2. INTRODUCTION
Amaranth Advisors LLC was an American multi-strategy hedge
fund founded by Nicholas Maounis and headquartered in
Greenwich, Connecticut. During its peak, the firm had up to $9
billion in assets under management before collapsing in
September 2006, after losing in excess of $5
billion on natural gas futures.The firm's failure
was one of the largest known trading losses and
hedge fund collapses in history.
3. FOUNDATION
❏ Founded by- NICHOLAS MAOUNIS
❏ Amaranth began in 2006 with $7.4 billion in assets.
❏ It built a solid reputation within the hedge fund community.
❏ The fund was able to attract money from Large Pension Funds.
4. THE TRADING❏ The funds big name Trader- BRIAN HUNTER helped te fund climbed to the
peak of success.
❏ Brian Hunter was an energy trader that specialised in natural gas trades.
❏ Amaranth’s claim to faim was associated with energy trading.
❏ Strategy-”Open positions to buy or sell tens of billions of commodities.”
5. INVESTMENT PRINCIPLES
PRINCIPLE #1
Past market behavior does not equal future market behavior.
PRINCIPLE #2
Adverse changes in liquidity can more than offset the perceived merits of an
investment.
PRINCIPLE #3
Scenario analysis and risk planning are needed to prepare an investor for an
event that has not happened previously.
PRINCIPLE #4
Risk management can take place at the human resource level of an
organization.
8. CRITICAL LIQUIDATION CYCLE
❏ By the end of Friday, 9/15/06, the fund had lost morning than $2-
billion month-to-date.
❏ It was at this point that the critical liquidation cycle was initiated.
❏ This cycle has been modeled in De Souza and Smirnov (2004) as
being a kind of barrier-put option.
❏ By Wednesday, September 20th, the fund locked in a further $3.2
billion in losses, including the $2.15 billion concessionary payment to
two financial institutions who, in turn, took on Amaranth’s
remaining energy positions.
9. ❏ As discussed in Till (2007b), Amaranth Advisors, LLC had employed a
natural gas spread strategy
❏ On June 25th, 2007, the U.S. Senate Permanent Subcommittee on
Investigations (PSI) released a report on the Amaranth debacle,
entitled, “Excessive Speculation in the Natural Gas Market.”
❏ Amaranth’s core energy trading strategies were constructed through
calendar spreads, which were executed on both the New York
Mercantile Exchange (NYMEX) and the Intercontinental Exchange
(ICE).
❏ His spread trading strategy involved taking long positionsin winter
contract deliveries and short positions in non-winter contract
deliveries.
Trading strategies
10. What went wrong?
❏ Aggressive Trading-A series of bad bets by Brian Hunter
❏ Hurricane season
❏ Calendar Spread Strategy
❏ Two ways to look at the tragedy
1.As a single investment decision that would either succeed or fail
on its own merits
2. As one component in a broad trading strategy based on
exploiting market anomalies.
11. SOLUTIONS
Amaranth Advisors could have avoided all this grief
❏ By performing basic scenario planning
❏ What-if scenario analysis
❏ Need for Human Resource
12. The aftermath
❏ The Commodity Futures Trading Commission (CFTC) and Federal
Energy Regulatory Commission (FERC) charge Amaranth with
❏ Amaranth sues JP Morgan for interfering with its efforts to secure a
better settlement deal with other parties during the collapse of its
portfolio.
❏ The FERC judge rules that trader Brian Hunter violated FERC’ s Anti-
Manipulation Rule.
❏ The FERC judge fines Hunter $30 million. Hunter appeals, and shortly
thereafter, because the US Court of Appeals for the District of
Columbia Circuit agrees that FERC did not have jurisdiction over the
futures markets where Hunter was trading, he wins.
13. ❏ Banks such as Morgan Stanley and Goldman Sachs, pension funds;
the San Diego County Employees Retirement Association, Man
Group; all are said to have had stakes in the fund.
❏ The London Stock Exchange-listed Goldman Sachs Dynamic
Opportunities Fund owned 5% of the funds’ assets, and reported a
potential loss of up to $15 million from their $500 million fund.
❏ An analysis showed that a -24% loss was considered quite normal for
the fund and if investors did have position-level transparency, they
would have noted that the fund’s over-the-counter natural gas
positions were massive in comparison to the prevailing open interest
in the exchanged-traded futures market
Who lost?
14. Lessons to be learnt
❏ Increased care by financial institutions in participating in the
commodity derivatives markets.
❏ One should still be cautious about concluding that the alternative
investment industry has the wherewithal to absorb major hedge fund
failures.
❏ An obvious regulatory gap in covering over-the-counter energy
derivatives trading.
❏ One of the consequences of the massive liquidity that had severely
mispriced all manner of risky assets.
15.
16. CONCLUSION
❏ Whatever the exact rationale , the strategy was highly
aggressive and it failed
❏ As a single investment decision , hunters strategy failed to
have a sound basis
❏ Hunter fell into the trap of status quo bias
❏ Markets did not reel in shock from amaranths demise
❏ There is no doubt that hedge funds entering the energy
market will make massive returns