Posted on 09/18/2006 8:44:09 PM PDT by DebtAndDelusion
Amaranth Advisors, a big U.S. hedge fund, has told its investors to brace for huge losses as a result of its costly bet that natural gas prices — now at a two-year low — would rise.
Some reports said the fund's losses could amount to $4 billion US.
"We anticipate our year-to-date losses might be in excess of 35 per cent as we near completion of the disposition of our natural gas exposure," the hedge fund said in a letter to investors obtained by several media organizations.
Amaranth traders apparently placed hugely leveraged bets that natural gas prices would rise.
Instead, gas prices fell 15 per cent in the last couple of weeks and hit two-year lows amid abundant supplies and the lack of damaging hurricanes.
Amaranth said it had met every margin call and was unwinding its natural gas positions.
"We are in discussions with our prime brokers and other counterparties and are working to protect our investors while meeting the obligations of our creditors," the company said.
A Canadian unit of Amaranth, Amaranth Canadian Trust, blamed news of the trading losses for a drop in the unit value of Cinram International Income Fund.
Amaranth Canadian Trust (ACT) owns 15 per cent of Cinram, a maker of DVDs and CDs.
Amaranth said in a public letter to Cinram that the heavy trading and losses in Cinram units on Monday was due to uncertainty about Amaranth's plans for its stake in Cinram.
"Earlier this morning the Amaranth investment fund group announced significant trading losses in its natural gas trading business," the letter said. "Shortly thereafter, the trust units of Cinram came under intense selling pressure.
"Given the absence of any fundamental news about Cinram, we believe this selling was due to market participants speculating about ACT's intentions with respect to its Cinram holdings," Amaranth said.
Amaranth said Cinram's units are undervalued and called for Cinram to be sold or taken private.
Cinram units closed at $22 Monday, down 83 cents.
Paulson must walk a delicate tightrope to enable these hedge funds to unwind in an orderly fashion. Much pressure now.
HG
Well now the shoe is on the other foot. Hedge funds under the gun.
I was listening to a business channel today. It seems that this was the fault of a 32 year old in the company. Last year he made 800 million for the company and received 75 million dollars in commissions. This year, he didn't do so well.
For the "little less educated" lol, can someone explain what they were doing?
I understand they were betting on higher prices but how?
Is it something like: they "gained control" of ten dollar stock with paymet due in a year at a price of $40 (And they thought it would be worth $80 by then?)
Simple explanations welcomed-thanks!
It depends what kind of investing in NG they were doing. If it was heavy into options or futures with set experation dates, and they were betting on it going up, kiss that 4 billion goodbye.
I'm sure the news that it looks like a El Nino winter is going to occur this winter where things are warmer and dryer being annouced this week was the last blow to their hedge.
I'd actually be investing in NG companies at these prices right now. Longterm, its a solid play. But if you were betting shortterm on NG prices going up, your in the house of pain.
Bet it's a LOT more than that when they get it figured out.
Short term bets with on the price of NG going higher. Bets probably made before the hurricane season that a major hurricane would disrupt a big portion of production and prices would spike. Hurricane season ended up being mild so far.
Ya know, it really is sad in one way. The MSM can't use the issue to scare us about high natural gas prices because of severe winters or hurricanes.
Is it really at a two year low? I got some tanks I should fill.
It was way up last year.
Ooops!
Good.
The contract price has occasionally dropped below 5 dollars recently.
I believe LTCM was trading in currencies, and thus threatened the global economy.
this is great news.
NG in storage is at an all time September high.
no hurricanes in sight for the gulf.
whoever was in charge of risk management of that hedge portfolio should be publically flogged.
The whole point of a hedge fund is put large sums of money to work, but protected by a balance of investing so if the market moves one direction, you make money, it moves another, you make money. And it if moves in a real dramatic direction, risk is minimized by sufficent bets in the oppposite direction.
These people were obviously placing high risk bets trying to swing for the fences and got hammered.
I bet they hate Karl Rove and his hurricane steering machine.
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