Analysis of the Fall of Amaranth Advisors Llc

I. Dennis Heinz, Christian Lyles, Muhammad Williams

II. FIN 4533 Derivatives, Dr. Parvez Ahmed

III. Fall 2011

IV. Case #9. Amaranth Advisors LLC: Using Natural Gas Derivatives to Bet on the Weather

V. Relation to Course Topics

a. Futures, Forwards, Swaps and Options

b. Price Spreads

c. Derivative Trading Strategies

d. Arbitrage

VI. In studying this case we will attempt to describe a brief overview of Amaranth Advisors LLC, some information about the major players within this company, the causes of their collapse and the effects that were felt in the aftermath. This paper includes our opinion about what happened at Amaranth in 2006 as well as answers to discussion questions found at the end of chapter 9 in the Risk Takers text. Sources from articles are cited in the bibliography.

Birth of Amaranth Advisors LLC.

Nicholas Maounis founded Amaranth Advisors LLC (known hereafter as Amaranth) in 2000 in Greenwich, CT. It operated as a “multi-strategy hedge fund specializing in convertible bonds, mergers, acquisitions, corporate restructuring and utilities” (Marthinsen, 271). Maounis really made a name for himself working for Paloma Partners Management Company, and eventually managing a convertible bond fund of $400 million. Feeling that his skills had been greatly sharpened he decided to open Amaranth after he was able to raise $200 million in private investments.

The minimum investment in Amaranth was $5 million, and initial investors were subject to a 13-month lock-up period with 90-day notice. After the lock-up period, withdrawals of annual profits required 45-day written notice and could be made only four times a year (January, April, July and October), subject to a 2.5% fee. There was also a gating provision that restricted quarterly withdrawals to no more than 7.5% of an investor’s net asset value. Like many hedge funds, Amaranth charged a 1.5% fee and a 20% incentive on gains above an investor’s high-water mark...