Three days after news broke that hedge fund Amaranth Advisors LLC lost a significant portion of its net asset value in the natural gas futures market, the company’s founder late Wednesday updated investors on the size of the fund’s losses while reporting that the gas trading book had been sold to third parties. There were also reports Wednesday and Thursday that Citigroup — the largest U.S. bank — was interested in purchasing a stake in Amaranth, but the company declined comment.

In a letter to investors late Wednesday, Amaranth founder Nick Maounis said that as of Sept. 19, “the net asset value of the multi-strategy funds had declined approximately 65% month-to-date and approximately 55% year-to-date.” This would put month-to-date losses for the company — which manged $9.5B as of last month — somewhere in excess of $6 billion.

Word of the fund’s sizeable losses sent shockwaves through the natural gas industry as traders attempted to decipher the ripple-effect on the natural gas futures market (see Daily GPI, Sept. 19). The news also spurred calls for tighter regulation as Connecticut Attorney General Richard Blumenthal highlighted Amaranth’s difficulties in his call on Tuesday for more oversight of hedge funds (see Daily GPI, Sept. 20).

“During the week of Sept. 11, 2006, we experienced significant mark-to-market losses in our natural gas derivatives portfolio,” Amaranth founder Nick Maounis told investors in a letter. “The resulting margin calls on these positions created serious constraints on the funds’ liquidity. In order to prevent further mark-to-market losses on the natural gas positions, and to reduce the risk of defaulting on margin calls, we transferred these positions to a third party at a price that resulted in additional significant losses. To generate the liquidity required to avoid defaults under our counterparty documents, we also sold a significant number of positions in the funds’ other portfolios.”

According to sources close to the situation, Amaranth Advisors sold its energy portfolio at a loss to J.P. Morgan Chase & Co and Citadel Investment Group LLC, although none of the three companies would comment on the transaction. Citadel, a large hedge fund run by Kenneth Griffin out of Chicago, currently manages more than $12 billion for a wide range of investors.

Maounis told investors that Amaranth has “continued to meet all margin calls,” adding that “our major financial counterparties have confirmed that they are now comfortable with our portfolio and overall liquidity position.” A New York Mercantile Exchange spokeswoman backed this claim up on Wednesday, telling NGI that Amaranth’s clearing member on the exchange was still in “good standing” (see Daily GPI, Sept. 21).

Despite the significant hit to the fund’s net asset value, Maounis is planning to hold a conference call for investors Friday and the company intends to begin scheduling one-on-one meetings with investors next week. “Amaranth is determined to earn back its investors’ trust, and one step towards that end is to share as much information as we reasonably can,” he said in the letter. “We assure you that we are eager to do so.”

Reports of Amaranth’s troubles echoed MotherRock’s demise in early August (see Daily GPI, Aug. 4). However, Amaranth’s rumored losses — if confirmed — are significantly greater. After less than two years of operation, energy hedge fund MotherRock LP said it was closing its doors following an alleged $200+ million loss in natural gas trading over June and July.

Amaranth might not be the last fund to break the bank either, according to industry watchers (see related story). Citigroup analyst Tim Evans said when these things happen, it is normally a string of companies making the bad call. “When we see a company having trouble like this in the market, there is usually more than one company having difficulty,” he said. “I don’t think we should just assume that this is the end of it. We had the MotherRock situation in August and now this Amaranth blow-up.

“I think this is indicative of a larger problem that some traders or funds have been very highly leveraged in their approach to the market,” he added. “With these aggressive position sizes, it does not take long to erase all of your profits.” With these larger-than-market position sizes, Evans said “profit from five years can evaporate in five weeks.”

Maounis started in the mid-1980s on a small proprietary trading desk before going to Paloma Partners, a hedge-fund family specializing in convertibles. In 2000, he spun off Amaranth from Paloma.

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