Just days after hedge fund Amaranth Advisors LLC warned investors of significant losses due to wrong-way bets in the natural gas futures arena, the company’s founder in a conference call with investors Friday said Amaranth plans to continue operations while working to restore the confidence of investors.

According to multiple reports, Amaranth founder Nick Maounis informed investors Friday that the firm increased its energy trading position in 2006 because it was making substantial returns. During the call, Maounis reportedly disclosed that Amaranth earned $1.26 billion in energy and commodities trading in 2005. Through August 2006 this year, he said the firm recognized energy and commodities trading profits of about $2.17 billion.

While taking no questions from investors during the brief conference call, Maounis said that the fund had received a “substantial” number of requests from investors for their money back. He added that Amaranth has engaged Skadden, Arps, Slate, Meagher & Flom attorney Phil Harris to evaluate the requests.

In the call, Maounis said market conditions deteriorated rapidly during the Sept. 11 week with material losses beginning early in the week and Amaranth accelerating its efforts to reduce exposure. He added that on Sept. 14, the fund experienced roughly $560 million in trading losses on its natural gas positions alone.

The call followed a letter to investors from Maounis late Wednesday (see Daily GPI, Sept. 22) that said the net asset value of the multi-strategy funds had declined “approximately 65% month-to-date” through Sept. 19 and “approximately 55% year-to-date.” This would put month-to-date losses for the company — which managed $9.5B as of last month — somewhere in excess of $6 billion.

While the Amaranth news was eerily reminiscent of MotherRock’s demise in early August (see Daily GPI, Aug. 4), 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.

“MotherRock was just a minor tremor compared to Amaranth and there could be more,” said Tom Saal of Commercial Brokerage Corp. But rather than pouring over the details of these downfalls or speculating who might be the next, the futures broker is consulting his clients and customers — natural gas buyers and sellers — how to protect themselves and even possibly take advantage of the hedge funds’ impact in the market.

“The behavior of the hedge funds has changed over the past several years,” Saal said. “There are now trend- and counter-trend funds. The first type, trend or ‘black box’ funds use a very systematic approach, trading around a pre-defined model or set of technical parameters. Counter-trend, or ‘discretionary’ funds, are the new breed out there and they are the ones we have to take a close look at. Understanding their behavior can help you manage your risk in the futures or options markets.”

Saal and colleague Ed Kennedy are hosting a workshop to discuss this and other strategies for trading and hedging natural gas purchases and sales on Oct. 4-5 at the New York Mercantile Exchange. For more information visit https://workshops.gasmart.com/hedging/.

Others point out that despite the significant loss, regulation on funds and the over-the-counter market is unlikely to come because these collapses have happened before. “It almost seems like it was bound to happen again,” said Steve Blair, a broker with Rafferty Technical Research.

“What is interesting is you see all of these stories about how Amaranth unloaded all of its natural gas positions to Citadel and JP Morgan. What they fail to say is that it is nearly impossible for them to have totally done that because you can’t transfer futures positions,” he said. “The only thing they could have possibly sold off is their over-the-counter positions, which is an important factor. They had to go into the market to unload their futures positions and that is part of the reason futures came down so hard last week. As far as repercussions go, I wouldn’t be surprised to see more fallout next week.”

Commenting on Amaranth being the second fund to hit the skids in two months, Blair said he did not expect other funds to limit their risk down the road. “The reward is too great,” he said. “You have people out there that want to make big bucks and they are willing to make huge bets to do it. Some funds might use this as a cautionary tale, but history has proven that it will be repeated. You can look back to Barings Bank and Nick Leeson as one of a number of examples. No matter how many times it happens, you are always going to have people who really like to lay it all on the line despite the risk.”

Blair said regulation of the over-the-counter market could help — if it ever became a reality. “People have wanted more regulation in the over-the-counter markets for years and it just hasn’t come,” he said. “Until these investors make a big enough stink to regulators, it still won’t happen. Maybe that is part of the pull for people who invest in hedge funds because there is an unlimited amount of risk and an incredible amount of potential reward. Maybe regulation will never happen for that reason.”

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