Enron Reach Beyond The Grave"] , Salon, July 6, 2007
* [http://hsgac.senate.gov/_files/062507Report.pdf "Excessive Speculation in the Natural Gas Market"] , United States Senate Permanent Subcommittee on Investigations, June 25, 2007
* [http://www.cftc.gov/opa/enf07/opa5359-07.htm Commodities Futures Trading Commission charges Amaranth and head energy trader Brian Hunter with Attempted Manipulation of the Price of Natural Gas Futures"] , CFTC, July 25, 2007