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.
These guys are charging huge fees and have to bring in huge profits, 10 to 20% per year. That means big risk.
Would have been a great time to take profits. Can't believe they didn't. NG futures are down 40 PERCENT since then.
It's Bush's fault, he lost the key to his hurricane machine.
/Salute
And some people try to tell us there is no God!
Not to worry. We taxpayers will bail them out.
Either very very quietly (in the next room) or wait until the Christmas party and he is really sloshed and work it into the conversation.
"If you're looking for investment advice, the best advice I can give anyone is to beware of those "bright young tigers"."
So the bright young tiger gets fired for screwing up.
Now he has to learn to live on the $75 mil that he made last year.
It's not so much that a high flying hot-money hedge fund has crashed and burned. In the search for yield in the current black box driven market, highly leveraged dollars must be risked to "earn" nickels and pennies. The concern is that such a blowup may spark a domino-like effect as a cascading debt default unwinds across the financial spectrum.
Nothing worse than making billions on paper and finding out the corresponding long to your short can't pay. Thus the concept of counter-party risk emerges. Because when you can't get paid for a winner you can't pay for your losers and so on and so on down the chain. It is not uncommon for these hedge funds to be leveraged ten or twenty times their capital. They can literally be wiped out in the blink of an eye.
Then of course there are the derivatives -- what Buffet has referred to as "financial weapons of mass destruction." Some of these derivative contracts can bring leverage of a hundred times across dozens of interlocking financial contracts. They serve to convert low cost debt into paper profits according to modern accounting techniques -- all in the name of "hedging" risk.
There is a fear that a systemic crash along the lines of this firm's woes can easily be triggered by fat tail standard deviations, rogue traders or some kind of event that sparks unheard of volatility. The majority of NYSE trading is now done between computer programs and there is some concern that the US government is monetizing its own debt through offshore purchases in the bond markets.
It is all extremely complicated and based with ever escalating levels of debt as the foundation. No one really knows what is going on now but you should expect to see more of these kind of stories.
I wouldn't worry about it though. After all, we have it on very good authority (CNBC) that the economy is sound.
HG
LTCM controlled 5% of the bonds in the entire world!!When their positions went against them, rather than close them at a loss LTCM borrowed more money and doubled down (always a bad idea).
From InvestorPedia:
LTCM started with just over $1 billion in initial assets and focused on bond trading. The trading strategy of the fund was to make convergence trades, which involve taking advantage of arbitrage between securities that are incorrectly priced relative to each other. Due to the small spread in arbitrage opportunities, the fund had to leverage itself highly to make money. At its height in 1998, the fund had $5 billion in assets, controlled over $100 billion and had positions whose total worth was over a $1 trillion.
Due to its highly leveraged nature and a financial crisis in Russia (i.e. the default of government bonds) which led to a flight to quality, the fund sustained massive losses and was in danger of defaulting on its loans. This made it difficult for the fund to cut its losses in its positions. The fund held huge positions in the market, totaling roughly 5% of the total global fixed-income market. LTCM had borrowed massive amounts of money to finance its leveraged trades. Had LTCM gone into default, it would have triggered a global financial crisis, caused by the massive write-offs its creditors would have had to make. In September 1998, the fund, which continued to sustain losses, was bailed out with the help of the Federal Reserve and its creditors and taken over. A systematic meltdown of the market was thus prevented.
Amaranth does not control 5% of the natural gas in the world, nor will its collapse (should that occur) cause a chain-failure of the global banking system (including some smaller governments). Liquidation of the Amranth positions is described as orderly.
For the Wikipedia explanantion, Go Here
Wait till the same happens with oil. Oh, boy it might be bloody.
Actually, there is quite a bit of hurricane season left, and it is "on track"..
The Hurricanes (and typhoons) just haven't been occurring where they have affected us..(yet).
The East Coast, West coast, or Gulf States could still end up being the target of extreme weather..
Some weather person (Janice Dean, FOXnews) said we're only about half way through the season and activity is actually above projections..
Maybe try the Buddhist approach - tell him that it is all an illusion. Having the 4 billion was an illusion, and losing the 4 billion was an illusion ...
LOL!
There was a movie with this theme, based on the trader who nearly ruined Barclays, called Rogue Trader.
Imagine the fun and games when interest rates jerk up or down. Natrual Gas is small potatoes compared to interest rate futures.
The leverage on futures contracts is quite high; on derivatives, infinite. Just place a bet.
The Durasell Fund will also invest in the casino -- that's the hedge part.
Wow, this is truly pathetic investment strategy. How much do you wanna bet that the ultimate decision maker who came up with the idea of this "Natural Gas Hedge" was a Left Wing Democrat? These clowns, and others like them, are the primary reason that we've been paying WAYYYY too much for energy (gas, heating, etc...) over the last year or two.
I'm still investing in the casino itself, since I don't have to pay the Durasell Unlimited Fund's fees that way. Sorry.
Did I mention that for every $20 million you invest in the Durasell Fund you get -- ABSOLUTELY FREE -- an official, cotton poly blend Durasell Fund t-shirt?
Yet he didn't have to pay for this year's loss? Sounds like he's on the road to CEO...get a huge bonus when the business cycle favors your choice, but when you make the wrong decision, it's just "bad luck"...
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