Amaranth Advisors: Burning Six Billion In Thirty Days

Introduction:
In September, 2006, a large-sized hedge fund named Amaranth Advisors LLC lost $4.942 billion in natural gas futures trading and was forced to close their hedge fund. Although Amaranth Advisors was not exclusively an energy trading fund, the energy portion of their portfolio had slowly grown to represent 80% of the performance attribution of the fund. Their collapse was not entirely unforeseeable or unavoidable. Amaranth had amassed very large positions on both the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) in natural gas futures, swaps, and options. The trades consisted mainly of buying and selling natural gas futures contracts with a
By September 30, Amaranth had liquidated the majority of its equity and public debt positions.
It was rumored that Amaranth had taken a substantial long position in the winter-summer spread in September, with a particularly large position in the March-April “widow-maker” spread. Several news reports indicated that Amaranth had also held outright long positions in winter contract months. Both these positions were betting on a rise in natural gas prices during the winter of 2007.Early in September 2006, weather forecasts predicted a meek hurricane season and with a milder than usual winter. This news coupled with surging inventories, led to a major decline in natural gas prices and caused the spread between winter and summer months to narrow substantially, hurting Hunter’s trades.
Conclusion: The collapse of the hedge fund Amaranth Advisors in September of 2006 drew a flurry of attention. There are several reasons why this hedge fund failure attracted such widespread media attention. First, the size and speed at which Amaranth made losses. In less than 14 days, from September 7, 2006 to September 21, 2006, they had lost almost $4 billion. Second, their losses occurred in the natural gas markets. There is some evidence that Amaranth’s trading activities in the natural gas markets distorted market prices and ultimately hurt consumers of natural gas. For instance, the Municipal Gas Authority of Georgia (MGAG) complained that its hedging costs with abnormally high winter