Description
Lessons from the Collapse of Amaranath Advisors
A Case Study in Risk Management. Lessons from the Collapse of Amaranth Advisors, L.L.C.
Outline
I. II. III. I V. V. S U M M A RY INTRODUCTION/BACKGROUND THE STRATEGY RISK MANAGEMENT LESSONS
Summary
(1) AMARANTH’S TRADING STRATEGY WAS LONG WINTER, SHORT NON-WINTER NATURAL GAS FUTURES CONTRACTS.
(2)
(3) (4) (5)
SIGNIFICANT LEVERAGE WAS USED.
MARKET RISK WAS HIGH, BUT MAY HAVE BEEN REASONABLE. LIQUIDITY RISK WAS EXCESSIVELY AND IMPRUDENTLY HIGH. REGULATORS AND/OR PRACTITIONERS NEED BETTER MEASURES OF LIQUIDITY RISK.
I.
• • • •
Introduction/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
Pomona COllege
Amaranth’s Funds
? 60% from fund-of-funds
? 7% from insurance companies
? 6% from retirement and benefit programs ? 6% from high net worth individuals ? 5% from financial institutions
? 2% from endowments
? 3% was insider capital ? Minimum investments in Amaranth were $5 million ? Management fee was 1.5% and the incentive fee was 20%
? High Watermark was kept
Pomona COllege
Risk Management and Liquidity 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)
Pomona COllege
Timeline of the events in September
Past Performance of Natural Gas Futures (1990-2005)
The Profit and Loss of Amaranth’s Natural Gas Positions in September
Amaranth’s Trading Strategy
•
?
NATURAL GAS SPREAD TRADING STRATEGY
short one contract, and go long on the other
• •
LONG WINTER NATURAL GAS FUTURES, OPTIONS, SWAPS SHORT NON-WINTER NATURAL GAS FUTURES, OPTIONS, SWAPS
NOTE:
W I N T E R = N O V, D E C , J A N , F E B , A N D M A R
II. The Strategy
II. The Strategy
II. The Strategy
•
• •
WHY DO IT? C O M P E N S A T I O N T O S P E C U L A TO R S T O NATURAL HEDGERS , STORAGE OPERATORS B A C K T E S T – WO R K S , B U T N O T Q UA N T S EXPERIENCE AND FEELING
II. The Strategy
III. Risk Management
• • •
M A R K E T R I S K = VA R LIQUIDITY RISK = CONCENTRATION IN MARKET M A NA G E M E N T R I S K = H U N T E R I N C A L G A RY
III. Risk Management
III. Risk Management
IV. Lessons
(1) (2) (3) (4) (5)
LIQUIDITY RISK IS A REAL RISK. T R A N S PA R E N C Y A C R O S S S I M I L A R M A R K E T S M A Y B E USEFUL. M O R E S TA N D A R D M E A S U R E S O F L I Q U I D I T Y R I S K DEVELOPED. INTERNAL RISK MANAGEMENT S P R E A D P O S I T I O N S A R E N OT “A R B I T R A G E P O S I T I O N S ” .
IV. Lessons
OVERALL, LIMITED CRISIS. • MBS , CDS MARKET ON EXCHANGE RATHER THAN OTC? • LIQUIDITY RISK ON ROLL OVER FINANCING FOR “RISKY” POSITIONS – RISKIER THAN HISTORY SUGGESTS . • INTERNAL RISK – LEHMAN HAD $72B OF MBS AND ANOTHER $ 1 0 B O F R E A L - E S TA T E E X P O S U R E A N D $ 2 6 B F R E / F N M W I T H A $ 6 B C A P I TA L B A S E O F $ 2 6 B A N D L E V E R A G E O F 2 4 !
V. Thanks
doc_456683367.pptx
Lessons from the Collapse of Amaranath Advisors
A Case Study in Risk Management. Lessons from the Collapse of Amaranth Advisors, L.L.C.
Outline
I. II. III. I V. V. S U M M A RY INTRODUCTION/BACKGROUND THE STRATEGY RISK MANAGEMENT LESSONS
Summary
(1) AMARANTH’S TRADING STRATEGY WAS LONG WINTER, SHORT NON-WINTER NATURAL GAS FUTURES CONTRACTS.
(2)
(3) (4) (5)
SIGNIFICANT LEVERAGE WAS USED.
MARKET RISK WAS HIGH, BUT MAY HAVE BEEN REASONABLE. LIQUIDITY RISK WAS EXCESSIVELY AND IMPRUDENTLY HIGH. REGULATORS AND/OR PRACTITIONERS NEED BETTER MEASURES OF LIQUIDITY RISK.
I.
• • • •
Introduction/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
Pomona COllege
Amaranth’s Funds
? 60% from fund-of-funds
? 7% from insurance companies
? 6% from retirement and benefit programs ? 6% from high net worth individuals ? 5% from financial institutions
? 2% from endowments
? 3% was insider capital ? Minimum investments in Amaranth were $5 million ? Management fee was 1.5% and the incentive fee was 20%
? High Watermark was kept
Pomona COllege
Risk Management and Liquidity 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)
Pomona COllege
Timeline of the events in September
Past Performance of Natural Gas Futures (1990-2005)
The Profit and Loss of Amaranth’s Natural Gas Positions in September
Amaranth’s Trading Strategy
•
?
NATURAL GAS SPREAD TRADING STRATEGY
short one contract, and go long on the other
• •
LONG WINTER NATURAL GAS FUTURES, OPTIONS, SWAPS SHORT NON-WINTER NATURAL GAS FUTURES, OPTIONS, SWAPS
NOTE:
W I N T E R = N O V, D E C , J A N , F E B , A N D M A R
II. The Strategy
II. The Strategy
II. The Strategy
•
• •
WHY DO IT? C O M P E N S A T I O N T O S P E C U L A TO R S T O NATURAL HEDGERS , STORAGE OPERATORS B A C K T E S T – WO R K S , B U T N O T Q UA N T S EXPERIENCE AND FEELING
II. The Strategy
III. Risk Management
• • •
M A R K E T R I S K = VA R LIQUIDITY RISK = CONCENTRATION IN MARKET M A NA G E M E N T R I S K = H U N T E R I N C A L G A RY
III. Risk Management
III. Risk Management
IV. Lessons
(1) (2) (3) (4) (5)
LIQUIDITY RISK IS A REAL RISK. T R A N S PA R E N C Y A C R O S S S I M I L A R M A R K E T S M A Y B E USEFUL. M O R E S TA N D A R D M E A S U R E S O F L I Q U I D I T Y R I S K DEVELOPED. INTERNAL RISK MANAGEMENT S P R E A D P O S I T I O N S A R E N OT “A R B I T R A G E P O S I T I O N S ” .
IV. Lessons
OVERALL, LIMITED CRISIS. • MBS , CDS MARKET ON EXCHANGE RATHER THAN OTC? • LIQUIDITY RISK ON ROLL OVER FINANCING FOR “RISKY” POSITIONS – RISKIER THAN HISTORY SUGGESTS . • INTERNAL RISK – LEHMAN HAD $72B OF MBS AND ANOTHER $ 1 0 B O F R E A L - E S TA T E E X P O S U R E A N D $ 2 6 B F R E / F N M W I T H A $ 6 B C A P I TA L B A S E O F $ 2 6 B A N D L E V E R A G E O F 2 4 !
V. Thanks
doc_456683367.pptx