Amaranth Advisors: Burning Six

Billion in Thirty Days

By
Nadine Mohanna
Rani Zahr

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

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 at
Amaranth.
Took Amaranth from a multi-strategy fund to a heavy
concentration on natural gas feature market (30%
through 2005)
Controlled more than 60% of their assets on natural
gas in 2006

Natural Gas
Steady continuous production
Seasonal Demand
Long-short spread

3/30/07

3/29/07

3/28/07

3/27/07

3/26/07

3/25/07

3/24/07

3/23/07

3/22/07

3/21/07

3/20/07

3/19/07

3/18/07

3/17/07

3/16/07

3/15/07

3/14/07

3/13/07

3/12/07

3/11/07

3/10/07

3/9/07

3/8/07

3/7/07

3/6/07

3/5/07

3/4/07

3/3/07

3/2/07

3/1/07

Betting the spread

Betting the Spread

$13

$12

$11

$10

$9
Spot Price Winter Long

$8
Spot Price Summer Short

$7

$6

$5

3/30/07

3/29/07

3/28/07

3/27/07

3/26/07

3/25/07

3/24/07

3/23/07

3/22/07

3/21/07

3/20/07

3/19/07

3/18/07

3/17/07

3/16/07

3/15/07

3/14/07

3/13/07

3/12/07

3/11/07

3/10/07

3/9/07

3/8/07

3/7/07

3/6/07

3/5/07

3/4/07

3/3/07

3/2/07

3/1/07

Long-Short Gain 2

13

12

11

10

9
Spot Price Winter Long

Spot Price Summer Short

3/30/07

3/29/07

3/28/07

3/27/07

3/26/07

3/25/07

3/24/07

3/23/07

3/22/07

3/21/07

3/20/07

3/19/07

3/18/07

3/17/07

3/16/07

3/15/07

3/14/07

3/13/07

3/12/07

3/11/07

3/10/07

3/9/07

3/8/07

3/7/07

3/6/07

3/5/07

3/4/07

3/3/07

3/2/07

3/1/07

Long-Short Gain 3

$11

$10

$9

$8
Spot Price Winter Long

Spot Price Summer Short

$7

$6

$5

3/30/07

3/29/07

3/28/07

3/27/07

3/26/07

3/25/07

3/24/07

3/23/07

3/22/07

3/21/07

3/20/07

3/19/07

3/18/07

3/17/07

3/16/07

3/15/07

3/14/07

3/13/07

3/12/07

3/11/07

3/10/07

3/9/07

3/8/07

3/7/07

3/6/07

3/5/07

3/4/07

3/3/07

3/2/07

3/1/07

Long-Short Gain 4

$11

$10

$9

$8

$7

$6
Spot Price Winter Long

Spot Price Summer Short

$5

$4

$3

$2

3/30/07

3/29/07

3/28/07

3/27/07

3/26/07

3/25/07

3/24/07

3/23/07

3/22/07

3/21/07

3/20/07

3/19/07

3/18/07

3/17/07

3/16/07

3/15/07

3/14/07

3/13/07

3/12/07

3/11/07

3/10/07

3/9/07

3/8/07

3/7/07

3/6/07

3/5/07

3/4/07

3/3/07

3/2/07

3/1/07

Amaranth Disaster
Amaranth Disaster

$11

$11

$10

$10
Spot Price Winter Long

Spot Price Summer Short

$9

$9

$8

Amaranth Natural Gas Strategy

Date

Spread Change Loss/Contract Total Contracts

Daily Loss

9/8/06

0.179

17900

68,400 $1,224,360,000

9/11/06

0.076

7600

35000

$266,000,000

9/12/06

0.046

4600

28000

$128,800,000

9/13/06

0.059

5900

30000

$177,000,000

9/14/06

0.135

13500

41,400

$558,900,000

9/15/06

0.381

38100

15000

$571,500,000

9/18/06

0.392

39200

22000

$862,400,000

9/19/06

0.057

5700

17500

$99,750,000

9/20/06

0.122

12200

8000

$97,600,000

Trading Loss

$3,986,310,000

Liquidation to JPM, Citadel, & ML

$2,400,000,000

Total Losses

$6,386,310,000

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 10,000
Each contract is for 10,000 mmBTU's

Assume the spread Bet Assumption was that a 1 cent change in

spread would create a loss or gain of $10 depending on the
direction of movement of the Natural Gas Widow Maker spread
Calculated September 14 then made projections for the
remainder months
($13,500 loss per contract)*(X Contracts) = $560,000,000
X = 41,400 contracts assuming each 1 cent change affected the futures
price

Notes:

September 8th has 6 days of losses associated with it

Naked Shorts Hypothesis: We believe Amaranth was speculating
on naked shorts and had to find a major player that has access
to many stocks therefore the liquidation of the energy
department to JPM, Citadel, & ML

Early warning signs

Blackstone group pulled out
Deutsche bank firing Hunter
subsequent law suits

lost 70% of Deutsche natural gas profit

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

THANK YOU