History Of Amaranth Hedge Funds

Amaranth Advisors LLC was managing the assets of cost US$9 billion. It was an American multi-strategy hedge fund. However, it faced the biggest lost and collapsed in the year 2006. The loss was about $6 billion just in a time of one week and it was on natural gas futures. This loss was recorded as the largest ever hedge fund collapse.

Background of Amaranth Hedge Fund

Amaranth hedge fund was founded by Nicholas Maounis and it was located in Greenwich (Connecticut). On average, it was only convertible arbitrage which was the basic profit center of Amaranth. However, in the early 2000s, most of the capital was after convertible arbitrage strategies, thus it got very tough for the strategy to search for new opportunities. At that time, trader named Brian Hunter was taking care of Amaranth’s energy desk. He belonged to Canada and he was responsible for placing bet on the natural gas market in future. Nevertheless, it was not something new for Brian; he had already earned huge profits for the firm by placing ‘spread trades’ on the prices of natural gas in the year 2005. It was the time when natural gas refining and production had received severe blow due to hurricane ‘Katrina’. Amaranth placed a stake of 8:1 leverage stating that there would be increase in the prices of the March 2007 and March 2008 futures contracts compared to the price of the months April 2007 and April 2008 contracts.

However, unfortunately nothing according to the expectations of Amaranth took place. It went in this way that the spread between the March and April 07 contracts moved from $2.49 at the end of the month August in 2006 to $0.58 by the end of the month September in 2007. The fall in the price proved disaster for Amaranth hedge funds and it ultimately led to the whooping loss of $6.5 billion.

If ’spreads’ in future prices in the history are taken into view, it comes into light that bet in future prices for the months March and April contracts have never been easy to make predictions about. Various factors such as meteorological and sociopolitical events affect the spread. Moreover, there is always a major part of uncertainty in these events; thus they make the placing of this kind of large spreads a precarious matter.

Amaranth hedge fund had more than $9 billion under management and according to the reports, losses could exceed 65%. Later on it was reported that energy portfolio of Amaranth hedge fund would be transferred to some other party. It was only later on that the name of this third party was revealed and it was Citadel Investment Group and JP Morgan Chase.

Nevertheless, the loses that Amaranth faced were not as such threatening to the financial system but these lose cause a severe blow to ‘long term capital management’.

However, this incident in the history of hedge funds has increased pressure on the SEC (Securities and Exchange Commission) regarding the regulation of hedge funds. In September 2006, fund investors were informed about the suspension of the fund through a letter by the founder of the Amaranth.