Jenny Anderson delivered the best detailed account of the trades that wrecked Amaranth. In case you missed the story on Friday, here’s the goods:
Amaranth’s energy desk, run by a young, brash trader named Brian Hunter, bet on a number of different things, including certain “spread trades” in the natural gas market.
Among the spread trades Amaranth placed was a bullish one on the difference between the March and April futures price of natural gas for both 2007 and 2008.
The bet was that the spread between the two months would widen. The rationale was reasonable: Amaranth anticipated the price of the March contract would rise (March is the last month of winter and higher demand would result in higher prices) and April prices would fall, as summer approached and more supply led to lower prices.
The spread between the March and April futures contracts for 2007 was $2.49 during the last week of August. By Sept. 15, it fell to $1.15, more recently tumbling to 58 cents. Contracts for March-April bets in 2008 and 2009 — contracts that tend to be less volatile — also narrowed, wreaking havoc on the fund’s portfolio.
The reasoning was straightforward: inventories of natural gas were strong, sending futures prices down and souring Amaranth’s bet.
Now that these trades are threatening to bring down Amaranth altogether, lots of people have opinions about what went wrong. DealBreaker readers voted that it was the fault of fund manager Nick Maounis for not placing adequate risk controls on Hunter’s trades. Others have joked about how foolish it is to place large bets on the weather. But we can’t help thinking that if things had gone the other way, everyone would be saying how Maounis and Hunter were geniuses. Just like they were when things did go the other way last year.
Betting on the Weather and Taking an Ice-Cold Bath [New York Times]