Hedge Fund Says It Lost $4.6 Billion

By Katherine Burton and Matthew Leising
Bloomberg News
Tuesday, September 19, 2006

Amaranth Advisors LLC, a hedge fund manager with about $9.5 billion in assets, told investors that its two main funds fell an estimated 50 percent this month because of a plunge in natural gas prices.

"We are in discussions with our prime brokers and other counterparties and are working to protect our investors while meeting the obligations of our creditors," Nick Maounis, the founder of the Greenwich, Conn., firm, said in a letter to investors obtained by Bloomberg News. The funds, which had gained 26 percent through August, are down at least 35 percent for the year, or about $4.6 billion.

Amaranth, which made so-called spread trades that try to profit from price discrepancies among futures contracts, is at least the second hedge fund to be hurt by this year's tumble in natural gas. Last month, MotherRock LP, a $400 million fund run by former New York Mercantile Exchange President Robert "Bo" Collins, went bust after natural gas futures fell 68 percent from their Dec. 13 peak.

"The speed with which leveraged funds can evaporate is mind-boggling," said Mark Williams, a professor of finance and economics at Boston University specializing in energy markets.

This month, Amaranth, named for an imaginary flower that never fades, bought a portfolio of gas trades from ABN Amro Holding NV that the Dutch bank took over from MotherRock. ABN Amro had lent MotherRock $60 million and is still owed money by the fund.

Amaranth is "near the end of our disposition of natural-gas exposure," the letter said, adding that the firm had met all margin calls, or demands from brokers for additional collateral to cover loans. Steve Bruce, an Amaranth spokesman, declined to comment.

Natural gas prices fell 12 percent last week as the U.S. Energy Department said stockpiles climbed 12 percent above last year's levels. Demand for the power-plant fuel usually declines after summer air-conditioner use slows and before heating needs pick up.

Investors said the funds, Amaranth International and Amaranth Partners, wagered that the difference between futures prices for natural gas in the summer and winter months would continue to get larger, a trend that's held since at least the beginning of 2004.

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