Brian Hunter lost $6 billion of Amaranth Advisors hedge fund

Brian Hunter Amaranthe AdvisorsIllustration : CFTC case file

Brian Hunter was a former Canadian natural gas trader for the now bankrupt Amaranth Advisors hedge fund. Amaranth had over $9 billion in assets but collapsed in 2006 after Hunter’s gamble on natural gas futures market went wrong.

Brian Hunter first gained experience at Calgary based TransCanada Corp. before moving to New York to join Deutsche Bank in May 2001. There, he made $69 million for the bank in his first two years. By 2003, Hunter was promoted to head of the bank’s natural gas desk. In December 2003 Hunter’s trading group lost $400 million in a single week in an excessively risky trade. In a New York state court lawsuit, Hunter ascribed the loss to “an unprecedented and unforeseeable run-up in gas prices,” meaning Hunter’s failure to foresee the risk of his own trade rendered him blameless for its consequences. Hunter also blamed Deutsche’s trading software for allowing him to take large gambles. Finally Hunter said he had earned $40 million for the bank during 2003, and therefore not only was he not responsible for the loss, he actually deserved a bonus. Deutsche Bank denied the allegations and he subsequently was let go from the firm.

Amaranth Advisors LLC was an American multi-strategy hedge fund founded by Nicholas Maounis and headquartered in Greenwich, Connecticut. During its peak, the firm had up to $9 billion in assets under management before collapsing in September 2006, after losing in excess of $5 billion on natural gas futures. The firm’s failure was one of the largest known trading losses and hedge fund collapses in history.

On January 22, 2010, a Federal Energy Regulatory Commission administrative law judge ruled that Hunter violated the Commission’s Anti-Manipulation Rule. Judge Carmen Cintron found that “Hunter intentionally manipulated the settlement price of the at-issue natural gas futures contracts. His trading was specifically designed to lower the NYMEX price in order to benefit his swap positions on other exchanges.” The decision is subject to review by the Commission.

Lawsuit against JP Morgan

Amaranth filed a lawsuit against JP Morgan claiming $1 billion in damages, on the grounds that the bank interfered in the company’s efforts to strike a better deal with Goldman Sachs and Citadel LLC. In December 2012, the New York State Court of Appeals upheld an earlier dismissal of the case. During the collapse of Amaranth Advisors, Centaurus was credited as being one of the major players on the other side of their position.

Amaranth and Brian Hunter were subsequently accused by the Commodity Futures Trading Commission of conspiring to manipulate natural gas prices. When a 2-day congressional hearing found Hunter not guilty of pushing up prices, and thus adversely affecting end consumers of the gas, CFTC framed accusations against Hunter for trying to push the prices too low and FERC framed similar ones, but going one step further, accused Hunter of being able to successfully do so.

In 2007, Brian Hunter attempted to organize a new hedge fund, Solengo Capital Partners. However, his efforts were thwarted by regulatory agencies due to his previous questionable trading practices. Shortly after finding his new fund wrapped up in regulatory red tape, Hunter sold Solengo’s assets to Peak Ridge Capital Group and was hired by the firm as an adviser to its Commodity Volatility Fund. In 1Q 2008, the fund was up nearly 49% while many other hedge funds suffered losses.

Brian Hunter was the target of a $30 million fine to be levied by the Federal Energy Regulatory Commission in connection with the alleged manipulation of natural gas prices in 2006. In December 2007, Hunter sought to prevent the FERC from taking any action against him for his participation in trading in the natural gas futures market. A federal judge denied his request. In April 2011, the Federal Energy Regulatory Commission levied the expected $30 million penalty against Hunter, who has challenged the case in court.

On March 15, 2013, a US appeals court ruled that FERC acted outside its statutory mandate after all in imposing this fine, since it is the Commodity Futures Trading Commission that has authority over derivatives trading.

What Went Wrong?

While most of Amaranth’s initial energy investments were more conservative in nature, the energy desk consistently posted annual returns of around 30%. Eventually, Hunter was able to make more speculative positions using natural gas futures contracts. This worked in the fund’s favor in 2005 when hurricanes Katrina and Rita disrupted natural gas production and helped push the price of natural gas up nearly three-fold from the January low to the November high. Hunter’s speculations proved correct and earned the company well over $1 billion dollars and an epic reputation.

Although the risky bets on natural gas and hurricanes paid off in 2005, the same bets would ultimately bring about Amaranth’s demise a year later.

 Photo : CFTC Archives

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