It appears that the recent volatility in natural gas markets has undercut its second hedge fund in as many months as reports on Greenwich, CT-based Amaranth Advisors LLC, which has $7.5 billion in assets under management, said year-to-date losses might exceed 35% (more than $2.625 billion) due to last week’s plunge in natural gas prices.

An Amaranth spokeswoman said she could not comment at this time. She added that a public relations team was currently structuring a response.

Milder temperatures throughout the country combined with the absence of hurricanes in the Gulf of Mexico and the nation’s ever-growing natural gas storage glut brought the natural gas futures prompt month below $5 last week for the first time in two years. The October natural gas futures contract declined 12.2% from $5.675 to $4.982 during the week ended Sept. 15. Even more impressively, the January 2007 contract declined by 16.5% from $10.185 to $8.504. The all important October-January spread (January premium over October) declined from $4.51 on Sept. 8 to $3.52 on Sept. 15.

According to a letter to investors obtained by Bloomberg, the fund said it was addressing the situation. “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,” Amaranth’s founder Nick Maounis said, according to Bloomberg. Amaranth was “near the end of our disposition of natural-gas exposure,” the letter said, adding that Amaranth had met every margin call.

While the 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.

“Amaranth obviously was long the winter market and short next summer. Now they are neither,” said one Northeast broker. “Word on the street is they lost in excess of $2.5 billion. They were billed as a ‘multi-strategy’ hedge fund. I don’t know what that is supposed to mean. Prices went down and they lost money — that doesn’t sound like multi-strategy to me.”

The broker noted that the public may never know what exactly happened. “He was probably forced to liquidate due to a run on the bank. That is what happened at MotherRock,” he said. “These hedge funds are privately held, so they probably aren’t going to talk about the loss at length. They don’t have to have a response to this.”

The broker also noted there will likely be more of these hedge funds undergoing difficulties. “A lot of these guys talk to each other,” he said. “A lot of them operate in the same way.”

Schaeffer’s Investment Research analyst Bill Feingold said news of Amaranth’s “catastrophic natural gas losses” is probably the “most shocking thing I’ve read in my career. Evidently the firm, one of the largest hedge-fund operators around, took a huge bath in natural gas that caused its performance to go from, according to published reports, up almost 30% at the end of August to possibly down more than 35% year-to-date.”

Feingold said the news would be “shocking enough for a small fund,” but it was “particularly astonishing” because Amaranth is a huge diversified firm. “One has to assume that a large part of last week’s natural gas losses were triggered by forced Amaranth sales made to meet margin calls,” he added.

Feingold said that Maounis is a very good “convertible bond guy” who got started in the mid-1980s on a small proprietary trading desk and went to Paloma Partners, a “dominant hedge-fund family specializing in convertibles,” several years later. The analyst said that in 2000, Maounis spun off Amaranth from Paloma and had “grown the firm spectacularly up until this remarkable setback.”

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