Amaranth woes deepen amid probe
SINCLAIR STEWART AND PAUL WALDIE
From Wednesday's Globe and Mail
The financial industry began to brace itself Tuesday for the possible collapse of troubled Amaranth Advisors LLC, a hedge fund that is now under investigation amid revelations it lost billions of dollars in the past few weeks placing aggressive bets on the price of natural gas.
Although the markets appeared to absorb Amaranth's losses without too much turmoil, observers say the company's precarious health could prompt U.S. authorities to finally clamp down on the loosely regulated investment vehicles.
High-level officials at Amaranth, including Manos Vourkoutiotis, the head of its Canadian division, and Calgary-born Brian Hunter, its star energy trader, have been huddled in the company's Greenwich, Conn., headquarters for the past several days, trying to unwind positions, play damage control with business partners, and fend off a growing colony of vultures.
Tuesday, however, they were dealt another problem: a probe by Connecticut Attorney-General Richard Blumenthal, an ardent critic of the hedge fund industry. Mr. Blumenthal said he was concerned by “alleged representations” Amaranth officials made to investors in recent weeks about the performance of the fund, and was in the process of gathering evidence.
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The Globe and Mail
Amaranth's fund was up 26 per cent at the end of August, according to one source familiar with the matter. Indeed, it was on pace for perhaps its best year ever before disaster struck in the form of a massive position in the natural gas market. The fund had taken substantial positions in the futures market, in effect betting that the price of gas would climb higher as winter approached.
Unfortunately for Amaranth, meteorologists were grossly mistaken with their predictions of hurricanes and other damaging storms this summer. Tropical storm Ernesto never lived up to its advance billing, and weather forecasters recently began to call for a milder-than-expected winter, all of which contributed to a sudden slide in the price of natural gas. When prices plunged last week, Amaranth was left vulnerable, losing approximately half of its $9-billion (U.S.) in funds under management.
“The facts about mammoth losses by Amaranth offer additional powerful and compelling evidence about the need to reform disclosure and oversight requirements,” Mr. Blumenthal said Tuesday.
The sudden reversal of fortune at Amaranth, once one of the world's top 50 hedge funds, has prompted many to speculate that the firm will not survive. It was billed as an investment vehicle with moderate risk, and the wild gyrations could result in a mass exodus of investors, said observers with knowledge of the fund.
“They're out of business, man,” said a senior brokerage official who counts Amaranth as one of his most important clients. “I'm not sure how you maintain your assets under management when something like that happens.”
Peter Fusaro, co-founder of New York-based Energy Hedge Fund Center, which advises funds on energy-trading strategies, agreed that Amaranth will not likely be able to continue, and said the fund was far too speculative in its energy trading.
“They lost $4.5-billion. If I am an investor, do I feel comfortable in this hedge fund?” he asked. “The real story of Amaranth is traders gone wild. Here's leverage and gas options, two sticks of dynamite and trading.”
At the same time, he doubts that politicians can ever effectively police these funds, since much of the kind of trading that caused problems at Amaranth was either done offshore or through Internet trading.
“There will be a lot of congressional hearings, calls for investigations, and nothing done,” Mr. Fusaro said. “There is no regulation of cyberspace and all this electronic trading.”
Amaranth's Mr. Hunter made a fortune last year from his Calgary trading desk, routinely betting that natural gas prices would rise at a time when most hedge fund managers were shorting contracts in the belief they would fall in value. When hurricane Katrina hit, prices soared and Mr. Hunter looked like a genius, reportedly making more than $1-billion for the fund (and nearly $100-million for himself).
But timing is everything in natural gas, and some of his recent trades appear to have backfired.
Sources said Mr. Hunter and his team, consisting of about 20 people in Calgary, were betting on the spreads in gas prices between March and April next year. For a while, those spreads looked enticing, reaching $2.50 midway through the summer. But when gas prices fell sharply this month, this spread suddenly collapsed to just 75 cents, resulting in billions of dollars in losses.
There have been widespread fears that a major hedge fund collapse could trigger serious ripple effects. Yet hedge fund managers in Canada were not expecting much fallout from the Amaranth loss. Amaranth's Toronto team is said to be sticking with its current holdings. Several sources said the hedge fund had made its margin calls, was continuing to obtain credit from lenders, and was unwinding some of its positions in a relatively smooth process.
If anything, added Justin Dew, a senior hedge fund analyst at Standard & Poor's in New York, the Amaranth implosion might succeed in making large investors like pension funds take a more circumspect approach to the sector.
“This is a situation where the market basically breathed in and exhaled a manager, and in this case it has moved on,” Mr. Dew said. “The answer ‘Don't worry — trust us,' is not going to be as well taken as it was in the past.”
With files from reporters Andrew Willis and Tavia Grant |
