A Hedge Fund’s Loss Rattles Nerves
By GRETCHEN MORGENSON and JENNY ANDERSON
Published: September 19, 2006 in NY Times
Enormous losses at one of the nation’s largest hedge funds resurrected worries yesterday that major bets by these secretive, unregulated investment partnerships could create widespread financial disruptions.
The hedge fund, Amaranth Advisors, based in Greenwich, Conn., made an estimated $1 billion on rising energy prices last year. Yesterday, the fund told its investors that it had lost more than $3 billion in the recent downturn in natural gas and that it was working with its lenders and selling its holdings “to protect our investors.”
Price of Natural Gas
Amaranth’s investors include pension funds, endowments and large financial firms like banks, insurance companies and brokerage firms. The Institutional Fund of Hedge Funds at Morgan Stanley was an investor in Amaranth; as of June 30, it had a stake valued at $124 million. The turnabout in the fortunes of the $9.25 billion fund reflects the decline in energy prices recently; natural gas prices fell 12 percent just last week.
Yet also last week, Charles H. Winkler, chief operating officer at Amaranth, had met with prospective investors at the Four Seasons restaurant in Manhattan and reported that his fund was up 25 percent for the year, according to a meeting participant. Days later, rumors began circulating that Amaranth was losing money in one of its natural gas bets, a trade that had generated enormous profits for the fund in recent years.
Late in the week, the fund’s traders began dumping large stakes in convertible bonds and high-yield corporate debt, securities that could be sold without disrupting the market.
Mr. Winkler did not return a phone call seeking comment.
The scale of Amaranth’s losses — and how quickly they appear to have mounted — was the talk of Wall Street yesterday, as was speculation on how much the bet was leveraged, or made on borrowed money. Still, there were no signs of ripples on the financial markets as a result.
Amaranth’s woes are largely the result of a decline in natural gas prices that began in December, well before the spring months of March or April, when they typically fall off. Amaranth’s biggest stake was a combination bet on the spread between natural gas futures prices for March 2007 and those for April 2007. Amaranth had often bet that the spread on that so-called shoulder month — when natural gas inventories stop being drawn down and begin to rise — would increase.
But instead the spread collapsed. In the last six weeks, for example, the spread between the two futures contracts ranged from $2.50 at the end of July to around 75 cents yesterday.
Traders briefed on Amaranth’s problems, including one person who examined the fund’s books yesterday, said that the losses might be considerably larger than the firm estimated. Over the weekend, according to one person briefed on the situation, Goldman Sachs examined the fund’s positions.
Amaranth is not the first hedge fund to experience problems in energy markets. MotherRock Energy Fund, a $400 million portfolio, shut down last month after losing money on its bets that natural gas prices would fall. Summer heat sent prices soaring and the fund lost 24.6 percent in June and 25.5 percent in July, according to one investor.
The natural gas market is exceptionally volatile, making it an ideal playground for hedge funds that thrive on wide price movements in securities. Natural gas prices are subject to more severe swings than oil, in part because gas cannot be stored easily.
Arthur Gelber, the founder of Gelber & Associates, an energy advisory and consulting firm based in Houston, said that as a result, the natural gas market was about five times more volatile than the stock market.
The greatest demand for natural gas occurs during very hot or very cold weather, Mr. Gelber said. During mild periods, like early autumn, an oversupply of natural gas can cause a significant decline in price. Hedge funds have added to this natural volatility, he said.
Amaranth was founded six years ago by Nicholas M. Maounis, a former portfolio manager who had specialized in debt securities at Paloma Partners, another large hedge fund. Amaranth employs a so-called multistrategy approach to investing that allows nimble portfolio managers to seize opportunities in whatever markets seem to be most promising at the time.
Now that Amaranth has owned up to huge losses in a single sector, “multistrategy’’ seems to have been a misnomer at the fund.
In his letter to investors, Mr. Maounis, 43, wrote: “In an effort to preserve investor capital, we have taken a number of steps, including aggressively reducing our natural gas exposure.”
Amaranth has additional offices in Houston, London, Singapore and Toronto and employs 115 traders, portfolio managers and analysts, according to its Web site. The firm deploys capital “in a highly disciplined, risk-controlled manner,” it noted.
Its energy portfolio has been overseen by Brian Hunter, a trader who joined the fund from Deutsche Bank in 2004 and conducts trades from his hometown of Calgary, Alberta. Mr. Hunter made enough money at Amaranth in 2005, an estimated $75 million to $100 million, to place him among the 30 most highly paid traders in Trader Monthly magazine.
Rocaton Investment Advisers, a consulting firm in Norwalk, Conn., whose clients have $235 billion in assets, recommended Amaranth to its customers. Yesterday, Robin Pellish, Rocaton’s chief executive, declined to comment on her firm’s relationship with the fund or to identify clients that it had advised to invest in it.
“We’re well aware of the situation with Amaranth and we are monitoring developments,” Ms. Pellish said.
Citing Amaranth’s woes, Stewart R. Massey, founding partner of Massey, Quick & Company, an investment advisory firm in Morristown, N.J., said, “I think it will cause investors to go back and take another hard look at the multistrategy funds they are invested in and do a deeper round of due diligence.” Mr. Massey said he did not have any exposure to Amaranth.
The problems at Aramanth will help fuel a debate over whether more oversight is needed over hedge funds, which have become increasingly powerful forces in the markets. There are nearly 9,000 hedge funds, managing more than $1.2 trillion in assets. In 1990, hedge funds managed just $38.9 billion, according to Hedge Fund Research.
Last week, in a speech in Hong Kong, the president of the Federal Reserve Bank of New York, Timothy F. Geithner, said greater attention needed to be paid to the margin requirements and risk controls in dealings with hedge funds.
The growth in hedge funds, Mr. Geithner noted, will eventually “force us to consider how to adapt the design and scope of the supervisory framework to achieve the protection against systemic risk that is so important to economic growth and stability.’’
In 2004, Amaranth protested a new rule proposed by the Securities and Exchange Commission that would have required certain hedge funds to register with federal regulators and undergo greater scrutiny.
“Contrary to media stereotypes of hedge fund managers, Amaranth does not ‘operate in the shadows’ outside of regulatory scrutiny,” its general counsel wrote. “We do not understand why the commission is proceeding so urgently with this rulemaking when the public policy problem to be addressed remains poorly defined and the proposed regulatory response is so burdensome.”
The rule, which was issued in late 2004, was struck down in June by the United States Court of Appeals for the District of Columbia. Last month, the S.E.C. declined to appeal the ruling.
Published: September 19, 2006 in NY Times
Enormous losses at one of the nation’s largest hedge funds resurrected worries yesterday that major bets by these secretive, unregulated investment partnerships could create widespread financial disruptions.
The hedge fund, Amaranth Advisors, based in Greenwich, Conn., made an estimated $1 billion on rising energy prices last year. Yesterday, the fund told its investors that it had lost more than $3 billion in the recent downturn in natural gas and that it was working with its lenders and selling its holdings “to protect our investors.”
Price of Natural Gas
Amaranth’s investors include pension funds, endowments and large financial firms like banks, insurance companies and brokerage firms. The Institutional Fund of Hedge Funds at Morgan Stanley was an investor in Amaranth; as of June 30, it had a stake valued at $124 million. The turnabout in the fortunes of the $9.25 billion fund reflects the decline in energy prices recently; natural gas prices fell 12 percent just last week.
Yet also last week, Charles H. Winkler, chief operating officer at Amaranth, had met with prospective investors at the Four Seasons restaurant in Manhattan and reported that his fund was up 25 percent for the year, according to a meeting participant. Days later, rumors began circulating that Amaranth was losing money in one of its natural gas bets, a trade that had generated enormous profits for the fund in recent years.
Late in the week, the fund’s traders began dumping large stakes in convertible bonds and high-yield corporate debt, securities that could be sold without disrupting the market.
Mr. Winkler did not return a phone call seeking comment.
The scale of Amaranth’s losses — and how quickly they appear to have mounted — was the talk of Wall Street yesterday, as was speculation on how much the bet was leveraged, or made on borrowed money. Still, there were no signs of ripples on the financial markets as a result.
Amaranth’s woes are largely the result of a decline in natural gas prices that began in December, well before the spring months of March or April, when they typically fall off. Amaranth’s biggest stake was a combination bet on the spread between natural gas futures prices for March 2007 and those for April 2007. Amaranth had often bet that the spread on that so-called shoulder month — when natural gas inventories stop being drawn down and begin to rise — would increase.
But instead the spread collapsed. In the last six weeks, for example, the spread between the two futures contracts ranged from $2.50 at the end of July to around 75 cents yesterday.
Traders briefed on Amaranth’s problems, including one person who examined the fund’s books yesterday, said that the losses might be considerably larger than the firm estimated. Over the weekend, according to one person briefed on the situation, Goldman Sachs examined the fund’s positions.
Amaranth is not the first hedge fund to experience problems in energy markets. MotherRock Energy Fund, a $400 million portfolio, shut down last month after losing money on its bets that natural gas prices would fall. Summer heat sent prices soaring and the fund lost 24.6 percent in June and 25.5 percent in July, according to one investor.
The natural gas market is exceptionally volatile, making it an ideal playground for hedge funds that thrive on wide price movements in securities. Natural gas prices are subject to more severe swings than oil, in part because gas cannot be stored easily.
Arthur Gelber, the founder of Gelber & Associates, an energy advisory and consulting firm based in Houston, said that as a result, the natural gas market was about five times more volatile than the stock market.
The greatest demand for natural gas occurs during very hot or very cold weather, Mr. Gelber said. During mild periods, like early autumn, an oversupply of natural gas can cause a significant decline in price. Hedge funds have added to this natural volatility, he said.
Amaranth was founded six years ago by Nicholas M. Maounis, a former portfolio manager who had specialized in debt securities at Paloma Partners, another large hedge fund. Amaranth employs a so-called multistrategy approach to investing that allows nimble portfolio managers to seize opportunities in whatever markets seem to be most promising at the time.
Now that Amaranth has owned up to huge losses in a single sector, “multistrategy’’ seems to have been a misnomer at the fund.
In his letter to investors, Mr. Maounis, 43, wrote: “In an effort to preserve investor capital, we have taken a number of steps, including aggressively reducing our natural gas exposure.”
Amaranth has additional offices in Houston, London, Singapore and Toronto and employs 115 traders, portfolio managers and analysts, according to its Web site. The firm deploys capital “in a highly disciplined, risk-controlled manner,” it noted.
Its energy portfolio has been overseen by Brian Hunter, a trader who joined the fund from Deutsche Bank in 2004 and conducts trades from his hometown of Calgary, Alberta. Mr. Hunter made enough money at Amaranth in 2005, an estimated $75 million to $100 million, to place him among the 30 most highly paid traders in Trader Monthly magazine.
Rocaton Investment Advisers, a consulting firm in Norwalk, Conn., whose clients have $235 billion in assets, recommended Amaranth to its customers. Yesterday, Robin Pellish, Rocaton’s chief executive, declined to comment on her firm’s relationship with the fund or to identify clients that it had advised to invest in it.
“We’re well aware of the situation with Amaranth and we are monitoring developments,” Ms. Pellish said.
Citing Amaranth’s woes, Stewart R. Massey, founding partner of Massey, Quick & Company, an investment advisory firm in Morristown, N.J., said, “I think it will cause investors to go back and take another hard look at the multistrategy funds they are invested in and do a deeper round of due diligence.” Mr. Massey said he did not have any exposure to Amaranth.
The problems at Aramanth will help fuel a debate over whether more oversight is needed over hedge funds, which have become increasingly powerful forces in the markets. There are nearly 9,000 hedge funds, managing more than $1.2 trillion in assets. In 1990, hedge funds managed just $38.9 billion, according to Hedge Fund Research.
Last week, in a speech in Hong Kong, the president of the Federal Reserve Bank of New York, Timothy F. Geithner, said greater attention needed to be paid to the margin requirements and risk controls in dealings with hedge funds.
The growth in hedge funds, Mr. Geithner noted, will eventually “force us to consider how to adapt the design and scope of the supervisory framework to achieve the protection against systemic risk that is so important to economic growth and stability.’’
In 2004, Amaranth protested a new rule proposed by the Securities and Exchange Commission that would have required certain hedge funds to register with federal regulators and undergo greater scrutiny.
“Contrary to media stereotypes of hedge fund managers, Amaranth does not ‘operate in the shadows’ outside of regulatory scrutiny,” its general counsel wrote. “We do not understand why the commission is proceeding so urgently with this rulemaking when the public policy problem to be addressed remains poorly defined and the proposed regulatory response is so burdensome.”
The rule, which was issued in late 2004, was struck down in June by the United States Court of Appeals for the District of Columbia. Last month, the S.E.C. declined to appeal the ruling.
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