Michael Covel: News & Info.

From a reader today:

This is one sentence from a Bloomberg story on Amaranth’s conference call this afternoon:

Amaranth founder Nicholas Maounis, speaking on a conference call with investors today, said his firm considered the market moves that caused the losses a ‘highly remote’ possibility. (Emphasis mine) The firm’s energy investments were ‘fully consistent’ with its strategy, he said.

First of all, we know that ‘highly remote’ events are not that remote after all. Long-Term Capital learned the hard way, but by now everyone else should know that ‘remote’ stuff happens!

Second, he claims that the energy investments were fully consistent with their strategy? How is that possible? They were supposed to be a multi-strategy fund, but they had 50% of their capital in energy trades. In fact, it looks like they had 50% of their capital in ONE trade. How is that consistent with ‘multi-strategy’?

I received a call today from a well-known trend following firm. My friend wanted to vent/laugh a little at the irony in the definition of Amaranth:

1. Any of various annuals of the genus Amaranthus having dense green or reddish clusters of tiny flowers and including several weeds, ornamentals, and food plants. Also called pigweed.
2. An imaginary flower that never fades.

But he quickly turned serious about the $4.6 billion dollars transferred in the zero sum game of the markets. He noted that Morgan Stanley had declined to invest with his firm due to perceived ‘riskiness’, but that same Morgan had lost their shirts in Amaranth.

He went on to question the blind sheep plowing money long only into “commodity funds.” He then told me that 21 of their 26 positions in their portfolio are “shorts.” Market is down - follow the trend.

So how bad was the ‘Pigweed’ fund blowup?

“Many investors, meantime, want out. Some are so anxious to exit their positions that they’re willing to sell their stakes in the fund for less than half what they were worth at the end of August, according to Hedgebay, which operates a secondary market for hedge fund holdings. For example, people who had $1-million (U.S.) invested in the fund a few weeks ago are now willing to sell their position for $400,000, said Hedgebay co-founder Jared Herman in an interview from Connecticut. Investors are now willing to pay $300,000 for that stake.”

Put all your eggs in one basket (one market) and allowing a young thirty something to pull the trigger with no risk management…and none of this is a surprise. The surprise to me is who was invested in this donkey show.

I will be speaking at Hedge Funds World Japan. The event is 5-7 December 2006 at The Four Seasons Hotel in Tokyo.

From today:

“NEW YORK (AP) — Stocks dropped suddenly Tuesday after Thailand’s military launched a coup against the country’s prime minister. While the major indexes recovered most of their losses in late afternoon, all closed lower. Tech stocks smarted from Yahoo Inc.’s news that slower ad sales would depress its third-quarter results.”

With a headline like that, would you have not expected to see a Dow drop of more than -0.12%? That’s right, that headline is for a one tenth of one percent drop. BTW, the AP writer who penned that is paid a salary.

Natural Gas Down Move.

I received an email today from a non-US hedge fund that manages $4 billion out of the UK. They wanted to know when the Korean version of Trend Following will be released. They are not mentioned in my book. Interestingly, they declined to participate in one of my new books underway. My view? They want no association and want no comment, but they obviously find the book useful for their marketing even though the book profiles their competitors.

I thank them either way.

I find the excerpt below…simply amazing:

“Amaranth, started in 2000 by former Paloma Partners’ hedge fund guru Nicholas Maounis, was up nearly 30 percent before management fees this year, and its asset base had grown to a whopping $9.5 billion. At the firm’s Greenwich, Conn., offices, four security guards and local police kept a close watch over the building. After studying weather patterns and other data, Amaranth made an enormous wrong-way bet that a Katrina-like hurricane would cause the difference between summer and winter natural gas prices to widen dramatically. Instead, a mild hurricane season caused that spread to collapse, wiping out about $5 billion in value. “I can’t believe they bet the whole fund on a hurricane,” said one energy trader. Maounis dropped the bomb to his investors in a letter yesterday saying the firm’s losses could be “in excess of 35 percent” for the year. Officials at Amaranth - whose name comes from the Greek word amarantos, meaning “unfading” - declined to comment. The losses are especially painful for Amaranth’s large institutional investors, including several pension funds, university endowments and fund-of-funds managed by big brokerage houses, including Morgan Stanley, Deutsche Bank and Credit Suisse. Morgan Stanley’s Institutional Fund of Hedge Funds gave $94 million to Amaranth in November 2004, which represented more than 5 percent of its fund, according to regulatory filings. Maounis will have to navigate some difficult seas in the next month, when some investors can begin pulling money out of the fund. Sources said Amaranth had devised so-called gates - which restrict client withdrawals to up to two years after investment. That will probably stave off a rush for the doors that would collapse a smaller fund. Still, about $1 billion worth of lock-up agreements will expire in the next two months, sources said. “I think Amaranth is going to die a slow and painful death,” said one source. Amaranth’s blow up marks the second hedge fund in the last month to be shaken by the volatile energy markets. Last month, MotherRock, a $400 million fund run by former New York Mercantile Exchange President Bo Collins, lost all of its investors’ capital when the natural gas markets turned against it. Ironically, Amaranth bought a portfolio of MotherRock trades from ABN Amro’s futures unit, which was left holding the bag after MotherRock collapsed.”

David Faber in reporting about the Amaranth hedge fund losses said today (they went from +23% YTD to -35% YTD), “It will have no impact on other funds.” Oh really? It is a zero sum game! Those losses of $3 to $4 billion at Amaranth went to winners on the other side of the coin in Natural Gas.

From MarketWatch:

“Hedge fund Amaranth Advisors LLC said Monday that it has suffered heavy losses related to in its investments in natural gas and it could report a year-to-date decline in the fund of more than 35% when it finishes unwinding its positions. The firm said it has met every margin call to date on the positions, and has nearly completed disposing of its natural gas exposure. “We are in discussions with our prime brokers and other counterparties and are working to protect our investors while meeting the obligations of our creditors,” the company said in a prepared statement issued Monday.”

From Dealbreaker.com:

So who is this Brian Hunter we mentioned in the previous item about the huge losses at Amaranth Advisers? We haven’t been able to track down a picture of him yet but we’ve collected some details on young man who came to head his fund’s energy trading desk at the age of thirty-two. Earlier this year, Trader Magazine ranked him at 29 in its list of top one hundred traders. He’s said to have made $800 million for the fund in 2005—much of it from the skyrocketing price of natural gas in the wake of hurricane Katrina—and was paid somewhere between $75 and $100 million. When he decided he wanted to leave New York for his native Calgary, Amaranth set up an office there for his team. Hunter’s role in the losses his fund expects to suffer as it unwinds its natural gas position is not yet known. One source familiar with the market for energy trades told DealBreaker he believed Hunter had made trades this year similar to his winning 2005 bets and got caught out when 2006 produced a much calmer hurricane season and new oil discoveries in the Gulf of Mexico.

From TheStreet.com:

“Based in Greenwich, Conn., Amaranth employs more than 360 people, including 115 traders. The fund’s Web site tabs its assets at $7.5 billion, and the firm has offices in Houston, Toronto, London and Singapore. Sources say assets under management may have been more than $9 billion going into September. “We have met every margin call to date,” the letter continues. “We are in discussions with our prime brokers and other counterparties and are working to protect our investors while meeting the obligations of our creditors.” A person familiar with Amaranth says the fund was up a little more than 20% for the year as recently as mid-August. Using that figure, a back-of-an-envelope calculation means Amaranth at one point was up $1.5 billion for the year. But in recent weeks it may have lost as much as $4 billion. The fund, assuming it is down 35% for the year, now has about $5 billion in assets under management. A trader with another hedge fund says the news of the big loss at Amaranth may explain some unusual trading in certain stocks last week. The trader speculated that Amaranth may have been liquidating positions in some of its equity holdings to satifisy the margin calls from its prime broker. Amaranth wouldn’t comment beyond its letter to investors. The hedge fund reported having $2.3 billion invested in U.S. stocks as of the end of June. Several of Amaranth’s big investments were Humana , Goldcorp and Sprint. A broker gives a margin call when an investor or trader does not have adequate collateral to support the amount of money it has borrowed.”

Last Friday after giving a presentation to a mostly fundamental crowd, there was a question and answer session. One of the questions was essentially, “That sounds very promising, but why can’t you add a fundamental perspective for entries and exits on top of the trend following approach and do even better?”

The question was not meant to be negative to trend following as the questioner seemed genuinely interested in the subject, but rather I thought it was an attempt to cling to what someone knows best. I have yet to find any mechanical trend follower with a discretionary fundamental overlay. The closest I would know of someone who fits that category would be Paul Tudor Jones.

An old pro trader sent in a funny story about his days at Commodities Corporation:

“Back in the early 90’s Commodities Corporation (CC) brought a few Japanese traders in for some in-house “training”. Of course the ultimate and true goal was to capture some big Japanese money. I was still in their good graces and [CC] asked me to have lunch with a couple of these gentleman. They were new to the program and I hoped to give them some insight into how I handled the process of trading. I told them they had to come up with a method or system that fitted who they were. Then I told them I thought it was great to find a mentor and I was available anytime they had questions or issues and that is still me today. I then began to discuss how important risk management was and that I was willing at that time to risk only 1% per bet in dealing with public money. I am more aggressive today but that was then. I told them that losses were part of the process in finding winners. I will never forget as long as I shall live the youngest trader looked me square in the eye and with a very puzzled look asked “You have losses?” I knew right then these birds had a very long way to go and I often wonder what happened to them.”