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Amaranth's assets slashed by 65%

Date: Friday, September 22, 2006
Author: Paul Waldie, Globe & Mail

U.S. hedge fund's natural gas trading fiasco may have cost $6-billion, CEO concedes

Troubled hedge fund company Amaranth Advisors LLC lost as much as $6-billion (U.S.) last week, cutting the value of its assets by more than half, the company's chief executive officer confirmed yesterday.

Nick Maounis, Amaranth's founder and CEO, plans to hold a conference call with investors today to explain what went wrong and to urge them to stick with the Connecticut-based company. "Amaranth is determined to earn back its investors' trust, and one step towards that end is to share as much information as we reasonably can," Mr. Maounis said in a letter to investors sent late Wednesday.

In the letter, Mr. Maounis confirmed the fund lost approximately 65 per cent of its month-to-date net asset value because of losses in its natural gas portfolio.

Amaranth had about $9.2-billion in assets at the beginning of August. It now has about $3-billion. Just last month, Amaranth boasted to investors that its funds were up nearly 20 per cent year to date. The funds are now down 55 per cent year to date, Mr. Maounis said in his letter.

The natural gas portfolio was run by Brian Hunter, an Amaranth trader based in Calgary. Industry observers say Mr. Hunter made a series of complicated trades on the belief that natural gas prices would rise.

Instead, prices have fallen sharply, putting Mr. Hunter deeply offside on his trades.

Amaranth had bet heavily on Mr. Hunter's prowess, devoting 56 per cent of its capital to energy trading strategies, according to a letter to investors sent in August before the problems hit.

In his letter this week, Mr. Maounis said significant losses in the natural gas portfolio began showing up during the week of Sept. 11. In order to avoid "forced liquidation by our creditors," he said the fund transferred its natural gas positions to a "third party" at a loss. It also "sold a significant number of positions in the funds' other portfolios," he said. "We are now focused on communicating with our investors and defining the future of our business." There were reports yesterday that New York-based Citigroup Inc. was in negotiations to buy a stake in Amaranth. Citigroup officials declined comment.

Mr. Maounis will have his hands full persuading investors like Henry Kneis to stick with Amaranth, which takes it name from a mythical flower that is always in bloom.

"I'm not sure that there is anything he can say to me to earn my trust back," said Mr. Kneis, who is CEO of Toronto-based Abria Financial Group, a $200-million (Canadian) hedge fund company that had about $18-million invested with Amaranth.

Mr. Kneis said he expects a lot of angry questions on the conference call. "We want to understand what went wrong and how," he said. But an even more important question, he added, is: "What are they going to do vis-à-vis redemptions and how are they going to manage that process? Because there are going to be a lot of people heading for the door."

In his letter, Mr. Maounis said the fund is "evaluating all redemption requests received to date and will report back to you when we have completed our analysis."

The fund recently changed it redemption rules to make it a bit easier to make withdrawals. Prior to Sept. 1, investors had to lock in for 25 months. After that date, investors can take out 15 per cent of their money every quarter. Amaranth could voluntarily liquidate itself and give investors their money back. That's what MotherRock LP, a $500-million (U.S.) hedge fund, did after shutting down last month because of bad energy trading.

Abria isn't the only Canadian fund eager to find out what happened at Amaranth. Royal Bank of Canada's RBC Arc Fund also had a small amount invested with Amaranth. Katherine Gay, a spokeswoman for RBC Dominion Securities, said the fund will also be looking for an explanation today. However, she noted that the Amaranth investment accounted for $1.5-million (Canadian), roughly 5 per cent of the RBC fund. "Nobody likes losing 5 per cent," she said. "But it is only 5 per cent."

The Caisse de dépôt et placement du Québec, which has more than $100-billion in assets, had $77.3-million invested in an Amaranth fund as of Dec. 31, 2005.