More news on Amaranth Advisors broke late on Friday, September 29th 2006. Earlier in the day, DealBreaker.com reported that negotiations with Citicorp to sell all or a portion of the Amaranth management entity had broken off. Then, Nick Maounis, the hedge fund’s founder, sent a letter to investors Friday night. According to The New York Times, Amaranth announced:

• Amaranth was suspending all redemptions for September and October 2006 by investors to “enable the Amaranth funds to generate liquidity for investors in an orderly fashion, with the goal of maximizing the proceeds of asset dispositions.”
• Whenever investors are allowed to take money out of the multistrategy funds, any redemption fees and charges would be waived. Cash distributions also will be divvied up proportionately, subject to anticipated reserves. [TCM emphasis added.]
• The losses in the Amaranth Advisor funds have continued, as losses on the month have expanded to the range of 70% from 65% ( up from 65% announced the prior week) and the year-to-date negative returns expanded to the range of 55% to 60%. This means losses of approximately $6.4 billion for the month from a previous month end total of $9.2 billion. [The exact amount of loss depends on where positions are marked for month-end, which is expected to be completed sometime after October 4th.]
• Amaranth Advisors plans to remain in business, but it was uncertain what it would do.

The full content of the Amaranth letter is available here [$$$] on The Wall Street Journal website. The accompanying WSJ article reports:

The blowup is likely to result in extensive litigation. The new letter said that withdrawal requests received before Aug. 31 had been honored. In past hedge-fund collapses, there have been attempts by investors to recoup money from those who got out just before big losses. There is a ray of hope for investors, according to money managers familiar with Amaranth's sale of assets. Some of the investments -- including European bank loans and U.S. mortgage securities -- have fetched higher-than-expected prices, these people say. Some of these assets are in markets with relatively few buyers and sellers, so some had expected a fire sale that hasn't emerged.

In a conference call with investors on Sept. 22, Mr. Maounis defended the firm's energy trading and rejected suggestions that investors weren't warned that its natural-gas portfolio was growing, pointing to monthly updates about those trades. The new letter says the firm is trying to reduce operating expenses while retaining key staff to manage the winding down process. Based in Greenwich, Conn., Amaranth still has about 200 employees.

The letter said Amaranth continues to seek "strategic alliances that would enable the continued operation of the Amaranth platform." A once-giant hedge fund's trading infrastructure is a valuable asset, but it could end up being of little use if its best traders move elsewhere.

During the past month, it has been variously reported that Amaranth Advisors had numerous non-energy investments. Some of these no doubt were readily tradeable and likely would have been sold to meet margin demands from Amaranth's prime brokers. As a result, the portfolios of the remaining Amaranth assets are now likely to have greater proportions of more illiquid assets. Since there are fewer ready buyers and sellers of illiquid assets, the valuation of such assets is often more of an art than a science. Many times there is no direct market price quote available for month-end valuation purposes. Instead, information on comparable securities must be gathered and an imputed price must be calculated.

Typically, most investment funds, whether an asset manager, an investment advisor or a hedge fund, will generate internal valuations for each investment position. These results are often then compared with independent marks gathered from at least one, and often times, three or more independent sources, such as market data providers, brokers and market-makers. Generally, there is more divergence in valuation opinion as liquidity decreases. Hence, there often is some formal process at sophisticated asset managers about how differences between and among internal and external marks are resolved to arrive at the individual security valuation that is used to calculate the overall portfolio value.

Toomre Capital Markets has no specific knowledge of how Amaranth Advisors performs its month-end valuations. However, with all of the attention Amaranth received this month, it would not be a surprise to learn that some portion of this month's Amaranth losses result from the marks drifting from 'aggressive' or 'normal' assumptions to more 'conservative' assumptions. A known seller of large and illiquid security positions has the tendency to depress those security prices until the sales are completed. Now with so many reviewing Amaranth, this month's valuations should be expected to receive particularly close attention and hence should be at levels that can be readily defended to third-parties (i.e biased to the 'conservative' side).