Amaranth LLC Collapses on Slumping Natural Gas Prices

The price chart of natural gas prices explains why Amaranth Advisors LLC, a multi-billion dollar hedge fund, lost almost two-thirds of its assets in September of this year. Amaranth bet that natural gases prices would bounce back from their decline but its wager went awry. Instead of rebounding, prices kept falling so the fund was forced to sell its entire energy portfolio at a huge loss just to meet margin calls and investor redemptions.

The Amaranth collapse was not unique. In August of 2006 Mother Rock LP, another energy hedge fund with large bullish bets on natural gas, shut down operations as it suffered large loses resulting from falling natural gas prices.

It is difficult to imagine how these professional managers could have blundered so badly. Had they appreciated the volatile nature of natural gas, they might have recognized that price bubbles always burst and prices usually decline as quickly as they rise.

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Stay Clear of Hedge Funds

Posted September 27, 2006.