Hedge Fund Articles


The Amaranth Disaster

Amaranth is a name synonymous with disaster. Branded as the biggest hedge fund collapse in history, Amaranth lost $6 billion of investor’s money in one week alone.

So what was the culprit behind the fund’s demise? Surprisingly, it all boiled down to one bad bet. The funds we have seen collapsing lately due to the subprime mortgage crisis and the credit crunch have all had a sort of “storm” of factors that have contributed to their demise. But with Amaranth, that wasn’t really the case, making the monumental loss even harder to believe.

By 2005, Amaranth had placed most of its capital into energy trades, mainly the natural gas market. The firm’s head trader, Brian Hunter, was garnering enormous profits for the hedge fund by placing huge bets on natural gas prices. Hoping to continue his streak of good luck, Hunter used 8:1 leverage to place more bets on the prices of gas using both long and short techniques. When prices went in the complete opposite direction of what Hunter had predicted, losses were catastrophic. With prices on natural gas being so volatile and dependent upon a number of different social, political, and economic events, making such heavy bets using massive amounts of leverage is not usually a smart move. 

Amaranth suddenly had to inform investors that their $9 billion portfolio had experienced losses exceeding 65%. The fund suspended redemptions in the fall of 2006, then hired a liquidator only days later.

To make matters worse, the Commodity Futures Trading Commission (CFTC) charged Amaranth along with Brian Hunter with Attempted Manipulation of the Price of Natural Gas Futures, including making false statements to the New York Mercantile Exchange (NYMEX). These charges were in addition to the market manipulation charges brought on by the Federal Energy Regulatory Commission.

Apparently wanting to partake in the lawsuit frenzy, Amaranth filed a suit against JPMorgan Chase in late 2007, alleging that they had used their position as Amaranth’s clearing broker to prevent the hedge fund from transferring the remaining risk in its natural-gas derivatives portfolio to Goldman Sachs and Citadel Investment Group LLC. Amaranth is seeking $1 billion in damages.

The fund alleges that JPMorgan refused to execute a vital trade on Sept. 18, 2006, that would have transferred the fund’s natural-gas derivatives positions to Goldman Sachs in exchange for a concession payment of $1.85 billion from the fund. Amaranth accuses JPMorgan of wanting to take control of the portfolio themselves in hopes of gaining substantial profits.

“As a result, Goldman Sachs walked away from the trade,” the claim stated. “The effects on the fund were devastating.”

JPMorgan responded with their theory. “Amaranth’s lawsuit is an effort to rewrite history, and to blame JPMorgan for losses that were the result of Amaranth’s disastrous trading,” said Kristin Lemkau, a JPMorgan spokeswoman, in a statement. “JPMorgan’s conduct was entirely appropriate, and consistent with its rights and obligations as Amaranth’s future commissions merchant. The firm intends to defend this baseless lawsuit with the utmost vigor.”

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