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September 23, 2006

Hedge fund Amaranth Advisors faces blow-up

US-based hedge fund Amaranth Advisors, which made an investment in Indiabulls Finance Company (a consumer lending subsidiary of Indiabulls Financial Services) in June 2005, has landed itself in deep trouble following reckless trading in natural gas futures. The firm is now selling assets in order to stay afloat.

From Baltimore Sun
Amaranth said Thursday that its portfolio, worth $9.2 billion on Aug. 31, had lost 65 percent in value after bad bets on natural gas prices and the subsequent sale of its energy portfolio.

...Amaranth began incurring large losses on its natural gas portfolio in the week starting Sept. 11, and on Sept. 14, Amaranth lost roughly $560 million on its natural gas position as prices for the commodity plummeted. Faced with big margin calls on natural gas positions and unable to borrow more to finance them, Amaranth sold its positions.

The article points out that RAM Energy Resources Inc., an oil and gas exploration firm which had received an investment from Amaranth, has bought the hedge fund's stake.
Amaranth, which was RAM's fifth-biggest shareholder, sold all 739,175 of its shares - about 2 percent of RAM's total shares outstanding - back to the company in a negotiated transaction, RAM said.

RAM's stock had sunk 12 percent this week on speculation that selling by Amaranth would reduce the price. The announcement drove the shares up 6.4 percent, their biggest gain in three months.

Indiabulls Financial Services and its subsidiaries have received several rounds of funding from another US-based hedge fund, Farallon Capital.

Related Stuff:

The Globe and Mail, quoting industry observers, says the US Securities and Exchange Commission has launched a probe of Amaranth and that "this will be the impetus for regulators to finally crack down on the (hedge fund) industry and demand better transparency".

The Globe and Mail (G&M) article, as well another article in Washington Post point out that Amaranth landed in trouble because it violated the very raison d'ĂȘtre for hedge funds: to hedge.
Amaranth didn't fall apart because it was acting like a traditional hedge fund. It fell apart because it wasn't.

A lot of the blame for Amaranth's blow-up is being placed on the firm's star energy trader, Brian Hunter.

From Wash Post:
(Amarath CEO Nicholas Maounis) let Hunter increase the size of his natural gas positions so that they became more than half of the entire firm's exposure, even though Amaranth claimed to be a "multistrategy" fund. Before Hunter's arrival, all commodities positions made up about 20 percent of Amaranth's portfolio, natural gas no more than 7 percent.

In an intresting sidelight, the G&M article also points out how Amaranth's headquarters - the town of Greenwich, Connecticut - is home to some 200 hedge funds which control some $120-billion worth of assets (or about 10% of the global hedge fund industry).

The Wash Post article points out that Hunter replaced Harry Arora, a former Enron Corp. energy trader, as head of Amaranth's energy trading desk. The "relatively conservative" Arora "had a falling out with Maounis and Hunter over the risks the firm was taking" and left. He now heads another commodities hedge fund ARCIM Advisors, headquartered in - you guessed it - Greenwich, CT.

Arun Natarajan is the Founder of Venture Intelligence, which tracks private equity and venture capital in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.