The disaster of Amaranth natural gas losses
Contributed by:
Jack Haddad
MD, MBA, CMT, DITA
Advisors of the fund informed investors yesterday that the fund has lost 5 billion in 1 week on natural gas future bets. As of Sep 1st, the fund was ahead by 22% for the year. It has now plummeted to -57% for the year after their prime brokers forced the fund to liquidate their positions on natural gas futures. The fund went from 9 to 4.5 billion.
Investors in other markets could very well feel the spreading chill of a 1 week’s 5 bilion drop. Some investors are concerned about a swift exodus if the commodities market remains weak for a prolonged period of time. For instance, the Commoditiy Rel Return Fund of Allianz AG’s Pacific Investment Management Co., or Pimco– which invests in a number of commodities– has grown to more than 12 billion from 8 billionin about a year.
Another concern is investors’ redemptions. After such a staggering loss, invoestors are going to inquire about the mind-state of the fund– which may cause a cascade of liquidation steps. Investors withdrawing their money aren’t the only potential source of strain. Many derivatives contracts have clauses that give counterparties the right to close out those transactions in the even of a change in material circumstances. This means that Aramanth will constantly have to unwind positions which could pressure other markets.
Worse, the losses at Aramanth arelikely to renew calls for greater transparency among hedge funds.
