Monday, September 18, 2006

Blowing up is hard to do

Shades of Long Term Capital Management! $5B gone in one month thanks to leverage. Please ignore that the trader responsible was a 32 year old with physics and applied math degrees ;-)

Big coverage in today's WSJ: here and here. Turns out that Hunter was a huge risk taker with a troubled history at Deutsche Bank, who left and made Amaranth $1B last year. From the first WSJ article:

...A graduate professor of his was a leader in the emerging field of financial modeling and derivatives.

Mr. Hunter joined TransCanada Corp., a Calgary pipeline company that was becoming a player in the growing business of trading energy, rather than simply transporting it. The company would help customers like gas producers lock in prices for some of the fuel it shipped for them.

Mr. Hunter, then 24, came armed with fresh theories about options pricing and impressed his bosses with his ability to spot price anomalies. They gave him increasing amounts of money to trade with after early successes. Among them: He convinced them that options in Canadian gas were underpriced as a pipeline from Canada to Chicago was set to open and create a greater market for it.

"He helped us prove that mathematically...and it paid off hugely," says Shondell Sabad, a former colleague there who now trades for a Calgary bank."


Amaranth Says Funds Lost 50% This Month on Gas Trades

By Katherine Burton and Matthew Leising
Sept. 18 (Bloomberg) -- Amaranth Advisors LLC, a hedge-fund manager with about $9.5 billion in assets, told investors its two main funds fell an estimated 50 percent this month because of a plunge in natural-gas prices.

``We are in discussions with our prime brokers and other counterparties and are working to protect our investors while meeting the obligations of our creditors,'' Nick Maounis, the 43-year old founder of the Greenwich, Connecticut-based firm, said in a letter to investors obtained by Bloomberg News. The funds, which had gained 26 percent through August, are down at least 35 percent for the year, or about $4.6 billion.

Amaranth, which made so-called spread trades that try to profit from price discrepancies among futures contracts, is at least the second hedge fund to be hurt by this year's tumble in natural gas. Last month, MotherRock LP, a $400 million fund run by former New York Mercantile Exchange President Robert ``Bo'' Collins, went bust after natural-gas futures fell 68 percent from
their Dec. 13 peak.

``The speed with which leveraged funds can evaporate is mind boggling,'' said Mark Williams, a professor of finance and economics at Boston University specializing in energy markets. Earlier this month, Amaranth, named for an imaginary flower that never fades, bought a portfolio of gas trades from ABN Amro Holding NV that the Dutch bank took over from MotherRock. ABN Amro had lent MotherRock $60 million, and is still owed money by the fund.

Margin Calls Met

Amaranth is ``near the end of our disposition of natural-gas exposure,'' the letter said, adding the firm had met all margin calls, or demands from brokers for additional collateral to cover loans. Steve Bruce, an Amaranth spokesman, declined to comment.

Gas prices fell 12 percent last week as the U.S. Energy Department reported stockpiles climbed 12 percent above last year's levels. Demand for the power-plant fuel usually declines after summer air conditioner use slows and before heating needs pick up.

Investors said the funds, Amaranth International and Amaranth Partners, wagered that the difference between futures prices for natural gas in the summer and winter months would continue to get larger, a trend that's held since at least the beginning of 2004. Futures are contracts to buy or sell a commodity on a specific date at a preset price.

Spreads Narrow

Instead, the spread collapsed. The difference in price between the 2007 March and April contracts for natural gas peaked in July at $2.60. That shrunk to $1.15 by the end of last week. The spread between the two was about 75 cents today on the New York Mercantile Exchange. Spreads between March and April contracts in 2008, 2009 and later have also collapsed.

Investors in Amaranth included fund-of-funds managed by Wall Street banks including Morgan Stanley, Credit Suisse Group and Deutsche Bank AG, according to U.S. Securities and Exchange Commission filings. As of June 30, Morgan Stanley's $2.3 billion Institutional Fund of Hedge Funds had $126 million, or 5.48 percent of the fund, invested in Amaranth.

The trader behind Amaranth's natural-gas bets is Calgary- based Brian Hunter, who is co-head of the firm's global energy and commodities business. As of June 30, energy trades accounted for about half of its funds' capital and generated about 75 percent of their profits.

New Fund

Before joining Amaranth, Hunter, 32, was responsible for Deutsche Bank AG's natural-gas trading desk from 2001 until 2004. Before joining Deutsche Bank he was an options trader and quantitative analysts for Transcanada Gas Services. Hunter graduated from the University of Alberta with a bachelor of science with honors in physics and a master of science in applied mathematics.

Maounis spun his firm off from Greenwich-based Paloma Partners in 2000. A convertible-bond specialist who worked at Paloma for 10 years, Maounis started Amaranth with 27 investment professionals and about $450 million in assets. The firm's initial strategies included trading convertible bonds and the stocks of merging companies.

Amaranth had recently been marketing an energy and commodities fund, slated to open in December, which it said had a capacity of $5 billion, according to a marketing document send to potential investors. The fund was to be managed by Hunter and Jeff Baird, co-head of Amaranth's Global energy and commodities business.


Anonymous said...

I wonder what kind of bonus you get after losing $5 billion?

I bet his bonus this year is still bigger than mine.

Darren Mallory said...


Nice blog very informative. Hope you don't mind but i have bookmarked it.

Financial Blog

PS said...

Allegedly, last year his total cut was $100 mln... no wonder he couldn't care less...

Anonymous said...

It seems like it should be illegal to take home $100mm one year and then lose $5 billion for your company - therefore, with an average annual bonus of $50mm - it seems like he should be required to GIVE IT ALL BACK - so of course - the incentive has been created (for the aggressive trader) to trade bigger and riskier bets, ...because any loss big or small just averages in a Zero (ie into his own personal bonus, i.e. NOT NEGAIVE $100mm) - whereas any GAIN averages in BIG BIG Bucks... doesn't take a Physics or Math Degree to figure that out - he's happy to gamble with everyone else's money and reap the rewards... when the losses come - no sweat - he's got his millions in the bank which can't be touched... hmmmm - where are the Risk managers, Asset/Liability Managers ? The Auditors ? the heads that are supposed to roll ???

Martin said...

"Amaranth, named for an imaginary flower that never fades..."

Amaranth is also the genus name of common ragweed, a noxious allergen.

Anonymous said...

losing billions is unfortunate, but really not unexpected with hedge funds. hedge fund investors are supposed to be able to withstand huge losses - they're not for people who can't stomach huge losses - if you can't afford to loose a few million, you should really buy an index fund or a mutual fund (or, ideally, increase the contribution to your 401/403 pension plan). your pension plan can likely afford to loose 6 or 7 figures, as well as a big investment bank - the flip side of this are those 20% returns. widows and orphans? unless they're worth millions, they should stay away, obviously, from hedge funds or speculative enterprises.

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