The Collapse of Amaranth Advisors

One of the Largest Hedge Fund Collapses in recent history

2006 -2007

Amaranth Advisors

The American multi-strategy  Hedge Fund was founded by  Nicholas M. Maouni in the year 2000.

Amaranth Advisors' investors included pension funds, endowments, banks and brokerage firms.  The firm had about $9.2 billion in assets under management.

In 2004, The fund decides to shift to Energy Trading and entrusts Brian to lead the Investments.

Source - Bloomberg U.S. Global Investors

Now if you are wondering why Energy Trading -

Stroke of Good Fortune

In 2005, Brian Hunter maintained a bullish position on the price of Natural Gas.

To his luck, Hurricane Katrina impacted the production of natural gas and thus caused prices to rise in August 2005. This resulted in Amaranth making $1 billion USD on those positions.

Hunter's Trading Strategy 

Was based on Natural Gas Trading prices increasing in the winter months and falling in the summer months.

Thus, Amaranth’s Futures went long on winter month positions and short on summer month positions.

Money Storms?

During the second half of 2005, the weather effects of La Nina was evident and people were bracing themselves for another hurricane in 2006 as well.

Brian saw this as an opportunity to make money once again as he predicted that another hurricane would drive the prices up.

 Lessons Learnt

By March 2006, the industry had recovered from the previous year’s destruction and started increasing their reserves by almost 40% to account for the probability of a Hurricane disrupting production.

 Good News Incoming?

By May 2006 the price of Natural Gas started falling, but this did not bother Hunter as he anticipated this price movement.

Amaranth at this point was already down 1$ Billion.  Sticking to his strategy, Hunter bought more of these positions trying to reduce his average purchase price.   All of this in the hope that if he won, he won more.

 Grim Reality

Amarnath held 75% of the gas future contracts for the winter season of 2006.

By Sept 2006, the price of natural gas slumped to an all-time low of 4.9$ in 4 years from 6.25$ in May.  As the prices began to decrease, Amaranth net assets were down by $3.5 Billion. They had lost so much money that they were in dire need to liquidate.

 It is not bad for everyone!

Amaranth notifies their investors of the suspension of the fund by Oct 1st 2006.

JP Morgan Chase and Citadel LLC (Hedge Fund) strike a deal to purchase 50% of Amaranth’s natural gas assets at the all time low prices.

 The Aftermath 

In the following months, JP Morgan Chase and Citadel LLC made a profit of 1$ billion each.

Brian Hunter was accused of violating anti-manipulation rules by the Federal Energy Regulatory Commission which could never be proved.  He appealed the fine of 30$ Million levied on him and the court ruled in his favour.  Ten years later by 2016, 90% of the investor’s money had been returned.

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