Amaranth Case

869 Words Jul 22nd, 2012 4 Pages
Amaranth Advisors: Burning Six Billion In Thirty Days

Introduction:
In September, 2006, a large-sized hedge fund named Amaranth Advisors LLC lost $4.942 billion in natural gas futures trading and was forced to close their hedge fund. Although Amaranth Advisors was not exclusively an energy trading fund, the energy portion of their portfolio had slowly grown to represent 80% of the performance attribution of the fund. Their collapse was not entirely unforeseeable or unavoidable. Amaranth had amassed very large positions on both the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) in natural gas futures, swaps, and options. The trades consisted mainly of buying and selling natural gas futures contracts with a
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Amaranth’s success in 2005 and early 2006: It was due to its energy (primarily natural gas) trades. Amaranth’s main energy trader was Brian Hunter, a 32-year-old Canadian and the former head of Deutsche Bank’s natural gas trading desk. In September 2005, Amaranth made more than $1 billion when Hurricanes Katrina and Rita hit the U.S Gulf Coast. These Hurricanes disrupted the supply of natural gas, and gas prices soared to record highs, just as Hunter had predicted. The rise in natural gas prices drove Amaranth’s 15% return for 2005, as the rest of the portfolio performed poorly.
Why Natural Gas market was unique relative to other commodities: It is because of gaseous form of natural gas made transportation difficult. Although natural gas could be liquefied and exported overseas, this process was both expensive and potentially hazardous.

Strategy used by the natural gas traders: One common strategy is to bet on the price of futures for the winter contract months. Many factors can influence the price of winter contracts, for e.g., a strong hurricane season that disrupts supplies just before winter. Traders who believe either a cold winter or a strong hurricane season will occur will take a long position in winter future contracts.
The Collapse: In September 2006, things took a turn for the worse for Amaranth. Hunter’s

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