Hedge Fund loses billions betting on Natural Gas Futures

By: Shahla_Walayat

The financial media is buzzing about the reports of "enormous losses" suffered by Amaranth Advisors, a Connecticut hedge fund that reported it had lost in excess of $4 billion in the collapse of natural gas prices during 2006.

Specifically, the fund claims that its losses were due to bets that the spread between the March and April 2007 natural gas contracts would widen. That spread, in fact, did not widen but instead grew tighter as natural gas prices fell. While the fund allegedly lost money on a number of natural gas–related bets, The New York Times is reporting that the spread bet was the most costly.

Rush for the Exit

Investors who put money into the Amaranth Multi-Strategy fund after 1st of Feb., had to agree to a 25-month lockup,. Investors who got in before that could redeem on Jan. 31, April 30, July 31 and Oct. 31 each year, provided they gave 45 days' written notice. But if investors representing more than 7.5% of the fund's assets asked to redeem, Amaranth could put up a so-called gate, halting all redemptions. A 2.5% redemption fee could also be levied in such a situation. As likely more than 7.5% has been requested, which now gives the firm the right to delay redemptions until it is able to return investor monies.

As for Natural Gas Futures

The futures peaked at over $15 and have recently traded to below $5, unwinding all of the gains observed during 2006. At this point in time given similar overhanging positions amongst other large speculators, the bears continue to have the upper hand.

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