I. Dennis Heinz, Christian Lyles, Muhammad Williams
II. FIN 4533 Derivatives, Dr. Parvez Ahmed
III. Fall 2011
IV. Case #9. Amaranth Advisors LLC: Using Natural Gas Derivatives to Bet on the Weather
V. Relation to Course Topics
a. Futures, Forwards, Swaps and Options
b. Price Spreads
c. Derivative Trading Strategies
VI. In studying this case we will attempt to describe a brief overview of Amaranth Advisors LLC, some information about the major players within this company, the causes of their collapse and the effects that were felt in the aftermath. This paper includes our opinion about what happened at Amaranth in 2006 as well as ...view middle of the document...
5% fee and a 20% incentive on gains above an investor’s high-water mark (Marthinsen, 272).
Early Years of Amaranth
During the years of 2001-2003 Amaranth had done quite well and earned returns of 29%, 15% and 21%, respectively. In 2002 they expanded into the energy sector by hiring former Enron trader Harry Arora, and allocated 2% of the fund’s assets into these new investments. About halfway through 2004, returns were lackluster at less than 4%. Not thrilled with the yearly performance they decided to allocate more of the fund’s assets on energy-related investments and hired a somewhat controversial trader by the name of Brian Hunter.
Hunter had built up a reputation as one of the top energy traders in the world. “Mr. Hunter personally generated $17 million in profit in 2001 and $52 million in 2002,” according to a complaint his attorney later brought in New York State Court. “By 2002, he pulled down more than $1.6 million in salary and bonus and began supervising the gas desk in 2003” (Bloomberg). His relationship ended rather abruptly and on a sour note with Deutsche Bank when he was accused of losing over $50 million in one week. Overall, his trades were believed to have generated $100 million dollars over his 3 years there. Nick Maounis had heard of Hunter and was looking to develop his own energy desk at Amaranth so he was hired to head up the new Amaranth venture. There were several funds interested in Hunter’s services at the time. “…Hunter told Maounis about the job offer by Cohen's $8.5-billion, Stamford, Connecticut-based hedge fund, the 23rd-largest by December 2005…Maounis countered by giving Hunter more trading authority”(New York Times).
As Amaranth’s convertible bond positions tumbled and equity positions remained stagnate it was clear that change was needed. Maounis looked to Hunter’s cutting edge techniques to increase returns. Hunter responded by earning over $200 million over his first 6 months on the job. He was a genius and was rewarded with a promotion to co-head of Amaranth’s commodities group.
Through strategies deployed by Hunter, Amaranth profited handsomely during Hurricanes Katrina and Rita. He speculated on the direction of natural gas prices based on weather patterns and bet that natural gas prices would hike at the change of seasons so he took long positions in natural gas futures. In 2005 after Katrina hit and the prices began to rise, Hunter helped Amaranth make a $1 billion gain and more resources and responsibilities were given to Hunter and his team.
As a result of his dramatic success, Maounis became very eager to keep Hunter with Amaranth and offered increases in compensation and trade authority. “By the end of 2005, Hunter was the highest-paid trader at Amaranth, the former employees say. Under his new deal, Hunter earned 15 percent of any profit he made, while most traders made an average of 10 percent” (Bloomberg). Hunter was reported to have made $75 million off the...