Behind Amaranth's Sudden Swoon

The hedge fund may have shed more than one-third its value after natural gas bets went sour. Could other funds be in the same boat?

From Platts Oilgram News

Holding long positions in the natural gas futures market nearly killed Greenwich (Conn.)-based hedge fund Amaranth Advisors, several sources told Platts after the fund announced on Sept. 18 it was liquidating its gas book after suffering hefty losses last week.

"The Amaranth multi-strategy funds experienced significant losses in their energy-related investments following a dramatic move in natural gas prices," said Amaranth founder and Managing Partner Nick Maounis. "In an effort to preserve investor capital, we have taken a number of steps, including aggressively reducing our natural gas exposure," Maounis said. "As of this writing, we anticipate our year-to-date losses might be in excess of 35% as we near completion of the disposition of our natural gas exposure."

Peter Fusaro, principal of the Energy Hedge Fund Center, which researches funds for investors, said it was not clear if the 35% loss was from the full fund, which is worth more than $7 billion, or the energy fund, which is worth about $1 billion. "They were long on gas and made a lot of money after Katrina," Fusaro said.


  Tim Evans, energy analyst for Citigroup Global Markets, said he reads Maounis' statement as saying the 35% loss was in Amaranth's total equity and not simply in the gas segment of its portfolio. "Apparently the natural gas strategy moved so far against them as to offset gains they may have had in other areas to produce an overall 35% decline," he said.

Evans said a larger concern arises when looking at recent Commodity Futures Trading Commission reports. "The reportable noncommercial category was still net long last week," he said. "So there certainly are other funds that still have an exposure to natural gas prices. If you look at total open interest, there are a lot of positions on. So the paper market is at record proportions and everybody's not on the right side of it."

In the past couple of weeks, New York Mercantile Exchange front-month gas futures prices have dropped significantly, to as low as $4.90 per million British thermal units, but winter-month prices have slid even further, tightening the spread that hedge funds such as Amaranth bet on, according to Jay Levine, principal of Portland (Me.)-based gas-trading adviser enerjay. The announcement by Amaranth, one of the top 100 hedge funds in the U.S., could force an already weak market even lower.


  "If any hedge fund or large speculator liquidates or, more importantly, is forced to due to trades/positions going the wrong way, that's going to create at least a temporary run on the bank and an 'unnatural' state of affairs," Levine said. "Never mind that natural gas was heading down already, this just greases the wheels for further declines, although we may well have seen the worst of it by now. But the fact is any speculative liquidation, rumored or not, is often a case of exacerbating an already bad situation."

On Sept. 18, Amaranth was rumored to be a takeover target of rival Centaurus, the Houston-based hedge fund founded by former Enron gas trader John Arnold. Centaurus officials could not be reached for comment.

One market source in Houston said Amaranth is believed to have "hundreds of thousands of contracts on," and how those contracts would fit or offset those held by another hedge fund would be critical in any takeover deal.

In late May, market observers said they believed Amaranth lost $350 million to $500 million as a result of a gas calendar swap position going bad. But in early June, Amaranth said that despite some gas trading losses, its trading unit as a whole was still up almost $1.5 billion for the year. In August, a hedge fund operated by former NYMEX President Robert "Bo" Collins folded after suffering enormous losses in the gas options market.

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