Amaranth Advisors LLC was an American multi-strategy

hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as shor ...

founded by Nicholas M. Maounis and headquartered in

Greenwich, Connecticut Greenwich (, ) is a town in southwestern Fairfield County, Connecticut, United States. At the 2020 census, the town had a total population of 63,518. The largest town on Connecticut's Gold Coast, Greenwich is home to many hedge funds and othe ...

. At its peak, the firm had up to $9.2 billion in assets under management before collapsing in September 2006, after losing in excess of $6 billion on

natural gas Natural gas (also called fossil gas or simply gas) is a naturally occurring mixture of gaseous hydrocarbons consisting primarily of methane in addition to various smaller amounts of other higher alkanes. Low levels of trace gases like carbon di ...

futures Futures may mean: Finance *Futures contract, a tradable financial derivatives contract *Futures exchange, a financial market where futures contracts are traded * ''Futures'' (magazine), an American finance magazine Music * ''Futures'' (album), a ...

. Amaranth Advisors collapse is one of the biggest hedge fund collapses in history and at the time (2006) largest known trading losses.

History

2000 founding

The company was founded in 2000 by Nicholas M. Maounis and based in

. Throughout much of its history, convertible arbitrage was the firm's primary profit vehicle. Maounis had prior to founding Amaranth Advisors worked at Paloma Partners as a

portfolio manager A portfolio manager (PM) is a professional responsible for making investment decisions and carrying out investment activities on behalf of vested individuals or institutions. Clients invest their money into the PM's investment policy for future gro ...

covering debt securities. The company was named after the

amaranth ''Amaranthus'' is a cosmopolitan genus of annual or short-lived perennial plants collectively known as amaranths. Some amaranth species are cultivated as leaf vegetables, pseudocereals, and ornamental plants. Catkin-like cymes of densely pack ...

an "immortal" flower that retains vivid color even after death.

2004–2005 Focus on energy trading

During 2004-2005, the firm shifted its emphasis to energy trading by Canadian trader Brian Hunter who invested in the natural gas market. In 2005 the firm made an estimated $1 billion on rising energy prices after

Hurricane Katrina Hurricane Katrina was a destructive Category 5 Atlantic hurricane that caused over 1,800 fatalities and $125 billion in damage in late August 2005, especially in the city of New Orleans and the surrounding areas. It was at the time the cos ...

curtailed production.

2006 Energy trading losses

2005 Dec – natural gas price decline

Amaranth Advisors' troubles began in December 2005 as natural gas prices began to decline and Amaranth Advisors portfolio was structured for the price to move in the spring months of March or April. Hunter, who was 32 years old at the time, invested heavily in natural gas futures which resulted in a single week loss of $6.5 billion when prices failed to move as expected.

Sept 18th 2006 – client told of losses

On Monday September 18, 2006 Amaranth Advisors told investors that natural gas market downturn had resulted in $3 billion of losses. Further Amaranth Advisors told investors that it was working with lenders for maintaining liquidity while also and now selling portfolio holdings "to protect our investors." Traders sold securities that could be liquidated without undermining and disrupting the energy market; these included convertible bonds and high-yield corporate debt.

Transferring energy portfolio

The fund had up to $9 billion under management and reports indicated their losses may have exceeded 65 percent of their investment. Amaranth transferred its energy portfolio to a third party consisting of

Citadel LLC Citadel LLC (formerly known as Citadel Investment Group, LLC) is an American multinational hedge fund and financial services company. Founded in 1990 by Kenneth C. Griffin, it has more than $50 billion in assets under management . The company h ...

and

JPMorgan Chase JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York City and incorporated in Delaware. As of 2022, JPMorgan Chase is the largest bank in the United States, the w ...

October 1, 2006 Fund suspends trading

On September 29, 2006, Amaranth's founder sent a letter to fund investors notifying them of the fund's suspension and on October 1, 2006, Amaranth hired the

Fortress Investment Group Fortress Investment Group is an American investment management firm based in New York City. Fortress was founded as a private equity firm in 1998 by Wes Edens, Rob Kauffman, and Randal Nardone. When Fortress launched on the NYSE in February 20 ...

to liquidate its assets. In September 2006 Amaranth Advisors investors were informed that they could not pull their money out and that redemptions would be temporarily suspended for two months. Ten years later 90% of assets had been returned and 10% of investor assets were still frozen through December 2016.

Clients

Amaranth Advisors' investors included

pension funds A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed and priva ...

, endowments, banks and brokerage firms including Institutional Fund of Hedge Funds at

Morgan Stanley Morgan Stanley is an American multinational investment management and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in more than 41 countries and more than 75,000 employees, the fi ...

. Pension fund clients included San Diego County Employees Retirement Association.

Investigations

2007 CFTC investigation

On July 25, 2007, the

Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options. The Commodity Exchange Ac ...

(CFTC) charged Amaranth and Hunter with attempting to manipulate the price of natural gas futures. Additionally, the

Federal Energy Regulatory Commission The Federal Energy Regulatory Commission (FERC) is the United States federal agency that regulates the transmission and wholesale sale of electricity and natural gas in interstate commerce and regulates the transportation of oil by pipeline in ...

charged Amaranth, Hunter and trader Matthew Donohoe with

market manipulation In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearanc ...

. The CFTC and the FERC had conflicting versions of what Hunter did, and are currently competing over

jurisdiction Jurisdiction (from Latin 'law' + 'declaration') is the legal term for the legal authority granted to a legal entity to enact justice. In federations like the United States, areas of jurisdiction apply to local, state, and federal levels. Jur ...

. In 2014 Hunter settled with the CFTC, paying a $750,000 fine and accepting a ban from trading all CFTC-regulated natural-gas products.

2010 Federal Energy Regulatory Commission

On January 22, 2010, a

administrative law judge ruled that Hunter violated the Commission's Anti-Manipulation Rule. Judge Carmen Cintron found that "Hunter intentionally manipulated the settlement price of the at-issue natural gas futures contracts. His trading was specifically designed to lower the NYMEX price in order to benefit his swap positions on other exchanges." The decision is subject to review by the Commission.

Legal

In November 2007 Amaranth Advisors filed a lawsuit against

JPMorgan JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York City and incorporated in Delaware. As of 2022, JPMorgan Chase is the largest bank in the United States, the wo ...

claiming $1 billion in damages on the grounds that the bank interfered in the company's efforts to avoid collapse after natural-gas trades losses in 2006. The suit claimed that JP Morgan as Amaranth Advisors's clearing broker use their position to prevent Amaranth Advisors from derisking their exposure from its natural-gas derivatives portfolio by preventing the portfolio from being sold to first

Goldman Sachs Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, Hong ...

and later

. In December 2012, the

New York State Court of Appeals The New York Court of Appeals is the highest court in the Unified Court System of the State of New York. The Court of Appeals consists of seven judges: the Chief Judge and six Associate Judges who are appointed by the Governor and confirmed by ...

upheld an earlier dismissal of the case. During the collapse of Amaranth Advisors, Centaurus was credited as being one of the major players on the other side of their position.

Criticism

During the week of September 11, 2006, one week before clients were notified of losses, Amaranth Advisors was seeking new investors and marketing their fund as being up 25 percent for the year. ''The New York Times'' reported that Amaranth Advisors said it was a multi-strategy fund though acted "like an energy and commodities fund. When it bet big on natural gas and lost, it was apparent that it was neither multistrategy nor particularly well hedged" and also that in Amaranth Advisors' case " 'multistrategy' seems to have been a misnomer at the fund."

Nassim Nicholas Taleb Nassim Nicholas Taleb (; alternatively ''Nessim ''or'' Nissim''; born 12 September 1960) is a Lebanese-American essayist, mathematical statistician, former option trader, risk analyst, and aphorist whose work concerns problems of randomness ...

proposed the company's use of "twelve

risk manager In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...

s" was meaningless, as the risk models failed to anticipate or ameliorate the problems that ended Amaranth Advisors.