Amaranth Advisors

Amaranth Advisors
Company type	Private
Industry	Hedge funds
Founded	2000 in Greenwich, CT, United States
Founder	Nicholas Maounis
Defunct	September 2007
Fate	Bankrupted
Number of locations	Houston, London, Singapore, Toronto, Greenwich (2006)
Key people	• Robert Jones (Chief Risk Officer); • Charles H. Winkler (COO);
AUM	US$9.2 billion (at its peak Aug 2006)

Last updated March 23, 2024

Amaranth Advisors LLC was an American multi-strategy hedge fund founded by Nicholas M. Maounis and headquartered in Greenwich, Connecticut.^[1] At its peak, the firm had up to $9.2 billion in assets under management before collapsing in September 2006, after losing in excess of $6 billion on natural gas futures.^[1] Amaranth Advisors collapse is one of the biggest hedge fund collapses in history and at the time (2006) largest known trading losses.^[4]

History

2000 founding

The company was founded in 2000 by Nicholas M. Maounis and based in Greenwich, Connecticut. Throughout much of its history, convertible arbitrage was the firm's primary profit vehicle. Maounis had prior to founding Amaranth Advisors worked at Paloma Partners as a portfolio manager covering debt securities.^[2] The company was named after the amaranth ^[5] an "immortal" flower that retains vivid color even after death.

2004–2005 Focus on energy trading

During 2004-2005, the firm shifted its emphasis to energy trading, led by the success of Canadian trader Brian Hunter who invested in the natural gas market. In 2005 the firm made an estimated $1 billion^[2] on rising energy prices after Hurricane Katrina curtailed production.

Natural gas trading gradually came to dominate Amaranth Advisors, which previously had been more diversified in strategy and investments. The financial success of Hunter's trades attracted increasing attention from investors, leading to massive inflows of cash. Hunter's prominence in the firm also raised calls for caution from both inside and outside Amaranth by those who worried being concentrated in a single volatile commodity introduced major risks.^[6]

2006 Energy trading losses

2005 Dec – natural gas price decline

Amaranth Advisors' troubles began in December 2005 as natural gas prices began to decline and Amaranth Advisors portfolio was structured for the price to move in the spring months of March or April.^[2]

Hunter, who was 32^[4] years old at the time, invested heavily in natural gas futures which resulted in a single week loss of $6.5 billion when prices failed to move as expected.^[7]

Sept 18th 2006 – client told of losses

On Monday September 18, 2006 Amaranth Advisors told investors that natural gas market downturn had resulted in $3 billion of losses.^[2] Further, Amaranth Advisors told investors that it was working with lenders for maintaining liquidity while also and now selling portfolio holdings "to protect our investors."^[2] Traders sold securities that could be liquidated without undermining and disrupting the energy market; these included convertible bonds and high-yield corporate debt.^[2]

Transferring energy portfolio

The fund had up to $9 billion under management and reports indicated their losses may have exceeded 65 percent of their investment. Amaranth transferred its energy portfolio to a third party consisting of Citadel LLC and JPMorgan Chase.

October 1, 2006 Fund suspends trading

On September 29, 2006, Amaranth's founder 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 liquidate its assets.

In September 2006 Amaranth Advisors investors were informed that they could not pull their money out and that redemptions would be temporarily suspended for two months.^[4] Ten years later, 90% of assets had been returned and 10% of investor assets were still frozen through December 2016.^[4]

Aftermath

After the collapse of Amaranth, Maounis founded a new hedge fund named Verition Fund Management. Several ex-Amaranth employees were hired to work at the new fund.^[8]

Clients

Amaranth Advisors' investors included pension funds, endowments, banks and brokerage firms including Institutional Fund of Hedge Funds at Morgan Stanley.^[2] Pension fund clients included San Diego County Employees Retirement Association.^[9]

Investigations

2007 CFTC investigation

On July 25, 2007, the Commodity Futures Trading Commission (CFTC) charged Amaranth and Hunter with attempting to manipulate the price of natural gas futures.^[10] Additionally, the Federal Energy Regulatory Commission charged Amaranth, Hunter and trader Matthew Donohoe with market manipulation.^[11] The CFTC and the FERC had conflicting versions of what Hunter did, and are currently competing over jurisdiction.^[12] In 2014 Hunter settled with the CFTC, paying a $750,000 fine and accepting a ban from trading all CFTC-regulated natural-gas products.^[4]

2010 Federal Energy Regulatory Commission

On January 22, 2010, a Federal Energy Regulatory Commission administrative law judge ruled that Hunter violated the Commission's Anti-Manipulation Rule. Judge Carmen Cintron found that "Hunter intentionally manipulated the settlement price of the at-issue natural gas futures contracts. His trading was specifically designed to lower the NYMEX price in order to benefit his swap positions on other exchanges." The decision is subject to review by the Commission.^[13]

Legal

In November 2007 Amaranth Advisors filed a lawsuit against JPMorgan claiming $1 billion in damages on the grounds that the bank interfered in the company's efforts to avoid collapse after natural-gas trades losses in 2006.^[14] The suit claimed that JP Morgan as Amaranth Advisors's clearing broker use their position to prevent Amaranth Advisors from derisking their exposure from its natural-gas derivatives portfolio by preventing the portfolio from being sold to first Goldman Sachs and later Citadel LLC.^[14]

In December 2012, the New York State Court of Appeals upheld an earlier dismissal of the case. During the collapse of Amaranth Advisors, Centaurus was credited as being one of the major players on the other side of their position.^{[ citation needed ]}

Criticism

During the week of September 11, 2006, one week before clients were notified of losses, Amaranth Advisors was seeking new investors and marketing their fund as being up 25 percent for the year.^[2]

The New York Times reported that Amaranth Advisors said it was a multi-strategy fund though acted "like an energy and commodities fund. When it bet big on natural gas and lost, it was apparent that it was neither multistrategy nor particularly well hedged"^[7] and also that in Amaranth Advisors' case " 'multistrategy' seems to have been a misnomer at the fund."^[2]

Nassim Nicholas Taleb proposed the company's use of "twelve risk managers" was meaningless, as the risk models failed to anticipate or ameliorate the problems that ended Amaranth Advisors.^[5]

Related Research Articles

A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management.

<span class="mw-page-title-main">Contango</span> Situation when futures prices are above the expected spot price at maturity

Contango is a situation where the futures price of a commodity is higher than the expected spot price of the contract at maturity. In a contango situation, arbitrageurs or speculators are "willing to pay more [now] for a commodity [to be received] at some point in the future than the actual expected price of the commodity [at that future point]. This may be due to people's desire to pay a premium to have the commodity in the future rather than paying the costs of storage and carry costs of buying the commodity today." On the other side of the trade, hedgers are happy to sell futures contracts and accept the higher-than-expected returns. A contango market is also known as a normal market, or carrying-cost market.

In finance, speculation is the purchase of an asset with the hope that it will become more valuable shortly. It can also refer to short sales in which the speculator hopes for a decline in value.

In finance, a futures contract is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price or delivery price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative.

A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.

The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago. NYMEX is located at One North End Avenue in Brookfield Place in the Battery Park City section of Manhattan, New York City.

Liquidity risk is a financial risk that for a certain period of time a given financial asset, security or commodity cannot be traded quickly enough in the market without impacting the market price.

John Douglas Arnold is an American philanthropist, former Enron executive, and founder of Arnold Ventures LLC, formerly the Laura and John Arnold Foundation. In 2007, Arnold became the youngest billionaire in the U.S. His firm, Centaurus Advisors, LLC, was a Houston-based hedge fund specializing in trading energy products that closed in 2012. He now focuses on philanthropy through Arnold Ventures LLC. Arnold is a board member of Breakthrough Energy Ventures and since February 2024, is a member of the board of directors of Meta.

An energy derivative is a derivative contract based on an underlying energy asset, such as natural gas, crude oil, or electricity. Energy derivatives are exotic derivatives and include exchange-traded contracts such as futures and options, and over-the-counter derivatives such as forwards, swaps and options. Major players in the energy derivative markets include major trading houses, oil companies, utilities, and financial institutions.

A commodity broker is a firm or an individual who executes orders to buy or sell commodity contracts on behalf of the clients and charges them a commission. A firm or individual who trades for his own account is called a trader. Commodity contracts include futures, options, and similar financial derivatives. Clients who trade commodity contracts are either hedgers using the derivatives markets to manage risk, or speculators who are willing to assume that risk from hedgers in hopes of a profit.

Brian Hunter is a Canadian former natural gas trader for the now closed Amaranth Advisors hedge fund. Amaranth had over $9 billion in assets but collapsed in 2006 after Hunter's gamble on natural gas futures market went bad.

MotherRock was an energy sector hedge fund, one of the biggest traders of natural gas derivatives in New York, with assets of around $430 million at one point. It closed in August 2006 due losing money on its bets that natural gas prices would fall. In 2006 the summer heat led to prices increasing and in June 2006 MotherRock Energy Fund lost 24.6 percent and then in July 25.5 percent. Leveraged positions exacerbated the situation and eventually led to a loss of around $230 million in June and July 2006.

Moore Capital Management, LP (MCM) is a global investment management firm headquartered in New York, New York. In September 2018, MCM had $10.2 billion in total assets under management.

<span class="mw-page-title-main">2010 flash crash</span> U.S. stock market crash lasting 36 minutes in May 6, 2010

The May 6, 2010, flash crash, also known as the crash of 2:45 or simply the flash crash, was a United States trillion-dollar flash crash which started at 2:32 p.m. EDT and lasted for approximately 36 minutes.

A commodity trading advisor (CTA) is US financial regulatory term for an individual or organization who is retained by a fund or individual client to provide advice and services related to trading in futures contracts, commodity options and/or swaps. They are responsible for the trading within managed futures accounts. The definition of CTA may also apply to investment advisors for hedge funds and private funds including mutual funds and exchange-traded funds in certain cases. CTAs are generally regulated by the United States federal government through registration with the Commodity Futures Trading Commission (CFTC) and membership of the National Futures Association (NFA).

A managed futures account (MFA) or managed futures fund (MFF) is a type of alternative investment in the US in which trading in the futures markets is managed by another person or entity, rather than the fund's owner. Managed futures accounts include, but are not limited to, commodity pools. These funds are operated by commodity trading advisors (CTAs) or commodity pool operators (CPOs), who are generally regulated in the United States by the Commodity Futures Trading Commission and the National Futures Association. As of June 2016, the assets under management held by managed futures accounts totaled $340 billion.

Spoofing is a disruptive algorithmic trading activity employed by traders to outpace other market participants and to manipulate markets. Spoofers feign interest in trading futures, stocks, and other products in financial markets creating an illusion of the demand and supply of the traded asset. In an order driven market, spoofers post a relatively large number of limit orders on one side of the limit order book to make other market participants believe that there is pressure to sell or to buy the asset.

William O. Perkins III is an American hedge fund manager, film producer, author, and high stakes poker player. Perkins manages Skylar Capital, an energy trading hedge fund that had approximately $500 million in assets under management as of 2023.

<span class="mw-page-title-main">Securities market participants (United States)</span>

Securities market participants in the United States include corporations and governments issuing securities, persons and corporations buying and selling a security, the broker-dealers and exchanges which facilitate such trading, banks which safe keep assets, and regulators who monitor the markets' activities. Investors buy and sell through broker-dealers and have their assets retained by either their executing broker-dealer, a custodian bank or a prime broker. These transactions take place in the environment of equity and equity options exchanges, regulated by the U.S. Securities and Exchange Commission (SEC), or derivative exchanges, regulated by the Commodity Futures Trading Commission (CFTC). For transactions involving stocks and bonds, transfer agents assure that the ownership in each transaction is properly assigned to and held on behalf of each investor.

References

1 2 3 4 Barr, Alistair (25 September 2006). "Amaranth energy trades leveraged five times in May". San Francisco, United States: MarketWatch. Dow Jones & Company Inc. Retrieved 6 January 2020.
1 2 3 4 5 6 7 8 9 10 11 Morgenson, Gretchen; Anderson, Jenny (19 September 2006). "A Hedge Fund's Loss Rattles Nerves" . New York Times. No. Business Day. New York, N.Y., United States. The New York Times Company. p. C1. Retrieved 8 January 2020.
↑ "WEDDINGS; Stella Simakova, Robert Jones" . New York Times. United States. The New York Times Company. 7 April 2002. p. 12. Retrieved 8 January 2020.
1 2 3 4 5 Copeland, Rob (1 January 2016). "Ten Years After Blowup, Amaranth Investors Waiting to Get Money Back" . The Wall Street Journal. Eastern Edition. No. Hedge Funds. United States: Wall Street Journal. Dow Jones & Company Inc. ISSN 0099-9660 . Retrieved 6 January 2020.
1 2 Nassim Nicholas Taleb (2007). The Black Swan: The Impact of the Highly Improbable. Random House.
↑ Barbara T. Dreyfus (2013). Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster. NY: Random House, ISBN 9781400068395
1 2 Anderson, Jenny (29 September 2006). "Betting on the Weather and Taking an Ice-Cold Bath" . New York Times. No. Insider. New York, N.Y., United States. The New York Times Company. p. C8. Retrieved 23 April 2010.
↑ Strasburg, Jenny (2010-06-25). "Former Amaranth Chief Returns to the Stage". Wall Street Journal. ISSN 0099-9660 . Retrieved 2023-06-24.
↑ "San Diego Pension Fund Sues Amaranth (Mar 20, 2007)" . New York Times. No. DealBook. New York, N.Y., United States. The New York Times Company. 30 March 2007. Retrieved 8 January 2020.
↑ "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". CFTC. 2007-07-25.
↑ "Commission Takes Preliminary Action in Two Major Market Manipulation Cases" (PDF). Federal Energy Regulatory Commission. 2007-07-26. Archived from the original (PDF) on 2008-09-10.
↑ The Man Who Lost $6B
↑ Opalesque (26 January 2010). "FERC Rules that Amaranth's Brian Hunter Practiced Manipulation".
1 2 Bray, Chad (14 November 2007). "Amaranth sues JPMorgan; says it derailed efforts to save fund". United States: MarketWatch. Dow Jones & Company Inc. Retrieved 6 January 2020.