Allowing that much is still unknown surrounding the $6 billion downfall of hedge fund Amaranth Advisors LLC, veteran energy analyst John Olson of Poole Capital Partners LLC said it appears the fund tried to dominate the market by taking enormous position sizes. In Washington, DC, calls for regulation of over-the-counter trading continued.

Amaranth founder Nicholas Maounis warned investors last week 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-to-date losses for the company — which managed $9.5B as of last month — somewhere in excess of $6 billion (see Daily GPI, Sept. 19; Sept. 25).

“Amaranth was basically trading on steroids,” said Olson, who is chief investment officer for Poole, the general partner of three equity hedge funds. “They would take positions 20 or 30 times the size of what were considered normal transactions. It appeared Amaranth was applying a strategy of overwhelming force in the marketplace, and they did not have enough ammunition to sustain themselves in a falling market.”

Echoing Olson’s belief that Amaranth attempted strong-arm tactics in the natural gas arena, Robert McCullough, manager of McCullough Research, said Tuesday that he believes Amaranth trader Brian Hunter quite possibly attempted to corner the natural gas market and that the “lack of federal oversight” of energy markets and hedge funds by FERC, the CFTC and the SEC helped him almost accomplish his goal (see Daily GPI, Sept. 27).

Looking at the repercussions, Olson, who is best known for outing Enron early, told NGI there are probably other funds that are likely in a similar position in the market to Amaranth. “There probably are more casualties; we just haven’t heard from them yet,” he said. “There is a rumor that one New York bank is going to build some character here.”

He said that with funds entering the energy marketplace all of the time, the Amaranth story should serve as a warning. “This will probably serve as a shot over the bow, if you will, of the newcomers to this game,” Olson said. “Keep in mind that something around $60 billion of new funds went into energy commodity hedge funds over the last three years, and they have certainly contributed to the volatility of Nymex and the marketplace in general. How that $60 billion plays out remains to be seen.”

Despite the lack of hard facts in the case, the analyst said more details are likely to trickle out. “I would think that with the September quarter closing at the end of this week we might hear some more news in the following several weeks.”

Another topic brought to the forefront by the Amaranth story is hedge fund regulation. Bill Feingold, an analyst with Schaeffer’s Investment Research, said earlier this week that the “knee-jerk call for regulation” brought on by the media could be a good thing — if the regulation is implemented correctly.

“Let’s concede for a moment that further regulation is necessary,” Feingold said. “How do we make sure that the cure isn’t worse than the symptoms? Is it better to limit vastly the universe of assets pension funds and other investors can buy? One effect of this would be to go directly against Nobel-winning portfolio theory, which argues that a group of seemingly risky but uncorrelated assets can make up a portfolio that provides the best possible return for any given level of risk.”

Feingold said, realistically more regulation “may well be necessary,” but he noted that the regulators that are needed are the ones who are comfortable with the strategies they follow. “It’s not easy for regulatory bodies to hire sufficient numbers of talented workers who understand the strategies and can supervise appropriately,” he noted. “Simply put, their private market value is usually too high. How do you address this?”

As for reports in the media that regulators are moving too slowly on this issue, Feingold said the policy makers might be waiting until they have a complete staff ready to do the job. “If this be so, they deserve credit, not random impatience,” he said.

On the over-the-counter market regulation front, Sen. Dianne Feinstein (D-CA) on Wednesday criticized the Commodity Futures Trading Commission (CFTC) for its 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. She believes the bipartisan measure (sponsored by 12 Democrats and one Republican) would give the CFTC the means to effectively exercise its existing anti-fraud and anti-manipulation authority over energy commodities traded on U.S. exchanges.

She added that the fallout from Amaranth trader Brian Hunter’s ill-advised natural gas trades were far-reaching. She noted that among other clients who suffered massive setbacks, the collapse of the hedge fund reportedly cost the County of San Diego as much as $87 million in investments set aside for employee pensions.

“I see no evidence that the CFTC has done anything throughout this whole affair,” Feinstein said. “The CFTC consistently says they do not need additional authority to prevent manipulation in the over the counter markets. So if that’s the case, where were they before Amaranth’s Mr. Hunter bet $6 billion on natural gas futures? How many times do we have to learn this lesson? We need transparency in and federal oversight of our energy markets. We need to pass my legislation without delay.”

Various reports Wednesday stated that Calgary-based Hunter, age 32, was no longer with Amaranth. According to the Financial Times, Amaranth informed investors that the trader had left the firm and had received no termination pay.

Feinstein’s Oil and Gas Trader’s Oversight Act (S.2642) would:

The bill is also sponsored by Senators Olympia Snow (R-ME), Carl Levin (D-MI), Maria Cantwell (D-WA), Tom Harkin (D-IA), Barbara Mikulski (D-MD), Barbara Boxer (D-CA), Jeff Bingaman (D-NM), Byron Dorgan (D-ND), Frank Lautenberg (D-NJ), Jack Reed (D-RI), Russell Feingold (D-WI) and Joseph Lieberman (D-CT).

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