Amaranth Advisors(1)
Transcript of Amaranth Advisors(1)
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Amaranth Advisors: Burning Six
Billion in Thirty Days
By
Nadine MohannaRani Zahr
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Amaranth Advisors
Multi-strategy hedge fund
Founded in 2000 with $600 million under management
Grew to over $9.2 billion by mid 2006
Annualized return of 15%
September collapse: Lost more than 50% of assets under management totaling $6.6
billion
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Brian Hunter
Young natural gas speculator
Former head of Deutsche Banks natural gas desk. Fired after losing $50 million one month loss
Made $75 million in 2005
Named co-head of the energy trading desk atAmaranth.
Took Amaranth from a multi-strategy fund to a heavyconcentration on natural gas feature market (30%
through 2005) Controlled more than 60% of their assets on natural
gas in 2006
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Natural Gas Steady continuous production
Seasonal Demand
Long-short spread
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Betting the spread
$5
$6
$7
$8
$9
$10
$11
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$13
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Betting the Spread
Spot Price Winter Long
Spot Price Summer Short
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Long-Short Gain 2
Spot Price Winter Long
Spot Price Summer Short
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$5
$6
$7
$8
$9
$10
$11
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Long-Short Gain 3
Spot Price Winter Long
Spot Price Summer Short
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$2
$3
$4
$5
$6
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$8
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$10
$11
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Long-Short Gain 4
Spot Price Winter Long
Spot Price Summer Short
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Amaranth Disaster
$8
$9
$9
$10
$10
$11
$11
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Amaranth Disaster
Spot Price Winter Long
Spot Price Summer Short
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Calculation:Calculate the spread loss (Today's close - Previous days close)
This is the spread loss per 1 million BTU's
Multiply the spread loss by 10,000Each contract is for 10,000 mmBTU's
Assume the spread Bet Assumption was that a 1 cent change inspread would create a loss or gain of $10 depending on thedirection of movement of the Natural Gas Widow Maker spread
Calculated September 14 then made projections for theremainder months
($13,500 loss per contract)*(X Contracts) = $560,000,000
X = 41,400 contracts assuming each 1 cent change affected the futuresprice
Notes:
September 8th has 6 days of losses associated with it
Naked Shorts Hypothesis: We believe Amaranth was speculatingon naked shorts and had to find a major player that has accessto many stocks therefore the liquidation of the energy
department to JPM, Citadel, & ML
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Early warning signs
Blackstone group pulled out
Deutsche bank firing Hunter
subsequent law suits
lost 70% of Deutsche natural gas profit
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Conclusion
Lack of diversification
High leveraging
Outlier events Liquidity risk
Naked Shorts cause of liquidation to JPM,
Citadel, and ML
Spread position different than arbitrage
position
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