Flare-up - Hedge funds
Posted by archive
Hedge funds
Flare-up
Sep 21st 2006 | LONDON AND NEW YORK
From The Economist print edition
Source
Banks scramble to assess their positions after a hedge fund makes bad bets on natural gas
CALGARY, Alberta and Greenwich, Connecticut might be expected to mix about as well as oil and (sparkling) water. Calgary, which has boomed in recent years on the back of oil money, in its soul remains a cow town. Greenwich, a leafy suburb of New York, is anything but. The only herding done there recently is by the hedge funds that call it home following the latest investment fad.
It was one of those fashions—the seductive commodities boom—that rocked Calgary, Greenwich and the wider financial world this week. A young, though by no means junior, energy trader in Calgary made some very big bets on natural-gas prices that went spectacularly wrong. They have cost his employer, a Greenwich-based hedge fund called Amaranth Advisors, $6 billion since August 30th. That is more than half of what not long before was $9 billion it had under management.
In a letter to investors on September 20th, Amaranth reportedly said its losses this month alone could reach 65% of its funds. Withdrawal by investors—not to mention a possible exodus by managers deprived of their bonuses—are likely to hurt it more. The fund could be wound up if a buyer is not found.
Meanwhile, investors in America and abroad—including the sort of pension funds that have recently stocked up on their hedge-fund investments—are smarting. The pension fund at 3M, an American manufacturer, and the San Diego County employees' retirement fund were among those exposed to Amaranth. Funds of hedge funds run by Goldman Sachs and MAN Group expect to see losses of 2% to 3% as a result of its troubles. Funds run by Credit Suisse and Morgan Stanley were also hit. Meanwhile, investment banks have been assessing their losses as a result of lending to Amaranth through their prime-brokerage arms.
Yet unlike the panic after the 1998 collapse of Long-Term Capital Management (LTCM), the biggest hedge fund ever to blow up, the Amaranth case has thus far been met with general calm. Christopher Cox, head of America's Securities and Exchange Commission, said this week the incident was a reminder that hedge funds are not for all investors. But financial markets took it in their stride.
How did it happen? Brian Hunter, the 32-year-old Canadian energy trader, had made a fortune for Amaranth in 2005 when he bet that natural-gas futures would rise and then benefited from surging gas prices after Hurricane Katrina. Last year Trader Monthly ranked him the 29th highest-earning member of his profession, estimating his annual income at $75m to $100m. He was named head of Amaranth's energy-trading operations in the spring. This summer no big storms materialised and the same sort of positions—highly leveraged and insufficiently hedged, analysts say—left the fund exposed to falling prices. Natural-gas futures prices have dropped by two-thirds in the past nine months (see chart).
“I've never seen a hedge fund so highly leveraged in energy,” says Peter Fusaro of the Energy Hedge Fund Centre. He reckons that the fund held about 10% of the global market in natural-gas futures. “Somebody was not monitoring this correctly.”
As its losses mounted, last weekend Amaranth quietly summoned a group of investment banks to its Connecticut headquarters to try to sort out the financial mess. With teams from each firm ensconced in separate rooms, officials from Amaranth shuttled between them, seeking to sell off positions, craft bridging loans and possibly negotiate a takeover. By the end of the weekend, enough had been done to prevent panic. Unlike at LTCM, the Federal Reserve did not have to intervene. To help cover its losses, Amaranth also sold a big chunk of its leveraged loans. They were snapped up, mostly by buyers in Europe.
On September 20th, Amaranth said it had reached agreement to transfer its energy portfolio to JPMorgan Chase (also a futures-clearing broker for the fund) and Citadel, a Chicago-based hedge fund. That is ironic, since Citadel lost a fortune by short-selling natural gas last year and is still rebuilding its gas-trading business
Amaranth is not the first hedge fund to suffer from the wild swings in natural-gas prices in recent months. In August a smaller fund called MotherRock collapsed after big losses; it had been run by Robert Collins, a former head of the New York Mercantile Exchange.
Mr Fusaro reckons that hedge funds have $67.4 billion invested in the energy sector, up from $30 billion two years ago. They still account for a tiny share of the $7 trillion global energy market, but the combination of volatility in energy markets and the growing pool of investment in them means an increasing number of investors are exposed.
Also, banks and brokers will have to assess how prudently they are lending to their high-rolling clients, and whether they are calculating the risks well enough. “A lot of people are going to be looking at their energy exposures”, says Kate Hollis of Standard & Poor's, a rating agency. “When the markets wobble, everyone feels it.”
Copyright © The Economist Newspaper Limited 2006.
Flare-up
Sep 21st 2006 | LONDON AND NEW YORK
From The Economist print edition
Source
Banks scramble to assess their positions after a hedge fund makes bad bets on natural gas
CALGARY, Alberta and Greenwich, Connecticut might be expected to mix about as well as oil and (sparkling) water. Calgary, which has boomed in recent years on the back of oil money, in its soul remains a cow town. Greenwich, a leafy suburb of New York, is anything but. The only herding done there recently is by the hedge funds that call it home following the latest investment fad.
It was one of those fashions—the seductive commodities boom—that rocked Calgary, Greenwich and the wider financial world this week. A young, though by no means junior, energy trader in Calgary made some very big bets on natural-gas prices that went spectacularly wrong. They have cost his employer, a Greenwich-based hedge fund called Amaranth Advisors, $6 billion since August 30th. That is more than half of what not long before was $9 billion it had under management.
In a letter to investors on September 20th, Amaranth reportedly said its losses this month alone could reach 65% of its funds. Withdrawal by investors—not to mention a possible exodus by managers deprived of their bonuses—are likely to hurt it more. The fund could be wound up if a buyer is not found.
Meanwhile, investors in America and abroad—including the sort of pension funds that have recently stocked up on their hedge-fund investments—are smarting. The pension fund at 3M, an American manufacturer, and the San Diego County employees' retirement fund were among those exposed to Amaranth. Funds of hedge funds run by Goldman Sachs and MAN Group expect to see losses of 2% to 3% as a result of its troubles. Funds run by Credit Suisse and Morgan Stanley were also hit. Meanwhile, investment banks have been assessing their losses as a result of lending to Amaranth through their prime-brokerage arms.
Yet unlike the panic after the 1998 collapse of Long-Term Capital Management (LTCM), the biggest hedge fund ever to blow up, the Amaranth case has thus far been met with general calm. Christopher Cox, head of America's Securities and Exchange Commission, said this week the incident was a reminder that hedge funds are not for all investors. But financial markets took it in their stride.
How did it happen? Brian Hunter, the 32-year-old Canadian energy trader, had made a fortune for Amaranth in 2005 when he bet that natural-gas futures would rise and then benefited from surging gas prices after Hurricane Katrina. Last year Trader Monthly ranked him the 29th highest-earning member of his profession, estimating his annual income at $75m to $100m. He was named head of Amaranth's energy-trading operations in the spring. This summer no big storms materialised and the same sort of positions—highly leveraged and insufficiently hedged, analysts say—left the fund exposed to falling prices. Natural-gas futures prices have dropped by two-thirds in the past nine months (see chart).
“I've never seen a hedge fund so highly leveraged in energy,” says Peter Fusaro of the Energy Hedge Fund Centre. He reckons that the fund held about 10% of the global market in natural-gas futures. “Somebody was not monitoring this correctly.”
As its losses mounted, last weekend Amaranth quietly summoned a group of investment banks to its Connecticut headquarters to try to sort out the financial mess. With teams from each firm ensconced in separate rooms, officials from Amaranth shuttled between them, seeking to sell off positions, craft bridging loans and possibly negotiate a takeover. By the end of the weekend, enough had been done to prevent panic. Unlike at LTCM, the Federal Reserve did not have to intervene. To help cover its losses, Amaranth also sold a big chunk of its leveraged loans. They were snapped up, mostly by buyers in Europe.
On September 20th, Amaranth said it had reached agreement to transfer its energy portfolio to JPMorgan Chase (also a futures-clearing broker for the fund) and Citadel, a Chicago-based hedge fund. That is ironic, since Citadel lost a fortune by short-selling natural gas last year and is still rebuilding its gas-trading business
Amaranth is not the first hedge fund to suffer from the wild swings in natural-gas prices in recent months. In August a smaller fund called MotherRock collapsed after big losses; it had been run by Robert Collins, a former head of the New York Mercantile Exchange.
Mr Fusaro reckons that hedge funds have $67.4 billion invested in the energy sector, up from $30 billion two years ago. They still account for a tiny share of the $7 trillion global energy market, but the combination of volatility in energy markets and the growing pool of investment in them means an increasing number of investors are exposed.
Also, banks and brokers will have to assess how prudently they are lending to their high-rolling clients, and whether they are calculating the risks well enough. “A lot of people are going to be looking at their energy exposures”, says Kate Hollis of Standard & Poor's, a rating agency. “When the markets wobble, everyone feels it.”
Copyright © The Economist Newspaper Limited 2006.