2 natural gas hedge funds fall nearly 50%

The Baltimore Sun

NEW YORK -- Amaranth Advisors LLC, a hedge-fund manager with $9.5 billion in assets, told investors yesterday that its two main funds fell almost 50 percent this month because of a plunge in natural gas prices.

"We are in discussions with our prime brokers and other counter parties and are working to protect our investors while meeting the obligations of our creditors," wrote Nicholas N. Maounis, Amaranth's 43-year-old founder, in a letter to investors obtained by Bloomberg News.

The funds, which had gained 26 percent through August, are down at least 35 percent for the year, or about $4.6 billion.

Amaranth, of Greenwich, Conn., engaged in so-called spread trades that try to profit from price discrepancies among futures contracts.

Last month, MotherRock LP, a $400 million fund run by former New York Mercantile Exchange President J. Robert "Bo" Collins Jr., went bust after natural-gas futures fell 68 percent from their Dec. 13 peak.

"The speed with which leveraged funds can evaporate is mind-boggling," said Mark Williams, a professor of finance and economics at Boston University specializing in energy markets.

Amaranth bought a portfolio of gas trades earlier this month from ABN Amro Holding NV that the Dutch bank assumed from MotherRock. ABN Amro had lent MotherRock $60 million, and is still owed money by the fund.

Amaranth is "near the end of our disposition of natural gas exposure," adding that the firm had met all margin calls, or demands from brokers for additional collateral to cover loans, Maounis wrote in his letter. Steve Bruce, a spokesman for Amaranth, declined to comment.

Gas prices fell 12 percent last week as the Energy Department reported that stockpiles climbed 12 percent above last year's levels.

Demand for the power-plant fuel usually declines after summer air-conditioner use slows and before heating needs pick up.

Investors said the funds, Amaranth International and Amaranth Partners, wagered that the difference between futures prices for natural gas in the summer and winter months would continue to get larger, a trend that's been going on since at least the beginning of 2004.

Instead, the spread collapsed. The difference in price between the March and April contracts for natural gas peaked in July at $2.60, but that had shrunk to $1.15 by the end of last week.

The spread between the two was about 85 cents yesterday on the New York Mercantile Exchange.

Spreads between March and April contracts in 2008, 2009 and later have also collapsed.

Investors in Amaranth included funds managed by Wall Street banks including Morgan Stanley, Credit Suisse Group and Deutsche Bank AG, according to Securities and Exchange Commission filings.

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