Will Amaranth Dull Taste for Counter-Party Risk? Or Sharpen It?


One of our favorite sources just passed on more about Amaranth’s asset sales. It seems it’s not exactly a fire-sale. Despite its troubles, Amaranth is doing pretty well in selling some of its assets.

Just heard from other colleagues that Amaranth unwound their asset-backed "residuals" portfolio. Was marked in mid-$500 million valuation and it got sold at just under $500 million. Pretty decent realization for such an illiquid set of assets.

People's first reaction to Amaranth blowing up is to say -- and this seems like natural reaction -- that counterparties are going to be a lot more cautious about hedge fund exposure. I think that the lesson may actually wind up to be the opposite. If a fund can blow up so hugely, losing 65% of its value in a couple of day, and yet get unwound in orderly fashion, counterparties (if not investors) may in fact become more relaxed about hedge fund exposure.

One aspect of funds counterparties have been showing concern about is the increasing level of illiquidity in HF portfolios. Well, if Amaranth can blow out of a large Asian convert book and half a billion dollars of asset-backed residuals in less than a week at discounts of less than 5%, then one might ask the question: how illiquid really are illiquid instruments?

In reality, it seems that illiquidity has less to do with the instrument in question than with the environment into which the holder needs to sell. Amaranth blowing up was a result of its own mistakes and not an exogenous shock that had a parallel effect on many funds. Plenty of funds were ready to pounce on Amaranth's "illiquid" portfolio.

Anyone else have any tales to share from the Amaranth meltdown? Bought any Amaranth assets? Tried too? Let us know. Email tips (at) DealBreaker (dot) com. Thanks!