Looking to return what’s left of clients’ money after losing in excess of $6 billion on wrong-way natural gas bets during September, Amaranth Advisors LLC has hired Fortress Investment Group LLC to help sell its hedge-fund holdings, according to Associated Press reports. As part of the fallout, calls for the regulation of the over-the-counter (OTC) market and of hedge funds continue.
Amaranth founder Nicholas Maounis warned investors last month of significant losses due to bad bets in the natural gas futures arena over just a few days in September. He said the net asset value of the multi-strategy fund had declined “approximately 65% month-to-date” through Sept. 19 and “approximately 55% year-to-date.” This would put month-through Sept. 19 losses for the company — which managed $9.5B as of August– somewhere in excess of $6 billion (see NGI, Sept. 25; Oct. 2).
Documenting the hedge fund’s downfall, one prominent analyst said that while Amaranth’s trading strategy was sound, the position sizes were way too big (see related story).
The report early last week that Fortress has been brought in to help liquidate followed word that the Greenwich, CT-based hedge fund was preparing to shut down, a move the fund had vowed not to make. Despite the significant hit to the fund’s net asset value, Maounis said in late September that Amaranth intended to begin scheduling one-on-one meetings with investors and that the fund planned to continue operations while working to restore their confidence. “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 a letter to investors in late September. “We assure you that we are eager to do so.”
However, investor demands for redemption of their investments reportedly became more strident and unmanageable, leading to the move to hire Fortress. According to reports Monday, the amount of money investors get back depends on how effectively the $3 billion in assets held by the firm’s two main funds are liquidated. Maounis assured investors that fees associated with Fortress’ help will be paid by Amaranth and not by the Amaranth funds. Amaranth refused to comment on the report while calls to Fortress were unreturned as of time of press.
New York-based Fortress is a global alternative investment and asset management firm founded in 1998 with over $24 billion in equity capital under management. Its affiliates have offices in Dallas, Frankfurt, Geneva, Hong Kong, London, Rome, San Diego, Sydney and Toronto.
Immediately following reports of Amaranth’s troubles, the fund sold its energy portfolio at a loss to J.P. Morgan Chase & Co and Citadel Investment Group LLC. The fund was in talks to sell the remainder of its holdings to Citigroup, but those talks broke down late last month, according to sources close to the situation.
Highlighting the recent hedge fund blowouts, the latest call for regulation came last week from the American Public Gas Association (APGA), which has asked both the House and Senate for “greater transparency” in natural gas trading.
In letters to both branches of Congress, APGA CEO Bert Kalisch, citing the Amaranth trouble and the August collapse of fellow hedge fund MotherRock LP (see NGI, Aug. 7; Aug. 14), said, “APGA believes that the excessive volatility created by the activities and subsequent fallout of these hedge funds further supports the need for greater transparency in natural gas trading.”
Kalisch added that the Amaranth incident highlights the ongoing impact that unregulated and unlimited speculative trading can have on the natural gas market. “The media has reported that Amaranth held large speculative positions in natural gas for months into the future and they also apparently traded heavily in price spreads between the summer and winter seasons,” Kalisch said in the letters. “The positions they held were excessive and the unwinding of these positions has lead to even more volatility in a market already plagued by volatility for many years. These actions may have kept prices inflated for many years into the future, and, although the market is correcting and prices are falling, the effects will be felt by the American public.”
Combating the belief that no one but the big players were hurt by Amaranth’s fallout, Kalisch said American consumers were the ultimate victims because they are supplied by utilities that utilize hedging programs to stabilize natural gas costs. “Prudent utilities did not wait until the end of summer to fix prices for the coming winter,” Kalisch hypothesized. “Thus, they fixed the price of portions of their winter gas requirements (likely a majority) well before the hedge fund fallout sparked a drop in prices.”
The APGA calls for reform are not the first in this situation. Immediately following the news of Amaranth’s difficulties, Connecticut Attorney General Richard Blumenthal reiterated his long-standing call for more oversight of hedge funds in general. Blumenthal said he is “collecting evidence and reviewing facts” concerning the large losses at Amaranth and renewed his call for “greater transparency and disclosure” in the hedge fund industry. Sen. Dianne Feinstein (D-CA) joined the chorus of criticism in late September, blaming the Commodity Futures Trading Commission (CFTC) for failure to properly perform its oversight responsibility for energy trading markets. Feinstein also renewed her call for passage of legislation she has sponsored to increase transparency and accountability in energy trading markets for oil and natural gas.
In a letter to the heads of the Senate Agriculture Committee late last month, Paul N. Cicio, president of the Industrial Energy Consumers of America (IECA), said his group has voiced its support for legislation that would close a “substantial part” of a regulatory loophole by giving the CFTC oversight of the OTC energy electronic trading market (see NGI, Oct. 2).
In his letters to Congress, APGA’s Kalisch also said that the vast majority of natural gas derivatives are currently traded without government oversight. “While the Commodity Futures Trading Commission (CFTC) monitors trading of natural gas contracts cleared through the Nymex, it receives very limited information regarding trading of natural gas derivatives on the Intercontinental Exchange or on the over the counter market where tens of thousands of trades are placed every day,” he said.
The APGA asked Congress to give the CFTC the authority to collect information concerning all positions held by the largest traders in the natural gas derivatives market and not just positions cleared through the Nymex Exchange. “Natural gas and other energy markets have a somewhat unique situation because of the vastness of the unregulated over-the-counter market compared to other commodities,” he said. “The Amaranth and MotherRock fallouts highlight the need for regulators to understand and have access to more data to monitor the natural gas market. We also feel a speculative position limit that crosses over both exchange traded and OTC derivatives would help deter speculative interests from taking excessive positions.”
Kalisch added that without comprehensive large trader position reporting, the government is currently “handicapped in its ability” to deter energy market misconduct. “Without giving the government the tools to prevent manipulation, market users and consumers of natural gas, who depend on the integrity of the natural gas market, cannot have the confidence in those markets that the public deserves. The minimal costs associated with this increased transparency are far outweighed by the benefits that will be provided in terms of consumer confidence.”
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