Post by jannikki on Dec 10, 2006 9:55:19 GMT -4
Dec. 9, 2006, 7:00PM
Human frailty and huge losses
How one trader lost $6.6 billion at a hedge fund
By KATHERINE BURTON and JENNY STRASBURG
Bloomberg News
Nicholas Maounis, founder of the Amaranth Advisors hedge fund, made a decision in April 2005 that eventually cost him his firm.
His promising natural gas trader, Brian Hunter, had been offered a $1 million bonus to join Steven Cohen's SAC Capital Advisors. Maounis, who had built his Greenwich, Conn.-based fund to $6 billion in assets, didn't want Hunter to go.
Convertible bond and equity prices were falling, and oil and natural gas prices were increasing, making Hunter's expertise more valuable. So Maounis named Hunter co-head of the energy desk and gave him control of his own trades.
Hunter, within 17 months, would be responsible for $6.6 billion in losses, detonating the biggest hedge fund implosion ever. After Amaranth's sudden collapse, investors said Maounis gave Hunter too much latitude and that Hunter, trading more than half the firm's assets, was blinded by a gamble that had worked like a charm for two straight years.
"Amaranth's demise is not due to some complicated quantitative reason — it's about human failing and frailty," says Hank Higdon, who runs New York-based Higdon Partners, a recruiter for hedge funds and other money-management firms.
Hunter, 32, and Maounis, 43, declined to comment for this article.
Tallying the final days of Amaranth involves huge sums: During one week in September, Hunter's bet on natural gas lost about $4.6 billion. By month's end, the losses totaled $6.6 billion, or 70 percent of Amaranth's assets.
At least one investor saw serious warning signs about the big energy bets and pulled out before the collapse. Some former employees also say they raised questions about the extent of that wager. The former employees, like others familiar with Amaranth's unraveling, spoke on condition of anonymity because the fund is a private company.
When an abrupt market reversal left the fund facing enormous losses, it was too late to unload positions.
"When you know someone has such a big position, it's like blood in the water," says Mark Williams, a Boston University finance professor and former risk manager at electricity trader Citizens Power in Boston.
"Amaranth had exercised its muscle in the market when they were up, and now the tables were turned, and the market was exercising its muscle against them."
Market conditions weren't ideal in 2005, either, when Maounis negotiated with Hunter for an enhanced role at the firm. Amid the discussions, convertible bonds, once a mainstay for Amaranth, tumbled.
Amaranth's credit bets suffered after Standard & Poor's cut the credit ratings of General Motors Corp. and Ford Motor Co. to junk — or below investment grade — in May 2005, and its equity positions weren't making money, either, say two former portfolio managers at the firm.
Maounis, who often sat on the trading floor in Greenwich, looked to Hunter for rescue because his natural gas and other energy trades were successful.
'Do something,' former traders quote Maounis as saying when Hunter walked by. 'We need you.'
Hunter obliged. Investors and Amaranth employees say his big score came in September 2005, when the natural gas bets he had placed earlier in the year made $1 billion in the wake of hurricanes Katrina and Rita as he correctly wagered that prices would increase.
The hurricanes — Katrina hit the Gulf Coast on Aug. 29 and Rita followed on Sept. 24 — limited gas supplies, pushing prices to a record $14.20 per million British thermal units on Sept. 29.
That was when fellow employees started learning more about the low-key, 6-foot-5-inch Hunter, a Canadian who sometimes wore jerseys of the National Hockey League's Calgary Flames on the trading desk.
Maounis, a former convertible bond trader, opened Amaranth in September 2000 with $600 million in assets and the goal of operating a multistrategy hedge fund.
Amaranth grew with the industry. Hedge funds are loosely regulated, private pools of capital that allow managers to participate substantially in their investment gains. Such funds managed $1.1 trillion at that time, more than double the amount of five years earlier, according to Hedge Fund Research.
As the hedge fund field became more crowded, traders complained that everyone was trying to take the same positions and that market inefficiencies, which the funds exploit for profit, were disappearing.
Amaranth sought profits in shares of merging companies, distressed debt and stocks. It made a push into energy trading in 2002, hiring former Enron Corp. trader Harry Arora to lead the effort.
Maounis's style was to focus on raising money from investors, deciding how it should be allocated and hiring the best traders he could find. He didn't micromanage, preferring to give more leeway to traders who did well, former employees say.
Hunter, who grew up near Calgary, had earned a master's degree in mathematics from the University of Alberta before starting to trade natural gas in 1998, according to Amaranth marketing materials.
The first domino in Amaranth's demise fell in 2005 when Hunter told Maounis about the job offer by Cohen's $8.5 billion, Stamford, Conn.-based hedge fund.
By the end of 2005, Hunter was the highest-paid trader at Amaranth, the former employees say. Under his new deal with Maounis, Hunter earned 15 percent of any profit he made, while most traders made an average of 10 percent.
In 2005, Hunter earned about $75 million, primarily from his Katrina bet, compared with about $4 million in 2004, the employees say.
At the end of 2005, Maounis let Hunter move his wife and two children back to Calgary and open an office with eight traders.
Yet at least one potential investor visiting Amaranth at that time was concerned the fund's energy holdings were too large.
"It looked to us like the Amaranth multistrategy fund was a pure energy bet," says Edward Vasser, chief investment officer of Wolf Asset Management International, a Santa Fe, N.M.-based fund of funds. "Almost all of their profits came from their energy portfolio."
He decided against investing in Amaranth.
In January 2006, Maounis allocated $1 billion to Hunter, who then made $300 million during the next four weeks, former employees say.
The wager had been essentially the same since Hunter joined Amaranth. He was betting that the difference in prices of natural gas between winter months and summer months would widen.
In May, Hunter's fortunes changed. Spreads between the contract narrowed. Hunter lost $1 billion.
Amaranth's paper profits in natural gas were significant, yet it couldn't realize all of the gains selling. Traders and hedge funds knew Amaranth was desperate to get out of its trades, so they wouldn't pay current prices.
On Sept. 14, the funds lost $560 million when natural gas prices tumbled 10 percent as surging inventories and cooler weather cut demand for air conditioning. The spread between March 2007 and April 2007 contracts collapsed to 63 cents from $2 at the beginning of September.
The inevitable happened in September. Investors wanted their money back, so Maounis agreed to liquidate the funds and return cash to his clients as assets were sold.
In Calgary, Hunter is building a new home for his family, and people familiar with his plans say he's talking about getting back to trading.
www.chron.com/disp/story.mpl/business/4390470.html
Human frailty and huge losses
How one trader lost $6.6 billion at a hedge fund
By KATHERINE BURTON and JENNY STRASBURG
Bloomberg News
Nicholas Maounis, founder of the Amaranth Advisors hedge fund, made a decision in April 2005 that eventually cost him his firm.
His promising natural gas trader, Brian Hunter, had been offered a $1 million bonus to join Steven Cohen's SAC Capital Advisors. Maounis, who had built his Greenwich, Conn.-based fund to $6 billion in assets, didn't want Hunter to go.
Convertible bond and equity prices were falling, and oil and natural gas prices were increasing, making Hunter's expertise more valuable. So Maounis named Hunter co-head of the energy desk and gave him control of his own trades.
Hunter, within 17 months, would be responsible for $6.6 billion in losses, detonating the biggest hedge fund implosion ever. After Amaranth's sudden collapse, investors said Maounis gave Hunter too much latitude and that Hunter, trading more than half the firm's assets, was blinded by a gamble that had worked like a charm for two straight years.
"Amaranth's demise is not due to some complicated quantitative reason — it's about human failing and frailty," says Hank Higdon, who runs New York-based Higdon Partners, a recruiter for hedge funds and other money-management firms.
Hunter, 32, and Maounis, 43, declined to comment for this article.
Tallying the final days of Amaranth involves huge sums: During one week in September, Hunter's bet on natural gas lost about $4.6 billion. By month's end, the losses totaled $6.6 billion, or 70 percent of Amaranth's assets.
At least one investor saw serious warning signs about the big energy bets and pulled out before the collapse. Some former employees also say they raised questions about the extent of that wager. The former employees, like others familiar with Amaranth's unraveling, spoke on condition of anonymity because the fund is a private company.
When an abrupt market reversal left the fund facing enormous losses, it was too late to unload positions.
"When you know someone has such a big position, it's like blood in the water," says Mark Williams, a Boston University finance professor and former risk manager at electricity trader Citizens Power in Boston.
"Amaranth had exercised its muscle in the market when they were up, and now the tables were turned, and the market was exercising its muscle against them."
Market conditions weren't ideal in 2005, either, when Maounis negotiated with Hunter for an enhanced role at the firm. Amid the discussions, convertible bonds, once a mainstay for Amaranth, tumbled.
Amaranth's credit bets suffered after Standard & Poor's cut the credit ratings of General Motors Corp. and Ford Motor Co. to junk — or below investment grade — in May 2005, and its equity positions weren't making money, either, say two former portfolio managers at the firm.
Maounis, who often sat on the trading floor in Greenwich, looked to Hunter for rescue because his natural gas and other energy trades were successful.
'Do something,' former traders quote Maounis as saying when Hunter walked by. 'We need you.'
Hunter obliged. Investors and Amaranth employees say his big score came in September 2005, when the natural gas bets he had placed earlier in the year made $1 billion in the wake of hurricanes Katrina and Rita as he correctly wagered that prices would increase.
The hurricanes — Katrina hit the Gulf Coast on Aug. 29 and Rita followed on Sept. 24 — limited gas supplies, pushing prices to a record $14.20 per million British thermal units on Sept. 29.
That was when fellow employees started learning more about the low-key, 6-foot-5-inch Hunter, a Canadian who sometimes wore jerseys of the National Hockey League's Calgary Flames on the trading desk.
Maounis, a former convertible bond trader, opened Amaranth in September 2000 with $600 million in assets and the goal of operating a multistrategy hedge fund.
Amaranth grew with the industry. Hedge funds are loosely regulated, private pools of capital that allow managers to participate substantially in their investment gains. Such funds managed $1.1 trillion at that time, more than double the amount of five years earlier, according to Hedge Fund Research.
As the hedge fund field became more crowded, traders complained that everyone was trying to take the same positions and that market inefficiencies, which the funds exploit for profit, were disappearing.
Amaranth sought profits in shares of merging companies, distressed debt and stocks. It made a push into energy trading in 2002, hiring former Enron Corp. trader Harry Arora to lead the effort.
Maounis's style was to focus on raising money from investors, deciding how it should be allocated and hiring the best traders he could find. He didn't micromanage, preferring to give more leeway to traders who did well, former employees say.
Hunter, who grew up near Calgary, had earned a master's degree in mathematics from the University of Alberta before starting to trade natural gas in 1998, according to Amaranth marketing materials.
The first domino in Amaranth's demise fell in 2005 when Hunter told Maounis about the job offer by Cohen's $8.5 billion, Stamford, Conn.-based hedge fund.
By the end of 2005, Hunter was the highest-paid trader at Amaranth, the former employees say. Under his new deal with Maounis, Hunter earned 15 percent of any profit he made, while most traders made an average of 10 percent.
In 2005, Hunter earned about $75 million, primarily from his Katrina bet, compared with about $4 million in 2004, the employees say.
At the end of 2005, Maounis let Hunter move his wife and two children back to Calgary and open an office with eight traders.
Yet at least one potential investor visiting Amaranth at that time was concerned the fund's energy holdings were too large.
"It looked to us like the Amaranth multistrategy fund was a pure energy bet," says Edward Vasser, chief investment officer of Wolf Asset Management International, a Santa Fe, N.M.-based fund of funds. "Almost all of their profits came from their energy portfolio."
He decided against investing in Amaranth.
In January 2006, Maounis allocated $1 billion to Hunter, who then made $300 million during the next four weeks, former employees say.
The wager had been essentially the same since Hunter joined Amaranth. He was betting that the difference in prices of natural gas between winter months and summer months would widen.
In May, Hunter's fortunes changed. Spreads between the contract narrowed. Hunter lost $1 billion.
Amaranth's paper profits in natural gas were significant, yet it couldn't realize all of the gains selling. Traders and hedge funds knew Amaranth was desperate to get out of its trades, so they wouldn't pay current prices.
On Sept. 14, the funds lost $560 million when natural gas prices tumbled 10 percent as surging inventories and cooler weather cut demand for air conditioning. The spread between March 2007 and April 2007 contracts collapsed to 63 cents from $2 at the beginning of September.
The inevitable happened in September. Investors wanted their money back, so Maounis agreed to liquidate the funds and return cash to his clients as assets were sold.
In Calgary, Hunter is building a new home for his family, and people familiar with his plans say he's talking about getting back to trading.
www.chron.com/disp/story.mpl/business/4390470.html