The Collapse of Amaranth Advisors

            
 
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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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Case Details:

Price:

Case Code : FINC063 For delivery in electronic format: Rs. 300;
For delivery through courier (within India): Rs. 300 + Rs. 25 for Shipping & Handling Charges

Themes

Risk Management
Case Length : 18 Pages
Period : 2000-2009
Pub. Date : 2010
Teaching Note : Not Available
Organization : Amaranth Advisors
Industry : Investment Banking
Countries : US

Abstract:

Amaranth Advisors LLC (Amaranth) was a US based hedge fund incorporated in 2000 by Nick Maounis (Maounis). Initially, Amaranth used conservative investment strategies like arbitrage. When several hedge funds started using similar investment strategies, the resulting profitability came down. Maounis then shifted Amaranth's focus to energy trading. In mid 2004, Maounis hired Brian Hunter (Hunter), an energy trader who was working for Deutsche Bank energy trading desk. Hunter started generating good profits in energy trading. He generated US$ 1 billion profits in 2005. Hunter's trading strategy in 2005 was believed to be based on historical returns as well as on weather predictions. He used excessive leverage and invested in natural gas derivatives on NYMEX and ICE in 2006.

Finance | Case Study in Management, Operations, Strategies, Finance, Case Studies

However, his strategy went wrong and prices of natural gas contracts moved in opposite direction to his estimates. That led to margin calls from Amaranth's lenders which it could not meet and eventually had to windup with US$ 6.6 billion losses. As of December 2009, Hunter faced market manipulation charges by natural gas market regulators for some of his trades in 2006.

Issues:

Analyze the reasons that led to the collapse of Amaranth Advisors.
Study the importance of portfolio diversification as a risk mitigation strategy.
Examine the risk management and control systems at Amaranth Advisors.
Understand the flaws in debt and liquidity management strategy of Amaranth Advisors.
Critically examine the effectiveness of statistical models like Value at Risk (VaR) in risk management.

Contents:

  Page No.
Introduction 1
Background Note 2
Risk Management 4
Hunter's Bets 5
Why Did it Happen? 9
The Aftermath 10
Exhibits 12

Keywords:

Amaranth Advisors LLC, Risk Control, Risk Management, Business Judgment, Leverage, Liquidity Management, Debt Management, Commodity Futures Trading Commission, Federal Energy Regulatory Commission, Multi-strategy Hedge Fund, Convertible Arbitrage Strategy, Energy Trading, Natural Gas Trades, Value at Risk, Stress Tests, New York Mercantile Exchange, Derivative Instruments, Risk of Ruin, Peak Ridge Capital Management, NYMEX Natural Gas Futures

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