The Amaranth Disaster: How One Trader Lost $6 Billion on Natural Gas
“Amaranth” is Greek for “imperishable.” The flower that never fades. Somebody at the hedge fund picked that name on purpose, imagining a fund that would last forever. Instead, Amaranth Advisors became the biggest hedge fund collapse since Long-Term Capital Management in 1998. Two-thirds of its capital gone in two weeks. Six billion dollars, vanished on natural gas bets. Chapter 22 of Torsten Dennin’s “From Tulips to Bitcoins” tells this story.
The Rise of Brian Hunter
Brian Hunter was born in 1975 in Canada. A mathematician by training, not a roughneck or a pipeline engineer. He joined Deutsche Bank in 2001 and started trading natural gas. In his first year he made the bank $17 million. The next year, $52 million. For a young trader, those are spectacular numbers.
Then reality showed up. In one bad week, Hunter lost $50 million. Deutsche Bank fired him. That is how it works. You are a genius when the trades go right and you are unemployed when they do not.
Hunter moved to Amaranth Advisors, a hedge fund based in Greenwich, Connecticut. The fund had started in 2000 doing convertible bond arbitrage, which is about as boring as trading gets. Safe, predictable, small margins. But Amaranth got bored with boring. They moved into energy trading, specifically natural gas. And Brian Hunter became their star.
Hurricanes Changed Everything
To understand what happened at Amaranth, you have to understand what hurricanes did to the natural gas market in 2004 and 2005.
Natural gas in the US had been trading around $6 to $7 per million BTU. Then came the hurricane seasons. Katrina hit in August 2005. Rita followed a month later. Both storms tore through the Gulf of Mexico, where a huge share of US gas production sits. Pipelines damaged, platforms evacuated, supply disrupted.
Gas prices went from $7 to above $15 by December 2005. More than doubled in a few months. And Brian Hunter was on the right side of the trade. After Katrina and Rita, his positions at Amaranth earned over $1 billion in profits. One billion dollars from one trader. He became a legend in the energy markets.
The problem with legends is that people start believing in them. Including the legend himself.
Controlling the Market
By 2006, Amaranth was not just trading natural gas. They were dominating it. The fund held around 100,000 contracts per month, roughly 5% of total US natural gas consumption. On the exchange, Amaranth controlled 40% of all outstanding winter season contracts. For November futures specifically, they held 75% of the open interest.
When one fund controls that much of a market, they are no longer a participant. They are the market.
Hunter’s main bet was the March-April spread. Buying March contracts, selling April, betting the price difference would widen. The logic was seasonal. March is the last month of winter, gas demand still high. April is the start of spring, heating demand drops.
The Duel With MotherRock
Hunter was not the only big player. A fund called MotherRock, run by Bo Collins, held the exact opposite position. Collins bet the March-April spread would narrow. Hunter bet it would widen. One of them was going to be very right and the other very wrong.
For a while, Hunter was winning. Amaranth’s enormous volume pushed the spread wider and wider. By July 2006, the spread had been distorted by more than 70%. That is not trading skill. That is market manipulation through sheer size.
MotherRock broke first. In August 2006, Collins’s fund collapsed with losses exceeding $200 million. Could not meet margin calls. Shut down. Hunter had crushed his opponent.
But the market does not care about victories between hedge funds.
The Collapse
Late summer 2006. The hurricane season that everyone feared did not materialize. No major storms hit the Gulf. Gas supply was stable. And prices started falling. Fast.
The October delivery contract dropped from $8.45 to $4.80. The March-April spread, Hunter’s big bet, collapsed from $2.50 to under $0.50. That is a 75% drop in the spread he had bet everything on.
The math on 100,000 contracts is brutal. Every single penny of price movement on that many contracts equals a $10 million change in the fund’s value. Not a percentage change. Ten million dollars per penny.
On August 29, 2006, Amaranth lost $600 million in a single day. The next day, margin requirements jumped to $944 million. Within days, total margin commitments exceeded $3 billion. Total positions had reached $18 billion while actual capital melted away underneath.
In one week, assets dropped from $9 billion to $4.5 billion. Founder Nick Maounis told investors to expect losses of 35% or more.
The Aftermath
Amaranth did not survive. A fund called “imperishable” perished in about two weeks.
The Commodity Futures Trading Commission condemned Amaranth for price manipulation. When one fund holds 40% of winter contracts and 75% of November futures, they are not making bets. They are bending the market to fit their bets.
Brian Hunter left and, remarkably, started a new hedge fund. A man who lost $6 billion of other people’s money was able to raise new money and start again. In most professions, that would end your career. In finance, apparently, it is a resume item.
Ten years after the collapse, in 2016, Amaranth’s former investors were still waiting to get their money back. Most of it was simply gone.
What I Take From This
Dennin’s account of Amaranth fits the pattern that runs through this whole book. A trader makes a fortune on a correct call. The success convinces everyone that the next call will also be correct. Positions get bigger, concentration gets more extreme, and when the reversal comes, there is no way out because the positions are too large to unwind.
Hunter built his reputation on Katrina and Rita. His thesis was that storms would keep disrupting supply. When the 2006 hurricane season was quiet, the thesis evaporated, and so did the money.
What really gets me is the size. At 5% of US gas consumption and 40% of winter positions, Amaranth was not predicting the market. They were the market. And when you are the market and you are wrong, you cannot exit. There is nobody big enough to take the other side. You just watch the losses pile up, $10 million per penny, until the money runs out.
The imperishable flower wilted in two weeks. Six billion dollars. Gone.
Previous: Chapter 21: Zinc Katrina
Next: Chapter 23: Orange Juice
This is part of my From Tulips to Bitcoins book retelling series.