Toomre Capital Markets LLC

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Amaranth: Either Sell Self Or Liquidate

Amaranth Advisors has outlined its liquidation plans in private meetings with its investors, according to this story in The Financial Times of London. The article states that Amaranth will “either liquidate its remaining assets or sell itself to a larger institution.” This article also discloses that Brian Hunter, the former head of the firm’s energy trading group, no longer was with the firm and that Mr. Hunter “had not been given any termination payment.”

There has been considerable speculation about whether Amaranth can continue as a going concern. The fund group is facing numerous redemption requests from investors, which Amaranth has “said it would try and return money as equitably as possible to all investors, regardless of different lock-up agreements. Hedge fund investors often agree not to pull money out for a significant period after first injecting funds.” The article goes on to state “In conversations with investors, Amaranth has said it was hoping to conclude a sale within the next two weeks. Amaranth began holding meetings this week after acknowledging that it had received a ‘substantial’ number of redemption requests.” Another section of the article includes the following:

Investors have said they believed it was unlikely that Amaranth would be able to continue as an independent operation. It faces multiple regulatory probes, possible lawsuits and the likelihood of most of its investors demanding their money back.

The Securities and Exchange Commission is probing whether Amaranth misled investors regarding its risk management and trading policies. The Commodity Futures Trading Commission is also examining Amaranth's natural gas trades.

The most curious section of the FT article is at the end when it attempts to portray how Amaranth has been explaining how it lost so much money, despite supposed excellent risk management controls and a multi-strategy portfolio. This portion of the article includes the following:

Fund executives have been attempting to explain exactly how they lost so much so fast. Amaranth has said bad bets on the difference between the price of natural gas contracts for the winter months of 2007 and the summer months of 2006 cost about $1bn and that overall bets on natural gas cost $2.5bn. Further losses were accrued selling natural gas and other positions at a discount to meet margin calls.
To an outsider with no more information other than what variously has been reported in the press, the above explanation does not make sense. If the overall bets on natural gas ‘only’ cost $2.5 billion, Mr. Hunter’s book ‘only’ would have been down approximately $500 million year-to-date. Did liquidating positions to meet margin calls really cost the fund a total of $3.5 billion? Something seems odd with this explanation.

Using the leverage ratio and the assumed total assets referenced in this previous TCM post, at its peak near the end of August 2006, Amaranth Advisors had total assets of very close to $40 billion (4.3 leverage times $9.25 billion in equity). Late last week on the conference call with investors, Amaranth CEO Nick Maounis stated that the fund family’s remaining equity was leveraged 1.3:1, which implies that total assets were $4.55 billion (1.3 leverage times $3.5 billion in equity). Neither of these total asset numbers has been confirmed. However, using these derived asset numbers, one can calculate that Amaranth liquidated approximately ($40 billion minus $2.5 in natural gas losses minus $4.55 in ending assets) $33 billion in assets during September 2006 at a cost of $3.5 billion, or approximately 10.6% of asset values. A big percentage of the assets liquidated were associated with the energy portfolio. How much did selling $20+ billion plus in natural gas positions in a fire sale hurt the Amaranth Advisor investors? Was the discount 10%, 15% or even more?