Amaranth Advisers, whose near-collapse has made it the biggest disaster in the hedge fund industry since Long-Term Capital Management in 1998, revealed yesterday that it had lost $6bn (£3.2bn) in a week.
Nick Maounis, the founder of the company, set out the full extent of the losses as he opened talks about the future of the fund and promised to try "to earn back investors' trust". Some 65 per cent of Amaranth's value has been wiped out by ruinous bets on the natural gas market.
Citigroup, one of the financial services giants which helped bail out LTCM eight years ago, emerged as a potential white knight investor to prop up what is left of the fund, but some other backers are already demanding that it be wound up.
Mr Maounis, a long-time hedge fund trader who set up Amaranth in 2000, said a firesale of assets over the past few days had saved the fund from a forced liquidation by its creditors. On Wednesday, Amaranth in effect gave away the energy portfolio that led to its downfall to a consortium comprising JP Morgan and the Chicago hedge fund Citadel. The transfer of that and other assets at below their remaining market value had swelled Amaranth's losses from the $4.5bn first reported at the weekend, when it first admitted that its bets in the natural gas market had gone badly wrong. Amaranth's star trader, 32-year-old Brian Hunter, was one of the few hedge fund traders still betting that natural gas would rise, even as commodities prices were sliding sharply.
Amaranth's assets had swollen to $9bn at their peak a month ago, making it one of America's most influential hedge funds, with all the usual trappings of the industry, including plenty of luxuries for employees, including a private recording studio at its Connecticut headquarters where traders can relax by jamming on the company's guitars.
The fund's success in the past 18 months came largely because of ballsy and successful bets in the energy market by Mr Hunter. But Mr Maounis faces questions over how he allowed Mr Hunter to put so much of the fund's capital at risk, particularly since the trader already had a reputation as an aggressive risk-taker. He is currently suing his former employer, Deutsche Bank, for removing him from their trading desk and denying him a bonus after he racked up losses there.
Mr Maounis told his backers in a letter: "Amaranth is determined to earn back its investors' trust, and one step towards that end is to share as much information as we reasonably can. We assure you that we are eager to do so."
By moving quickly to dump the energy portfolio and a string of other investments, Amaranth was able to meet all the cash calls from its lenders. Even at its peak, it was borrowing less than $5 for every $1 its backers had invested, making it a much less highly leveraged hedge fund than LTCM. Observers of the hedge fund industry said all those involved had learned significant lessons from that debacle.
But in the past eight years, hedge funds have moved closer to the investment mainstream. Although hedge funds are closed to all but the wealthiest and most sophisticated individuals, pension funds are allocating larger amounts to these "alternative investments", and a whole industry has grown up offering "funds of funds". Man Group, the FTSE 100 hedge fund manager, is one of dozens of companies to have admitted multimillion dollar exposure to Amaranth.Reuse content