Amaranth Advisors Essay

733 WordsMay 7, 20103 Pages
Amaranth Advisors LLC was created in 2000 as a multi-strategy hedge fund with approximately $600 million in capital. It sought to employ a diverse group of arbitrage trading strategies particularly featuring convertible bonds, mergers and utilities. In 2002, Amaranth added energy commodity trading to its slate of strategies with JP Morgan Chase clearing Amaranth’s commodity trades. A multi-strategy fund runs several different strategies in-house that contribute to the total performance of the fund. A single-strategy fund concentrates the whole portfolio on one strategy. Amaranth was long natural gas futures. They enjoyed huge profits from natural gas futures and option trades in 2005 and early 2006. Brian Hunter used borrowed money…show more content…
During a follow up notification on August 9 NYMEX further notified Amaranth that they should not reduce September positions simply by shifting those positions to the October contract. Amaranth complied with NYMEX’s directions and subsequently reduced its September and October positions. However, at the same time Amaranth increased its positions in September and October in ICE contracts and as a results increased their overall positions in natural gas. The events that followed in late August and September led to huge losses with Amaranth losing significant value. The losses were created due to overconfidence, lack of transparency, and lack of risk management. Amaranth enjoyed huge profits and thought prices would just keep rising. There was no communication between Hunter and the management team. Also, investors had no knowledge that the majority of the portfolio was invested in natural gas positions. Leverage played a huge role in the losses. A hedge fund will typically borrow money, with certain funds borrowing sums many times greater than the initial investment. If a hedge fund has borrowed $9 for every $1 received from investors, a loss of only 10% of the value of the investments of the hedge fund will wipe out 100% of the value of the investor's stake in the fund, once the creditors have called in their loans. Risk management at Amaranth failed in August

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