Amaranth's Slide Began With Offer to Keep Star Trader

By Katherine Burton and Jenny Strasburg
December 6, 2006

Nicholas Maounis, founder of the Amaranth Advisors LLC hedge fund, made a decision in April 2005 that eventually cost him his firm.

His promising natural-gas trader, Brian Hunter, had been offered a $1 million bonus to join Steven Cohen's SAC Capital Advisors LLC. Maounis, who had built his Greenwich, Connecticut- based fund to $6 billion in assets, didn't want Hunter to go.

Convertible bond and equity prices were falling and oil and natural gas prices were increasing, making Hunter's expertise more valuable. So Maounis named Hunter co-head of the energy desk and gave him control of his own trades.

Hunter, within 17 months, would be responsible for $6.6 billion in losses, detonating the biggest hedge fund implosion ever. Since Amaranth's sudden collapse, investors have questioned the unusual trust Maounis put in his star trader, now 32. They say Maounis gave Hunter too much latitude and that Hunter, trading more than half the firm's assets, was blinded by a bet that had worked like a charm for two straight years.

``Amaranth's demise is not due to some complicated quantitative reason -- it's about human failing and frailty,'' says Hank Higdon, who runs New York-based Higdon Partners LLC, a recruiter for hedge funds and other money-management firms.

Hunter declined to comment for this article when contacted Dec. 4, and Maounis, 43, declined to comment through a spokesman.

Billions Lost

Tallying the final days of Amaranth involves huge sums: During one week in September, Hunter's bet on natural gas lost about $4.6 billion. By month's end, the losses totaled $6.6 billion, or 70 percent of Amaranth's assets.

At least one investor saw serious warning signs about the big energy bets and pulled out before the collapse. Some former employees -- who, like others familiar with Amaranth's unraveling, spoke on condition of anonymity because the fund is a private company -- also say they raised questions about the extent of that wager.

When an abrupt market reversal left the fund facing enormous losses, it was too late to unload positions.

`Blood in the Water'

``When you know someone has such a big position, it's like blood in the water,'' says Mark Williams, a Boston University finance professor and former risk manager at electricity trader Citizens Power in Boston.

``Amaranth had exercised its muscle in the market when they were up, and now the tables were turned, and the market was exercising its muscle against them.''

Market conditions weren't ideal in 2005, either, when Maounis negotiated with Hunter that April for an enhanced role at the firm. Amid the discussions, convertible bonds, once a mainstay for Amaranth, tumbled. In the first five months of 2005, convertible bond funds fell an average of 6.5 percent, according to Chicago-based Hedge Fund Research Inc., as the difference in yields between corporate and government bonds narrowed and volatility in the stock market dropped to a record low.

Amaranth's credit bets suffered after Standard & Poor's cut the credit ratings of General Motors Corp. and Ford Motor Co. to junk -- or below investment grade -- in May 2005, and its equity positions weren't making money, either, two former portfolio managers at the firm say.

Maounis, who often sat on the trading floor in Greenwich, looked to Hunter for rescue because his natural gas and other energy trades were successful.

`Do Something'

``Do something,'' former traders quote Maounis as saying when Hunter walked by. ``We need you.''

Hunter obliged. Investors and Amaranth employees say his big score came in September 2005, when the natural gas bets he had placed earlier in the year made $1 billion in the wake of hurricanes Katrina and Rita as he correctly wagered that prices would increase.

The hurricanes -- Katrina hit the U.S. Gulf Coast on Aug. 29 and Rita followed on Sept. 24 -- limited gas supplies, pushing prices to a record $14.20 per million British thermal units on Sept. 29.

That was when fellow employees started learning more about the low-key, 6-foot-5-inch (2-meter) Hunter, a Canadian who sometimes wore jerseys of the National Hockey League's Calgary Flames on the trading desk, colleagues say.

Convertible Bonds

Maounis, a former convertible bond trader, opened Amaranth in September 2000 with $600 million in assets and the goal of operating a multistrategy hedge fund like Kenneth Griffin's $12.8 billion Chicago-based Citadel Investment Group LLC, Amaranth investors say. Griffin built one of the largest hedge fund firms in the world with returns that averaged about 25 percent a year since 1991, according to investors in the funds.

Amaranth's assets totaled $7.5 billion by the end of 2005, making it the world's 39th-largest hedge fund, according to Hedge Fund Research. Its clients were some of the biggest institutional investors, including funds run by Goldman Sachs Group Inc., Morgan Stanley, Deutsche Bank AG and Bank of New York Co.'s Ivy Asset Management Corp. Pension funds of 3M Co. of St. Paul, Minnesota, and the San Diego County public employees also signed on.

Amaranth grew with the industry. Hedge funds -- loosely regulated, private pools of capital that allow managers to participate substantially in their investment gains -- managed $1.1 trillion at that time, more than double the amount of five years earlier, according to Hedge Fund Research.

As the hedge fund field became more crowded, traders complained that everyone was trying to take the same positions and that market inefficiencies, which the funds exploit for profit, were disappearing.

Leeway for Traders

Amaranth sought profits in shares of merging companies, distressed debt and stocks. It made a push into energy trading in 2002, hiring former Enron Corp. trader Harry Arora to lead the effort.

Maounis's style was to focus on raising money from investors, deciding how it should be allocated and hiring the best traders he could find. He didn't micromanage, preferring to give more leeway to traders who did well, former employees say.

Maounis knew who was making and losing money, though he mostly left the details to department heads and the risk management team headed by Rob Jones, Amaranth investment professionals say. Jones declined to comment through a spokesman.

Using this model, Amaranth had 15 percent annualized returns since its inception -- more than double the average performance of multistrategy funds for the same time period, according to Hedge Fund Research.


Maounis, who graduated from the University of Connecticut in 1985 with a finance degree, started his career at investment bank LF Rothschild, Unterberg, Towbin and hedge fund Angelo, Gordon & Co., both based in New York.

In 1992, he joined Greenwich-based Paloma Partners LLC and eventually traded $400 million, the largest amount managed by any individual at the hedge fund.

``At Paloma, Nick had a stellar reputation as a consistent performer in convertible arbitrage,'' says Leon Metzger, a former Paloma executive who is a lecturer in finance at Yale University in New Haven, Connecticut.

After eight years, Maounis left to form Amaranth with 27 employees.

The stocky, 5-foot-9-inch former trader created a pleasant environment for employees. Amaranth's offices featured a gym; a game room with pool tables, foosball and air hockey; and a music room with electric guitars and drums so people could jam. The traders and investment managers wore costumes at work for Halloween.

Mathematics Degree

Hunter, who grew up near Calgary, had earned a master's degree in mathematics from the University of Alberta before starting to trade natural gas in 1998, according to Amaranth marketing materials.

He traded for Calgary-based TransCanada Corp., then joined Deutsche Bank in New York in May 2001. In his first two years, he earned $69 million for the bank, according to a complaint Hunter later filed in New York State court in Manhattan that claims the bank owes him bonus money.

Ted Meyer, a Deutsche Bank spokesman, declined to comment on the suit. Deutsche Bank filed a motion for summary judgment last week, saying Hunter's bonus was at the discretion of bank managers. The lawsuit is pending.

By 2003, Hunter was head of the bank's natural gas desk.

``Brian was always very open to talking about the market and giving of his knowledge,'' says former Deutsche Bank colleague Bruno Stanziale, 34. ``He has an understanding of the market that others do not.''

`Unforeseeable Run-up'

In December 2003, Hunter and his colleagues were up $76 million for the year. In the first week of the month, however, the desk lost $51.2 million after an ``unprecedented and unforeseeable run-up in gas prices,'' according to Hunter's lawsuit.

Hunter says in the suit that even with the loss, he made $40 million for Deutsche Bank that year and more than $100 million in three years.

Hunter left Deutsche Bank in April 2004 and joined Amaranth shortly thereafter.

The first domino in Amaranth's demise fell a year later when Hunter told Maounis about the job offer by Cohen's $8.5- billion, Stamford, Connecticut-based hedge fund, the 23rd- largest by December 2005, according to Hedge Fund Research. Former Amaranth employees with knowledge of compensation agreements say Maounis countered by giving Hunter more trading authority.

By the end of 2005, Hunter was the highest-paid trader at Amaranth, the former employees say. Under his new deal with Maounis, Hunter earned 15 percent of any profit he made, while most traders made an average of 10 percent.

$75 Million Earned

Like many other employees, he put a third of his bonus in the fund, which vested over three years.

In 2005, Hunter earned about $75 million, primarily from his Katrina bet, compared with about $4 million in 2004, the employees say.

At the end of 2005, Maounis let Hunter move his wife and two children back to Calgary and open an office with eight traders.

Yet at least one potential investor visiting Amaranth at that time was concerned the fund's energy holdings were too large.

``It looked to us like the Amaranth multistrategy fund was a pure energy bet,'' says Edward Vasser, chief investment officer of Wolf Asset Management International LLC, a Santa Fe, New Mexico-based fund of funds. ``Almost all of their profits came from their energy portfolio.''

He decided against investing in Amaranth.

Assets in Energy

Still, the energy bet was working for Amaranth, which had about 30 percent of its assets in the sector. The flagship fund ended the year up about 15 percent, compared with Citadel's 7 percent.

In January 2006, Maounis allocated $1 billion to Hunter, who then made $300 million during the next four weeks, former employees say.

The wager had been essentially the same since Hunter joined Amaranth. He was betting that the difference in prices of natural gas between winter months and summer months would widen. Winter months were represented by March delivery contracts and summer months by April contracts.

He placed these trades going out until 2012, say market participants with knowledge of his positions. The spread widened to more than $2 early this year from about 40 cents when Hunter started at Amaranth in 2004.

Betting on Oil

Hunter also bet that natural-gas prices would increase while fuel and heating oils either would stay the same or fall.

Arora, Hunter's former boss and the trader with the most knowledge of energy markets at Amaranth, quit in March to start his own fund.

In April, Amaranth's fund climbed 13 percent, almost entirely because of energy trades, according to investors. In the first four months of the year, when other multistrategy funds were up an average of 5.3 percent, Amaranth's returns approached 30 percent, they say.

Some investors were troubled by the fund's concentrated wagers. Executives of Blackstone Alternative Asset Management, the fund of hedge funds unit of New York-based Blackstone Group, went to Calgary in May to visit Hunter and afterward pulled their entire investment, says a person familiar with the situation who spoke on condition of anonymity. A Blackstone spokesman declined to comment.

Narrowing Spread

Former employees also say they were concerned about the possibility of large losses. Some say they questioned Maounis and Jones about Hunter's gamble and were told that the wagers weren't particularly risky because it was an arbitrage -- profiting from price disparities -- rather than a directional bet on natural gas.

In May, Hunter's fortunes changed. Spreads between October and January contracts, another way to wager on price differences between warmer and colder months, narrowed to $3.27 from a high of $3.64. Spreads between March and April contracts also narrowed. Hunter lost $1 billion.

Jones and Maounis asked other traders, in areas like stocks and convertible bonds, to cut their positions to raise cash, former employees say.

Amaranth's paper profits in natural gas were significant, yet it couldn't realize all of the gains selling. Traders and hedge funds knew Amaranth was desperate to get out of its trades, so they wouldn't pay current prices.

Flights From Calgary

Word spread within the firm that Hunter had lost big, and other Amaranth traders say they assumed that he, Maounis and Jones would reduce the exposure to natural gas.

Hunter controlled 56 percent of Amaranth's assets and accounted for 78 percent of its performance as of June 30, according to a July report to investors obtained by Bloomberg News.

Starting in May, Hunter and his team spent most of the summer flying between Calgary and Greenwich to meet with Jones and Maounis, colleagues who saw them in Greenwich say. They conferred almost daily at 4 p.m. Eastern time, either in person or by phone or videoconference.

Still, money kept coming into the fund. In June, clients invested a net $379.4 million, the biggest inflow of the year, according to an Amaranth document given to investors.

The firm's energy allocation was unchanged as of July 31, according to an investor letter sent in August.

``While we are targeting a smaller allocation for natural gas in the future, we believe opportunities in the natural gas market remain attractive and continue to maintain positions where we believe fundamentals are disconnected with current prices,'' Maounis wrote.

From June to August, the energy and commodities positions earned $1.35 billion, Maounis told clients on a Sept. 22 conference call, according to a transcript provided to Bloomberg News. Much of those gains were generated in August.

Surging Inventories

On Sept. 14, though, the funds lost $560 million when natural gas prices tumbled 10 percent as surging inventories and cooler weather cut demand for air conditioning. The spread between March 2007 and April 2007 contracts collapsed to 63 cents from $2 at the beginning of September.

``We had not expected that we would be faced with a market that would move so aggressively against our positions without the market offering any ability to liquidate positions economically,'' Maounis said in the call.

``We viewed the probability of market movements such as those that took place in September as highly remote.''

Jones asked traders to liquidate their positions. Convertible bonds, equities and European loans all were sold to meet margin calls. Yet the fund continued to need cash to meet margin calls on its energy trades.

`Continuing in Business'

During the weekend of Sept. 16-17, Goldman Sachs, Citigroup Inc. and JPMorgan Chase & Co. went to Greenwich to look at Amaranth's energy holdings. JPMorgan, one of the fund's brokers, and Citadel took over the natural gas positions on Sept. 20.

With a loss already estimated at more than 35 percent for the year, most hedge fund investors expected Amaranth to close.

Yet on Sept. 22, Maounis told his investors: ``We have every intention of continuing in business.''

In the following days, though, some fund managers say Maounis was unable to make decisions as simple as giving them the go-ahead to sell their positions. Other Amaranth executives say his indecisiveness stemmed from his focus on the bigger issue of how to keep Amaranth going.

The night of Sept. 26, Maounis sent a four-sentence e-mail to his 420 employees.

`Spirit Will Live'

``I want to thank all of you for your years of loyalty and support, especially during this especially difficult time for all of us,'' it began. ``I am quite sure that the Amaranth spirit will live on in all of us as nothing can ever take that away from us.''

Employees say they were shocked and also concerned about Maounis's state of mind.

Within an hour, Stanley Friedman, head of human resources, sent out his own message explaining that Maounis's e-mail ``was not intended to say goodbye'' or suggest that the firm was closing.

Three days later, though, the inevitable happened. Investors wanted their money back, so Maounis agreed to liquidate the funds and return cash to his clients as assets were sold.

The biggest hedge fund collapse in history didn't shutter Amaranth instantly, and no investors have sued. Most of the firm's employees are gone, including Hunter.

Amaranth moved to help place many of them at other hedge funds. Maounis and key executives are overseeing the sale of the last assets.

In Calgary, Hunter is still building a new home for his family, and people familiar with his plans say he's talking about getting back to trading.

``He will find a way to get involved again,'' says former Deutsche Bank colleague Stanziale. ``Otherwise, it would be too much intellectual capital wasted to have him on the sidelines.''

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