Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Amaranth Advisors Vows to Continue In Business

Amaranth Advisors held a much awaited conference call on Friday, September 22nd, 2006, which was its first oral communication with its investors since news broke earlier in the week about its colossal and unexpected losses due to natural gas investments. According to this article from the San Diego Union-Tribune, the investors “heard a recorded message from the hedge fund's founder, Nicholas Maounis, with no opportunity to ask questions.” The recording included the following information:

Maounis blamed this month's losses of nearly $6 billion on “unusual market behavior,” and said the fund has sold off [all of] its natural gas investments. He informed investors that Amaranth would not fold, contrary to earlier speculation. “We have every intention of continuing in business,” he said. “We are fully prepared to do whatever it takes to restore your confidence.” The Amaranth fund began incurring large losses in natural gas trades Sept. 11. On just one day, Sept. 14, the fund lost $560 million, according to Maounis.

The “listen-only” conference call no doubt was a disappointment to many investors. They have been demanding information on how such a large, multi-strategy with an excellent reputation for risk management could suddenly lose so much money so quickly. The losses suffered by Amaranth are simply staggering. The San Diego County Employees Retirement Association, a pension plan for public employees, apparently was one of the larger investors in the Amaranth funds. The above article reveals that losses on their $175 million investment had climbed to $87 million.

Today’s New York Times article Betting the House and Losing Big has further information on the Amaranth Advisors meltdown. According to this article, Charles H. Winkler, the Chief Operating Officer of Amaranth, as recently as Tuesday, September 12th and again on Thursday, September 14th, was touting that “Amaranth, a $9.2 billion fund, was posting returns of more than 25 percent for the year, according to one participant.” September 14th was the same day when natural gas prices declined by approximately 10%. The NYT article reveals Amaranth lost $560 million that same day on its energy positions, “accelerating losses the firm had suffered all week, Nicholas Maounis, the founder of Amaranth, said on a conference call yesterday.” Whoops… There went approximately 8% ($560mm / $7.25 Billion) of Amaranth’s performance in one day!!!

Mr. Winkler’s comments no doubt will be one focus of Connecticut Attorney General Richard Blumenthal’s investigations. An interesting question, though, is what performance figures can be used for marketing purposes amidst such a meltdown? The last performance figures communicated to investors at the end of August was the positive 25% plus return. Clearly, losses were being sustained through the nine trading days prior to September 14th and the large positive return was eroding and turning negative. If Mr. Winkler used a lesser return number, he could/would be accused of selective disclosure. On the other hand, if the hedge fund alerted all of its investors (as it did on Monday, September 18th) of the losses in an atypical manner, Amaranth left itself exposed to “shark-like” and “piling on” attacks of other market participants, which indeed happened this past week.

It will be fascinating to eventually learn what the daily P&L was both for the natural trading book and for the firm as a whole during the month of September. When Amaranth first released news of its losses on Monday morning, the WSJ estimated that its assets were down to $4.81 billion down from $9.25 billion at the start of the month. Including September 18th as the twelfth trading day in the month of September, Amaranth was averaging close to $370 million in losses each and every day!! (When the sale of the energy book was announced on Wednesday the 20th, the losses swelled to $6 billion and the average daily loss for September expanded to $420 million!!)

Toomre Capital Markets truly wonders what the Amaranth daily Value-at-Risk (“VAR”) looked like. Typically, VAR encompasses all likely events for 99 out of 100 observations. That means that a properly calibrated risk model should only have approximately two trading days a year that exceeds the calculated VAR. Was the Amaranth VAR close to $400 million? If so, was this key information communicated to its investors? If TCM were an Amaranth investor, we certainly would like to know how much risk and P&L volatility would be associated with that investment. $400 million of VAR seems quite excessive for a $9.25 billion fund. A key question for the Blumenthal and U.S. Securities and Exchange Commission investigations will be what was on the Amaranth risk reports and how much of that information was communicated to its investors.