Fall of Amaranth
Amaranth was a hedge fund based out of Greenwich Connecticut started by Nicholas Maounis in 2000. At its peak, Amaranth had 9 billion dollars in assets and employed 115 employees. Amaranth began by trading convertible bonds and made a lot of profit through convertible arbitrage by simultaneously buying and selling convertible securities and common stock to capture gains from a difference in prices. Because convertible securities were often mispriced, this trade was very popular and as the rest of the market caught on to this hot trade, Amaranth looked into finding their own new niche.
Amaranth’s appetite for risk grew over the years as new management began to climb aboard; they began to engage in risky energy trading deals. This shift towards energy trading was sparked by Brian Hunter; a young Canadian energy trader who was making sizeable gains for his fund of about 1 billion dollars. As Brian Hunter’s profits grew, so did his freedom to trade however he pleased. Amaranth’s investment strategy was playing the price spreads in the natural gas markets. By doubling down, Amaranth was able to invest even more money. If this was not risky enough, the natural gas market in which Amaranth was investing in was considered to be more volatile than the market. This is a very risky move but could pay off very well in the future if the market moved accordingly.
The managers were exploiting the difference between future delivery prices and purchasing put and call options that were way out of the money. This was their attempt to profit on market movements while keeping risk to an acceptable amount. By longing and shorting futures contracts of two related securities or commodities, Amaranth was able to capture the spread between the two prices. The spread strategy was thought to be a safer position to take than simply buying or selling a position. The natural gas market is a very volatile market, with prices moving by as much as 12% a week. (6) Because of the enormous risks
Amaranth’s appetite for risk grew over the years as new management began to climb aboard; they began to engage in risky energy trading deals. This shift towards energy trading was sparked by Brian Hunter; a young Canadian energy trader who was making sizeable gains for his fund of about 1 billion dollars. As Brian Hunter’s profits grew, so did his freedom to trade however he pleased. Amaranth’s investment strategy was playing the price spreads in the natural gas markets. By doubling down, Amaranth was able to invest even more money. If this was not risky enough, the natural gas market in which Amaranth was investing in was considered to be more volatile than the market. This is a very risky move but could pay off very well in the future if the market moved accordingly.
The managers were exploiting the difference between future delivery prices and purchasing put and call options that were way out of the money. This was their attempt to profit on market movements while keeping risk to an acceptable amount. By longing and shorting futures contracts of two related securities or commodities, Amaranth was able to capture the spread between the two prices. The spread strategy was thought to be a safer position to take than simply buying or selling a position. The natural gas market is a very volatile market, with prices moving by as much as 12% a week. (6) Because of the enormous risks