Abstract (Document Summary)
Mr. [Brian Hunter], within 17 months, would be responsible for US$6.6- billion in losses, detonating the
biggest hedge-fund implosion ever. Since Amaranth's sudden collapse, investors have questioned the
unusual trust Mr. [Nicholas Maounis] put in his star trader, now 32. They say Mr. Maounis gave Mr.
Hunter too much latitude and that Hunter, trading more than half the firm's assets, was blinded by a
bet that had worked like a charm for two straight years.
The first domino in Amaranth's demise fell a year later when Mr. Hunter told Mr. Maounis about the job
offer by Mr. [Steven Cohen]'s US$8.5- billion, Stamford, Conn.-based hedge fund. Former Amaranth
employees with knowledge of compensation agreements say Mr. Maounis countered by giving Mr.
Hunter more trading authority.
Mr. [Jones] and Mr. Maounis asked traders in other areas to cut their positions to raise cash, former
employees say. Word spread within the firm that Mr. Hunter had lost big, and other Amaranth traders
say they assumed that he, Mr. Maounis and Mr. Jones would reduce the exposure to natural gas.
Full Text (2517 words)
(Copyright National Post 2006, Saturday, Dec 16, 2006)
Nicholas Maounis, founder of the Amaranth Advisors LLC hedge fund, made a decision in April, 2005,
that eventually cost him his firm.
His promising natural-gas trader, Brian Hunter, had been offered a US$1-million bonus to join Steven
Cohen's SAC Capital Advisors LLC. Mr. Maounis, who had built his Greenwich, Conn.- based fund to
US$6-billion in assets, didn't want Mr. Hunter to go.
Convertible-bond and equity prices were falling and oil and natural-gas prices were increasing, making
Mr. Hunter's expertise more valuable. So Mr. Maounis named Mr. Hunter co-head of the energy desk
and gave him control of his own trades.
Mr. Hunter, within 17 months, would be responsible for US$6.6- billion in losses, detonating the
biggest hedge-fund implosion ever. Since Amaranth's sudden collapse, investors have questioned the
unusual trust Mr. Maounis put in his star trader, now 32. They say Mr. Maounis gave Mr. Hunter too
much latitude and that Hunter, trading more than half the firm's assets, was blinded by a bet that had
worked like a charm for two straight years.
"Amaranth's demise is not due to some complicated quantitative reason -- it's about human failing and
frailty," says Hank Higdon, who runs New York-based Higdon Partners LLC, a recruiter for hedge
funds and other money-management firms.
Mr. Hunter declined to comment for this article when contacted on Dec. 4, and Mr. Maounis declined to
comment through a spokesman.
Tallying the final days of Amaranth involves huge sums: During one week in September, Mr. Hunter's
bet on natural gas lost about US$4.6-billion. By month's end, the losses totalled US$6.6-billion, or 70%
of Amaranth's assets.
Some former employees -- who, like others familiar with Amaranth's unravelling, spoke on condition of
anonymity because the fund is a private company -- say they raised questions about the extent of the
energy bet. When an abrupt market reversal left the fund facing enormous losses, it was too late to
unload positions.
"When you know someone has such a big position, it's like blood in the water," says Mark Williams, a
Boston University finance professor and former risk manager at electricity trader Citizens Power in
Boston.
"Amaranth had exercised its muscle in the market when they were up, and now the tables were turned,
and the market was exercising its muscle against them."
Market conditions were not ideal in 2005, either, when Mr. Maounis negotiated with Mr. Hunter that
April for an enhanced role at the firm. Amid the discussions, convertible bonds, once a mainstay for
Amaranth, tumbled. In the first five months of 2005, convertible-bond funds fell an average of 6.5%,
according to Chicago- based Hedge Fund Research Inc., as the difference in yields between corporate
and government bonds narrowed and volatility in the stock market dropped to a record low.
Amaranth's credit bets suffered after Standard & Poor's cut the credit ratings of General Motors Corp.
and Ford Motor Co. to "junk" - - or below investment grade -- in May, 2005, and its equity positions
weren't making money, either, two former portfolio managers at the firm say.
Mr. Maounis, who often sat on the trading floor in Greenwich, looked to Mr. Hunter for rescue because
his natural-gas and other energy trades were successful.
"Do something," former traders quote Mr. Maounis as saying when Mr. Hunter walked by. "We need
you."
Mr. Hunter obliged. Investors and Amaranth employees say his big score came in September, 2005,
when the natural-gas bets he had placed earlier in the year made US$1-billion in the wake of
hurricanes Katrina and Rita as he correctly wagered that prices would increase.
The hurricanes -- Katrina hit the U.S. Gulf Coast on Aug. 29 and Rita followed on Sept. 24 -- limited
gas supplies, pushing prices to a record $14.20 per million British thermal units on Sept. 29.
That was when fellow employees started learning more about the 6- foot-5 Mr. Hunter, a Canadian
who sometimes wore jerseys of the National Hockey League's Calgary Flames on the trading desk,
colleagues say.
Mr. Maounis, a former convertible-bond trader, opened Amaranth in September, 2000, with US$600million in assets and the goal of operating a multistrategy hedge fund like Kenneth Griffin's US$12.8billion Chicago-based Citadel Investment Group LLC, Amaranth investors say. Mr. Griffin built one of
the largest hedge-fund firms in the world with returns that averaged about 25% a year since 1991,
according to investors in the funds.
Amaranth's assets totalled US$7.5-billion by the end of 2005, making it the world's 39th-largest hedge
fund, according to Hedge Fund Research. Its clients were some of the biggest institutional investors,
including funds run by Goldman Sachs Group Inc., Morgan Stanley, Deutsche Bank AG and Bank of
New York Co.'s Ivy Asset Management Corp. Pension funds of 3M Co. of St. Paul, Minn., and the San
Diego County public employees also signed on.
Amaranth grew with the industry. Hedge funds -- loosely regulated, private pools of capital that allow
managers to participate substantially in their investment gains -- managed US$1.1-trillion at that time,
more than double the amount of five years earlier, according to Hedge Fund Research.
As the hedge-fund field became more crowded, traders complained that everyone was trying to take
the same positions and that market inefficiencies, which the funds exploit for profit, were disappearing.
Amaranth sought profits in shares of merging companies, distressed debt and stocks. It made a push
into energy trading in 2002, hiring former Enron Corp. trader Harry Arora to lead the effort.
Mr. Maounis's style was to focus on raising money from investors, deciding how it should be allocated
and hiring the best traders he could find. He didn't micromanage, preferring to give more leeway to
traders who did well, former employees say.
Mr. Maounis knew who was making or losing money, though he mostly left the details to department
heads and the risk-management team headed by Rob Jones, Amaranth investment professionals say.
Mr. Jones declined to comment through a spokesman.
Using this model, Amaranth had 15% annualized returns since its inception -- more than double the
average performance of multistrategy funds for the same time period, according to Hedge Fund
Research.
Mr. Maounis, who graduated from the University of Connecticut in 1985 with a finance degree, started
his career at investment bank LF Rothschild, Unterberg, Towbin and hedge fund Angelo, Gordon &
Co., both based in New York.
In 1992, he joined Greenwich-based Paloma Partners LLC and eventually traded US$400-million, the
largest amount managed by any individual at the hedge fund.
"At Paloma, Nick had a stellar reputation as a consistent performer in convertible arbitrage," says Leon
Metzger, a former Paloma executive who is a lecturer in finance at Yale University in New Haven,
Conn.
After eight years, Mr. Maounis left to form Amaranth with 27 employees.
Mr. Hunter, who grew up near Calgary, had earned a master's degree in mathematics from the
University of Alberta before starting to trade natural gas in 1998, according to Amaranth marketing
materials.
He traded for Calgary-based TransCanada Corp., then joined Deutsche Bank in New York in May,
2001. In his first two years, he earned US$69-million for the bank, according to a complaint Mr. Hunter
later filed in New York State court in Manhattan that claims the bank owes him bonus money.
Ted Meyer, a Deutsche Bank spokesman, declined to comment on the suit. Deutsche Bank filed a
motion for summary judgment last week, saying Mr. Hunter's bonus was at the discretion of bank
managers. The lawsuit is pending.
By 2003, Mr. Hunter was head of the bank's natural-gas desk.
In December, 2003, Mr. Hunter and his colleagues were up US$76- million for the year. In the first
week of the month, however, the desk lost US$51.2-million after an "unprecedented and
unforeseeable run-up in gas prices," according to Mr. Hunter's lawsuit.
Mr. Hunter says in the suit that even with the loss, he made US$40-million for Deutsche Bank that year
and more than US$100- million in three years.
Mr. Hunter left Deutsche Bank in April, 2004, and joined Amaranth shortly thereafter.
The first domino in Amaranth's demise fell a year later when Mr. Hunter told Mr. Maounis about the job
offer by Mr. Cohen's US$8.5- billion, Stamford, Conn.-based hedge fund. Former Amaranth employees
with knowledge of compensation agreements say Mr. Maounis countered by giving Mr. Hunter more
trading authority.
By the end of 2005, Mr. Hunter was the highest-paid trader at Amaranth, the former employees say.
Under his new deal with Mr. Maounis, Mr. Hunter earned 15% of any profit he made, while most
traders made an average of 10%.
Like many other employees, he put a third of his bonus in the fund, which vested over three years.
In 2005, Mr. Hunter earned about US$75-million, primarily from his Katrina bet, compared with about
US$4-million in 2004, the employees say.
At the end of 2005, Mr. Maounis let Mr. Hunter move his wife and two children back to Calgary and
open an office with eight traders.
The energy bet was still working for Amaranth, which had about 30% of its assets in the sector. The
flagship fund ended the year up about 15%, compared with Citadel's 7%.
In January, 2006, Mr. Maounis allocated US$1-billion to Mr. Hunter, who then made US$300-million
during the next four weeks, former employees say.
The wager had been essentially the same since Mr. Hunter joined Amaranth. He was betting that the
difference in prices of natural gas between winter months and summer months would widen. Winter
months were represented by March delivery contracts and summer months by April contracts.
He placed these trades going out until 2012, say market participants with knowledge of his positions.
The spread widened to more than US$2 early this year from about US40 cents when Mr. Hunter
started at Amaranth in 2004.
Mr. Hunter also bet that natural-gas prices would increase while fuel and heating oils either would stay
the same or fall.
Mr. Arora, Mr. Hunter's former boss and the trader with the most knowledge of energy markets at
Amaranth, quit in March to start his own fund.
In April, Amaranth's fund climbed 13%, almost entirely because of energy trades, according to
investors. In the first four months of the year, when other multistrategy funds were up an average of
5.3%, Amaranth's returns approached 30%, they say.
Some investors were troubled by the fund's concentrated wagers. Executives of Blackstone Alternative
Asset Management, the fund-of- hedge-funds unit of New York-based Blackstone Group, went to
Calgary in May to visit Mr. Hunter and afterward pulled their entire investment, says a person familiar
with the situation who spoke on condition of anonymity. A Blackstone spokesman declined to
comment.
In May, Mr. Hunter's fortunes changed. Spreads between October and January contracts, another way
to wager on price differences between warmer and colder months, narrowed to $3.27 from a high of
$3.64. Spreads between March and April contracts also narrowed. Mr. Hunter lost $1-billion.
Mr. Jones and Mr. Maounis asked traders in other areas to cut their positions to raise cash, former
employees say. Word spread within the firm that Mr. Hunter had lost big, and other Amaranth traders
say they assumed that he, Mr. Maounis and Mr. Jones would reduce the exposure to natural gas.
Starting in May, Mr. Hunter and his team spent most of the summer flying between Calgary and
Greenwich to meet with Mr. Jones and Mr. Maounis, colleagues who saw them in Greenwich say.
They conferred almost daily at 4 p.m. Eastern time, either in person or by phone or videoconference.
From June to August, the energy and commodities positions earned US$1.35-billion, Mr. Maounis told
clients on a Sept. 22 conference call, according to a transcript provided to Bloomberg News. Much of
those gains were generated in August.
On Sept. 14, though, the funds lost US$560-million when natural- gas prices tumbled 10% as surging
inventories and cooler weather cut demand for air conditioning. The spread between March, 2007, and
April, 2007, contracts collapsed to US63 cents from US$2 at the beginning of September.
"We had not expected that we would be faced with a market that would move so aggressively against
our positions without the market offering any ability to liquidate positions economically," Mr. Maounis
said in the call. "We viewed the probability of market movements such as those that took place in
September as highly remote."
Mr. Jones asked traders to liquidate their positions. Convertible bonds, equities and European loans all
were sold to meet margin calls. Yet the fund continued to need cash to meet margin calls on its energy
trades.
During the weekend of Sept. 16-17, Goldman Sachs, Citigroup Inc. and JPMorgan Chase & Co. went
to Greenwich to look at Amaranth's energy holdings. JPMorgan, one of the fund's brokers, and Citadel
took over the natural-gas positions on Sept. 20.
With a loss estimated at more than 35% for the year, most hedge- fund investors expected Amaranth
to close.
Yet on Sept. 22, Mr. Maounis told his investors, "We have every intention of continuing in business."
In the following days, though, some fund managers say Mr. Maounis was unable to make decisions as
simple as giving them the go-ahead to sell their positions. Other Amaranth executives say his
indecisiveness stemmed from his focus on the bigger issue of how to keep Amaranth going.
On the night of Sept. 26, Maounis sent a four-sentence e-mail to his 420 employees.
"I want to thank all of you for your years of loyalty and support, especially during this especially difficult
time for all of us," it began. "I am quite sure that the Amaranth spirit will live on in all of us as nothing
can ever take that away from us."
Employees say they were shocked and also concerned about Mr. Maounis's state of mind.
Within an hour, Stanley Friedman, head of human resources, sent out his own message explaining
that Mr. Maounis's e-mail "was not intended to say goodbye" or suggest the firm was closing.
Three days later, though, the inevitable happened. Investors wanted their money back, so Mr. Maounis
agreed to liquidate the funds and return cash to his clients.
The biggest hedge-fund collapse in history didn't shutter Amaranth instantly, and no investors have
sued. Most of the firm's employees are gone, including Mr. Hunter.
Amaranth moved to help place many of them at other hedge funds. Mr. Maounis and key executives
are overseeing the sale of the last assets.
In Calgary, Mr. Hunter is still building a new home for his family, and people familiar with his plans say
he is talking about getting back to trading.