Inside Amaranth (Why The Fund Imploded)

[Uncle Max]

Nicholas Maounis, founder of hedge fund firm Amaranth Advisors LLC, made a decision in April 2005 that eventually cost him his firm.

Brian Hunter, his star natural gas trader, had been offered a $1 million-plus bonus to join Steven Cohen's SAC Capital Advisors LLC. Maounis, who had built his Greenwich, Connecticut-based firm to $6 billion in assets, didn't want the trader to leave. So he named Hunter co-head of the energy desk and gave him control of his own trades, according to former employees who requested anonymity.

Within 17 months, the trader chalked up $6.6 billion in losses, detonating the biggest hedge fund implosion ever. Investors say Maounis gave Hunter, 32, too much latitude and that the trader, managing more than half of the firm's assets, was blinded by a bet that had worked for two years.

"Amaranth's demise is not due to some complicated quantitative reason," says Hendry Higdon, who runs New York-based Higdon Partners LLC, a recruiter for hedge fund firms. "It's about human failing and frailty."

Market conditions weren't ideal in 2005 when Maounis negotiated with Hunter for an enhanced role. Convertible bonds were tumbling, and Amaranth's credit bets were suffering after Standard & Poor's cut the ratings of Ford Motor Co. and General Motors Corp. to junk levels.

Maounis, who often sat on the trading floor, looked to Hunter to rescue the firm because of his successful energy trades. "Do something," former traders quote Maounis as saying when Hunter walked by. "We need you."

Hunter, who liked to wager that the difference between the prices of natural gas in winter months and summer months would widen, obliged. Employees say his big score came in September 2005, when natural gas bets made $1 billion in the wake of Hurricanes Katrina and Rita.

Yet investors were concerned that Amaranth, which had about 30 percent of its assets in energy at the end of 2005, wasn't diversified enough. "It looked to us like the Amaranth multi-strategy fund was a pure energy bet," says Edward Vasser, chief investment officer of Wolf Asset Management International LLC, a Santa Fe, New Mexico-based fund of funds. Hunter and Maounis declined to comment.

In 2006, when an abrupt market reversal left the Amaranth fund facing enormous losses, it was too late to unload positions. During one week in September, Hunter's bet on natural gas lost about $4.6 billion.

(C) Bloomberg Markets Magazine Feb'07

 

[Andy Nguyen]

Nick is back

Amaranth Founder Sets Up New Hedge Fund
May 10 (Bloomberg) -- Nicholas Maounis, the hedge-fund manager whose Amaranth Advisors LLC collapsed under a record $6.6 billion loss in 2006, is seeking to start a new firm, according to a note sent yesterday to his former investors.

``Many of you have inquired as to my future plans,'' Maounis wrote. ``I welcome the opportunity to speak with you personally about my new venture.''

Maounis plans to open Greenwich, Connecticut-based Verition Fund Management LLC later this year with more than $200 million, according to two former investors briefed on the venture. Clients with money in Amaranth when it shut down won't pay incentive fees for three years, said the investors, who asked not to be identified because the fund is private. While the fund won't charge a management fee, all investors will pay the fund's expenses.

Verition, derived from the Latin word for truth, will start with three strategies: quantitative, which uses computer models to pick trades; bonds and loans; and special situations, focusing on convertible bonds issued by companies going through corporate events such as mergers. Maounis declined to comment.

Maounis, 44, a former convertible-bond trader, opened Greenwich-based Amaranth in September 2000 with $600 million. His goal was to build a firm like Kenneth Griffin's $20 billion Citadel Investment Group LLC in Chicago, which uses multiple strategies to trade securities including stocks, bonds, currencies and commodities. By August 2006, Amaranth's assets had climbed to about $9.5 billion.

Brian Hunter

In September of that year, bets on natural gas made by trader Brian Hunter lost about $4.6 billion in one week. By month's end, the losses had risen to $6.6 billion, the most ever by a hedge fund, resulting in a 60 percent loss for 2006. Amaranth investors have received 93 percent of their remaining money back, the note said.

Hedge funds, private investment pools, typically charge 2 percent of assets as a management fee and 20 percent of any profits as an incentive fee.

Hunter started Solengo Capital Advisors six months after Amaranth's collapse. The assets were acquired last year by Peak Ridge Capital Group Inc., a Boston-based private-equity firm, which hired Hunter to advise its commodity fund. Peak Ridge Commodity Volatility Fund gained 49 percent in the first quarter, two investors said last month.