Description
Amaranath Advisors Case Analysis
Amaranth Advisors
Financial Risk management
Flow Of Presentations
Case Background ? About the Company ? Natural Gas Spread Trades ? September Loss ? Amaranths Strategy ? Risk In Amaranth’s Strategy ? Conclusion
?
Case Background
• • • •
•
Amaranth Advisors was a large multiple strategy hedge fund In September of 2006, Amaranth loses $4.942B (about 48% of the fund value) On September 14 alone, the fund lost $681 million from its natural gas exposures The losses came from the energy trading desk headed by Brian Hunter from the excessive positions taken in natural gas derivatives The losses occurred quite quickly.
About The Company
?
Launched in 2000 as a multi strategy hedge fund trading in following areas:
? Energy Arbitrage and Other Commodities
? Convertible Bond Arbitrage ? Merger Arbitrage ? Credit Arbitrage ? Volatility Arbitrage ? Long/Short Equity, and Statistical Arbitrage
? ?
By 2005-06 80% of profits generated from energy trading, mainly in natural gas Brian hunter was the key person relating to the natural gas futures disaster
Fund Information
?Minimum investments in Amaranth were $5 million ?Management fee was 1.5% and the incentive fee was 20% ?High Watermark was kept
Risk management
? ?
It had appointed a risk manager for each trading desk They produced daily reports which indicated following Risk related parameters
? Daily position and profit and loss (P&L) information ? Greek sensitivities (i.e. delta, gamma, Vega, and rho)
? leverage reports
? concentrations ? premium at risk, ? Industry exposures ? Daily value-at-risk (VaR)
Natural Gas Spread Trades
The Natural Gas Futures Spread Trade The Natural Gas Spread Trade with Options Natural Gas Swaps
The Downfall
Time line of the Events
Daily Profit and Loss From September 1, 2006
Amaranth’s Trading Strategy
•
•
• •
Natural Gas Spread trading strategy Amaranth’s position in different futures indicated Amaranth was following Long Winter and Short Summer Long winter natural gas futures, options, swaps Short non-winter natural gas futures, options, swaps
Amaranth’s Position
Historical September Month Returns
Risk In Amaranth’s Strategy
Market Risk • Due to the Price movement and the Volatility • Price not moving according to the Historical Data Liquidity Risk • Ability To sell the Security with ease in the market • Compensation to speculators to natural hedgers, storage operators • Buying more futures contracts of the kind his fund already owned supported their price by increasing demand, propping up paper gains Funding Risk • Highly Leveraged • On August 31 2006 the leverage was as high as 5.23 Management Risk • No Concentration Limits • No Leverage Restrictions • No Stop loss Limits • Hunter in Calgary
Lessons
(1)
(2)
(3) (4) (5)
Liquidity Risk is a real risk. Transparency across similar markets may be useful. More standard measures of liquidity risk developed. Internal Risk Management Spread Positions are not “arbitrage positions”.
Thank You
doc_454675647.pptx
Amaranath Advisors Case Analysis
Amaranth Advisors
Financial Risk management
Flow Of Presentations
Case Background ? About the Company ? Natural Gas Spread Trades ? September Loss ? Amaranths Strategy ? Risk In Amaranth’s Strategy ? Conclusion
?
Case Background
• • • •
•
Amaranth Advisors was a large multiple strategy hedge fund In September of 2006, Amaranth loses $4.942B (about 48% of the fund value) On September 14 alone, the fund lost $681 million from its natural gas exposures The losses came from the energy trading desk headed by Brian Hunter from the excessive positions taken in natural gas derivatives The losses occurred quite quickly.
About The Company
?
Launched in 2000 as a multi strategy hedge fund trading in following areas:
? Energy Arbitrage and Other Commodities
? Convertible Bond Arbitrage ? Merger Arbitrage ? Credit Arbitrage ? Volatility Arbitrage ? Long/Short Equity, and Statistical Arbitrage
? ?
By 2005-06 80% of profits generated from energy trading, mainly in natural gas Brian hunter was the key person relating to the natural gas futures disaster
Fund Information
?Minimum investments in Amaranth were $5 million ?Management fee was 1.5% and the incentive fee was 20% ?High Watermark was kept
Risk management
? ?
It had appointed a risk manager for each trading desk They produced daily reports which indicated following Risk related parameters
? Daily position and profit and loss (P&L) information ? Greek sensitivities (i.e. delta, gamma, Vega, and rho)
? leverage reports
? concentrations ? premium at risk, ? Industry exposures ? Daily value-at-risk (VaR)
Natural Gas Spread Trades
The Natural Gas Futures Spread Trade The Natural Gas Spread Trade with Options Natural Gas Swaps
The Downfall
Time line of the Events
Daily Profit and Loss From September 1, 2006
Amaranth’s Trading Strategy
•
•
• •
Natural Gas Spread trading strategy Amaranth’s position in different futures indicated Amaranth was following Long Winter and Short Summer Long winter natural gas futures, options, swaps Short non-winter natural gas futures, options, swaps
Amaranth’s Position
Historical September Month Returns
Risk In Amaranth’s Strategy
Market Risk • Due to the Price movement and the Volatility • Price not moving according to the Historical Data Liquidity Risk • Ability To sell the Security with ease in the market • Compensation to speculators to natural hedgers, storage operators • Buying more futures contracts of the kind his fund already owned supported their price by increasing demand, propping up paper gains Funding Risk • Highly Leveraged • On August 31 2006 the leverage was as high as 5.23 Management Risk • No Concentration Limits • No Leverage Restrictions • No Stop loss Limits • Hunter in Calgary
Lessons
(1)
(2)
(3) (4) (5)
Liquidity Risk is a real risk. Transparency across similar markets may be useful. More standard measures of liquidity risk developed. Internal Risk Management Spread Positions are not “arbitrage positions”.
Thank You
doc_454675647.pptx