Amaranth Advisors

A leveraged bet that winter gas would outrun summer. The spread the model ruled out arrived in a week.

The world stops matching the model. Regime change and leverage turn a small error fatal.

Room: Q4 Where models die
Year: 2006
Impact: $6.6B
Sector: Hedge fund
Region: N. America
Category: Economic

Why this room

Amaranth's natural gas book was a calendar-spread position sized against historical spread behaviour and an assumed ability to exit at model prices. The fund had become the market it was modelling: it held 40% or more of the open interest in individual NYMEX contract months and at times more than 100,000 contracts, so the liquidity and mean-reversion assumptions embedded in its risk measures did not describe the world it was actually trading in. When the March/April spread collapsed in September 2006 the position could not be unwound at anything close to modelled prices, and margin calls converted a modelling error into insolvency inside a month. This is q4: the model held until the regime it assumed stopped existing, and leverage made the gap fatal rather than expensive.

The record

Amaranth lost more than $2 billion in the natural gas market during the first three weeks of September 2006, precipitating the liquidation of the entire $8 billion fund.certain
The fund's losses ultimately totalled $6.6 billion, a figure attributed to Bloomberg News in EDHEC's post-mortem of the collapse.high
Amaranth had approximately $9.2 billion in assets under management as of 31 August 2006, three weeks before it failed.high
Amaranth frequently held 40% or more of the open interest in NYMEX natural gas futures for a particular contract month, and at some points held more than 100,000 natural gas contracts.certain
The CFTC obtained a $7.5 million civil monetary penalty against the Amaranth entities, ordered by the U.S. District Court for the Southern District of New York on 12 August 2009, for attempted manipulation of NYMEX natural gas futures prices on 24 February and 26 April 2006.certain

Sources

The book

This entry is one of 111 in the register. The full story, and what it cost the people who lived it, is in Risky Business by Claudia Zeisberger, David Munro and Joanna Reijgersberg-Siew.

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