Amaranth Case

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Amaranth Advisors: Burning Six Billion In Thirty Days

Introduction:
In September, 2006, a large-sized hedge fund named Amaranth Advisors LLC lost $4.942 billion in natural gas futures trading and was forced to close their hedge fund. Although Amaranth Advisors was not exclusively an energy trading fund, the energy portion of their portfolio had slowly grown to represent 80% of the performance attribution of the fund. Their collapse was not entirely unforeseeable or unavoidable. Amaranth had amassed very large positions on both the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) in natural gas futures, swaps, and options. The trades consisted mainly of buying and selling natural gas futures contracts with a variety of maturity dates. Their trades were very risky from both a market risk perspective and a liquidity perspective.

Background:
Amaranth Advisors LLC: Amaranth was a multi-strategy hedge fund headquartered in Greenwich, Connecticut. Nicholas Maounis, a former convertible bond trader, founded Amaranth in September 2000.Amaranth’s initial assets under management of $600 million had grown to between $7.2 billion and $7.5 billion by the end of 2005, which translated to an average annual return of 15%, almost double the average return of other multi-strategy funds over the same period. The Primary strategies employed by the fund included convertible arbitrage, statistical arbitrage, energy trading, merger arbitrage, long/short trading and credit arbitrage. DAAS Capital Advisors: DAAS was a multi-strategy hedge fund, headquartered in the heart of Manhattan. It was founded in 2002 by Ali Armstrong, after he had spent several years as managing director at a major Wall Street investment bank. DAAS had achieved an average annual return of 18.2% since its inception and had grown its assets under management to approximately $2billion.The fund’s 2006 year-to-date return was approximately 16%.This positive performance was largely...
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