The Amaranth Collapse: What Happened and What Have We Learned Thus Far?

Abstract

On September 18th, 2006, market participants were made aware of a large hedge fund’s distress. On that date, Nick Maounis, the founder of Amaranth Advisors, LLC, had issued a letter to his investors, informing them that the fund had lost an estimated 50% of their assets month-to-date. By the end of September 2006, these losses amounted to $6.6-billion, making Amaranth’s collapse the largest hedge-fund debacle to have thus far occurred.There were (and are) many surprising aspects of this debacle. How could a well-respected hedge fund implode so quickly? Could this multi-strategy hedge fund really have become one big bet on winter natural gas prices? How could Amaranth have amassed such huge derivatives positions in natural gas, comparable in size to nationwide residual natural gas consumption, without any regulators noticing? Given the scale of Amaranth’s losses, why didn’t this debacle lead to wider systematic distress in the financial markets? That seemed to be a key worry following Long-Term Capital Management’s (LTCM’s) massive losses in 1998. Why didn’t that worry apply with Amaranth’s troubles? This paper will briefly cover each of these questions.