Amaranth Advisors(1)

7/30/2019 Amaranth Advisors(1)

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Amaranth Advisors: Burning Six

Billion in Thirty Days

By

Nadine MohannaRani Zahr


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Amaranth Advisors

Multi-strategy hedge fund

Founded in 2000 with $600 million under management

Grew to over $9.2 billion by mid 2006

Annualized return of 15%

September collapse: Lost more than 50% of assets under management totaling $6.6

billion


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Brian Hunter

Young natural gas speculator

Former head of Deutsche Banks natural gas desk. Fired after losing $50 million one month loss

Made $75 million in 2005

Named co-head of the energy trading desk atAmaranth.

Took Amaranth from a multi-strategy fund to a heavyconcentration on natural gas feature market (30%

through 2005) Controlled more than 60% of their assets on natural

gas in 2006


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Natural Gas Steady continuous production

Seasonal Demand

Long-short spread


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Betting the spread

$5

$6

$7

$8

$9

$10

$11

$12

$13

3/1/07

3/2/07

3/3/07

3/4/07

3/5/07

3/6/07

3/7/07

3/8/07

3/9/07

3/10/07

3/11/07

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3/14/07

3/15/07

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3/22/07

3/23/07

3/24/07

3/25/07

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3/27/07

3/28/07

3/29/07

3/30/07

Betting the Spread

Spot Price Winter Long

Spot Price Summer Short


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6

7

8

9

10

11

12

13

3/1/07

3/2/07

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3/4/07

3/5/07

3/6/07

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3/14/07

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3/21/07

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3/23/07

3/24/07

3/25/07

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Long-Short Gain 2




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$5

$6

$7

$8

$9

$10

$11

3/1/07

3/2/07

3/3/07

3/4/07

3/5/07

3/6/07

3/7/07

3/8/07

3/9/07

3/10/07

3/11/07

3/12/07

3/13/07

3/14/07

3/15/07

3/16/07

3/17/07

3/18/07

3/19/07

3/20/07

3/21/07

3/22/07

3/23/07

3/24/07

3/25/07

3/26/07

3/27/07

3/28/07

3/29/07

3/30/07

Long-Short Gain 3




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$2

$3

$4

$5

$6

$7

$8

$9

$10

$11

3/1/07

3/2/07

3/3/07

3/4/07

3/5/07

3/6/07

3/7/07

3/8/07

3/9/07

3/10/07

3/11/07

3/12/07

3/13/07

3/14/07

3/15/07

3/16/07

3/17/07

3/18/07

3/19/07

3/20/07

3/21/07

3/22/07

3/23/07

3/24/07

3/25/07

3/26/07

3/27/07

3/28/07

3/29/07

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Long-Short Gain 4




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Amaranth Disaster

$8

$9

$9

$10

$10

$11

$11

3/1/07

3/2/07

3/3/07

3/4/07

3/5/07

3/6/07

3/7/07

3/8/07

3/9/07

3/10/07

3/11/07

3/12/07

3/13/07

3/14/07

3/15/07

3/16/07

3/17/07

3/18/07

3/19/07

3/20/07

3/21/07

3/22/07

3/23/07

3/24/07

3/25/07

3/26/07

3/27/07

3/28/07

3/29/07

3/30/07

Amaranth Disaster




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Calculation:Calculate the spread loss (Today's close - Previous days close)

This is the spread loss per 1 million BTU's

Multiply the spread loss by 10,000Each contract is for 10,000 mmBTU's

Assume the spread Bet Assumption was that a 1 cent change inspread would create a loss or gain of $10 depending on thedirection of movement of the Natural Gas Widow Maker spread

Calculated September 14 then made projections for theremainder months

($13,500 loss per contract)*(X Contracts) = $560,000,000

X = 41,400 contracts assuming each 1 cent change affected the futuresprice

Notes:

September 8th has 6 days of losses associated with it

Naked Shorts Hypothesis: We believe Amaranth was speculatingon naked shorts and had to find a major player that has accessto many stocks therefore the liquidation of the energy

department to JPM, Citadel, & ML


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Early warning signs

Blackstone group pulled out

Deutsche bank firing Hunter

subsequent law suits

lost 70% of Deutsche natural gas profit


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Conclusion

Lack of diversification

High leveraging

Outlier events Liquidity risk

Naked Shorts cause of liquidation to JPM,

Citadel, and ML

Spread position different than arbitrage

position


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THANK YOU

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Amaranth Advisors(1)