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Faith in star trader blamed for Amaranth's fall

Investors question the authority, latitude that fund founder gave his man in Calgary

Bloomberg News

NEW YORK -- Nicholas Maounis, founder of the Amaranth Advisors LLC hedge fund, made a decision in April, 2005, that eventually cost him his company.

His promising natural gas trader, Brian Hunter, had been offered a $1-million (U.S.) bonus to join Steven Cohen's SAC Capital Advisors LLC. Mr. Maounis, who had built his Greenwich, Conn.-based fund to $6-billion in assets, didn't want him to go.

Convertible bond and equity prices were falling, and oil and natural gas prices were increasing, making Mr. Hunter's expertise more valuable. So Mr. Maounis named Mr. Hunter co-head of the energy desk and gave him control of his own trades.

Within 17 months, Mr. Hunter would be responsible for $6.6-billion in losses, detonating the biggest hedge fund implosion ever. Since Amaranth's sudden collapse, investors have questioned the unusual trust Mr. Maounis put in his star trader, now 32. They say he gave too much latitude to Mr. Hunter who, trading more than half the firm's assets, was blinded by a bet that had worked like a charm for two straight years.

"Amaranth's demise is not due to some complicated quantitative reason -- it's about human failing and frailty," says Hank Higdon, who runs New York-based Higdon Partners LLC, a recruiter for hedge funds and other money-management firms.

Mr. Hunter declined to comment for this article when contacted Dec. 4, and Mr. Maounis, 43, declined to comment through a spokesman.

Tallying the final days of Amaranth involves huge sums: During one week in September, Mr. Hunter's bet on natural gas lost about $4.6-billion. By month's end, the losses totalled $6.6-billion, or 70 per cent of the company's assets.

At least one investor saw serious warning signs about the big energy bets and pulled out before the collapse. Some former employees -- who, like others familiar with Amaranth's unravelling, spoke on condition of anonymity because the fund is a private company -- also say they raised questions about the extent of that wager.

When an abrupt market reversal left the fund facing enormous losses, it was too late to unload positions.

Mr. Maounis, who often sat on the trading floor in Greenwich, looked to Mr. Hunter for rescue because his natural gas and other energy trades were successful.

"Do something," former traders quote Mr. Maounis as saying when Mr. Hunter walked by. "We need you."

Mr. Hunter obliged. Investors and Amaranth employees say his big score came in September, 2005, when the natural gas bets he had placed earlier in the year made $1-billion in the wake of hurricanes Katrina and Rita as he correctly wagered that prices would increase.

The hurricanes -- Katrina hit the U.S. Gulf Coast on Aug. 29 and Rita followed on Sept. 24 -- limited gas supplies, pushing prices to a record $14.20 per million British thermal units on Sept. 29.

That was when fellow employees started learning more about the low-key, 6-foot-5-inch Mr. Hunter, a Canadian who sometimes wore a Calgary Flames jersey on the trading desk, colleagues say.

Mr. Hunter, who grew up near Calgary, had earned a master's degree in mathematics from the University of Alberta before starting to trade natural gas in 1998, according to Amaranth marketing materials.

He traded for Calgary-based TransCanada Corp., then joined Deutsche Bank in New York in May, 2001. By 2003, Mr. Hunter was head of the bank's natural gas desk.

In 2005, he earned about $75-million, primarily from his Katrina bet, compared with about $4-million in 2004, the employees say.

At the end of 2005, Mr. Maounis let Mr. Hunter move his wife and two children back to Calgary and open an office with eight traders.

Yet at least one potential investor visiting Amaranth at that time was concerned the fund's energy holdings were too large.

"It looked to us like the Amaranth multistrategy fund was a pure energy bet," says Edward Vasser, chief investment officer of Wolf Asset Management International LLC, a Santa Fe, N.M.-based fund of funds. "Almost all of their profits came from their energy portfolio."

He decided against investing in Amaranth.

Still, the energy bet was working for Amaranth, which had about 30 per cent of its assets in the sector. The flagship fund ended the year up about 15 per cent.

Mr. Hunter also bet that natural gas prices would increase while fuel and heating oils either would stay the same or fall.

In April, Amaranth's fund climbed 13 per cent, almost entirely because of energy trades, according to investors. In the first four months of the year, when other multistrategy funds were up an average of 5.3 per cent, Amaranth's returns approached 30 per cent, they say.

In May, Mr. Hunter's fortunes changed. Spreads between October and January contracts, another way to wager on price differences between warmer and colder months, narrowed to $3.27 from a high of $3.64. Spreads between March and April contracts also narrowed. Mr. Hunter lost $1-billion.

Mr. Maounis asked other traders, in areas like stocks and convertible bonds, to cut their positions to raise cash, former employees say.

From June to August, the energy and commodities positions earned $1.35-billion, Mr. Maounis told clients on a Sept. 22 conference call, according to a transcript provided to Bloomberg News. Much of those gains were generated in August.

On Sept. 14, though, the funds lost $560-million when natural gas prices tumbled 10 per cent as surging inventories and cooler weather cut demand for air conditioning. The spread between March, 2007, and April, 2007, contracts collapsed to 63 cents from $2 at the beginning of September.

With a loss already estimated at more than 35 per cent for the year, most hedge fund investors expected Amaranth to close.

Yet on Sept. 22, Mr. Maounis told his investors: "We have every intention of continuing in business."

In the following days, though, some fund managers say Mr. Maounis was unable to make decisions as simple as giving them the go-ahead to sell their positions. Other Amaranth executives say his indecisiveness stemmed from his focus on the bigger issue of how to keep Amaranth going.

The night of Sept. 26, Mr. Maounis sent a four-sentence e-mail to his 420 employees.

"I want to thank all of you for your years of loyalty and support, especially during this especially difficult time for all of us," it began. "I am quite sure that the Amaranth spirit will live on in all of us as nothing can ever take that away from us."

The biggest hedge fund collapse in history didn't shutter Amaranth instantly, and no investors have sued. Most of the firm's employees are gone, including Mr. Hunter.

© 2007 The Globe and Mail. All rights reserved.

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