Amaranth's bankruptcy

Résumé du document

Amaranth was founded by Nicholas Maounis, former Paloma Partners manager, in 2006. Initially, Amaranth was supposed to adopt a multistrategic approach to diversify its investment risks in multiple markets. Brian Hunter was waiting for a geopolitical contest, due to the situation in the Middle East, that should have caused the rise of the oil and, consequently, the gas one; moreover, he expected the gas facilities located in the Mexican Gulf to be damaged by hurricanes and cyclones.

Extraits

[...] The risk and the earning are symmetrical. Future trading is a zero-sum game. Goldman Sachs is said to have benefit from Amaranth losses. Moreover, Citadel and JP Morgan Chase have bought Amaranth's energy portfolio. On the recent days, they are said to have made huge profits and sell all Amaranth's energy assets. Sources AMÉDÉO Fabrice, Fin de partie pour le fonds Amaranth, Le Figaro Economie octobre 2006 ANDERSON Jenny, MORGENSON Gretchen, A Hedge Fund's Loss Rattles Nerves, The New York Times septembre 2006 La faillite d'Amaranth ne fait pas tache d'huile, Les Echos janvier 2007 http://www.econbrowser.com/archives/2006/09/amaranth_hedge.html Commodity Futures Trading Commission Le Crédit Agricole (to quote only a french example) Les AGF Institutional Fund of Hedge Funds at Morgan Stanley New York Mercantile Exchange : commodity market Million British Thermal Unit : the account unity for gas Options (to buy: call/ to sell: put) are only rights while futures are obligations. [...]

[...] Amaranth was the perfect victim for such mistakes because the gas market is highly volatile, and because Amaranth is the kind of actors in the market that are very prosper one day, and went into bankruptcy the day after. The gas market is said to be five times more volatile than the stock market. The first reason why the gas market is volatile is that gas cannot be stored. That's why hedge funds, that specific range of actors, are attracted by those markets. [...]

[...] Amaranth's bankruptcy Abstract Amaranth is an American hedge fund located in Greenwich, Connecticut. Last October, this hedge fund announced severe losses on its $9bn assets. These losses were estimated by the CFTC[1] at $ 6.6 bn, essentially due to unsuccessful bets on the natural gas market. Through the example provided by the failure of Amaranth, this paper, after providing with the elements related to that event, aims at giving an overview of the functioning of a hedge fund and the principles of commodity futures. [...]

[...] They typically use aggressive techniques that cannot be used by mutual funds, such as short sales, leverage trading, and the use of derivatives. They are only bound by legislation concerning the number of investors who cannot exceed one hundred. Consequently, the minimum investment amount is very high. Traditionally, hedge funds set its minimum at $250,000, and investments can reach $1m. That's why if a failure occurs, a hedge fund is on the edge. To conclude, if Amaranth looses, other wins. In a future contract, the loss of a party is what the other party earns. [...]

[...] No major natural catastrophe occurred, and the situation in the Middle East at that time was not so bad. The gas price kept on falling (cf. graph). This price was quoted on the Nymex[5], and it fell down in September from $ 8.5 per MBTU[6] to $ 4.87 How does Brian Hunter bet on the rise of the gas price? Financially speaking, you can bet on a commodity price to rise or to fall through commodity futures. A future is a contract to buy or to sell something at a specific price on a specific delivery date. [...]