Video: Amaranth selling off its portfolio

updated 9/21/2006 6:23:35 PM ET 2006-09-21T22:23:35

A Connecticut hedge fund that bet heavily on the natural gas market lost almost $6 billion over the past month as it sold assets at a loss to stay afloat while its bets on natural gas plummeted, the fund told investors.

Greenwich-based Amaranth Advisors said in a letter late Wednesday that the fund lost about 55 percent of its year-to-date assets and about 65 percent month-to-date as of Tuesday, leaving the hedge fund’s assets below $3.5 billion.

Amaranth, which opened the year with $7.4 billion in assets, hit an August high of $9.2 billion before a slide in the value of natural gas investments.

It said Wednesday it had transferred its energy portfolio to a third party, but has not identified that entity.

Amaranth’s energy portfolio was taken over by New York-based J.P. Morgan Chase & Co., the nation’s third-largest bank, and hedge fund Citadel Investment Group LLC, a $12 billion hedge fund based in Chicago, according to people familiar with the transaction. They requested anonymity because they were not authorized to discuss the deal.

The nation’s largest bank, New York-headquartered Citigroup Inc., was in negotiations to buy a stake in Amaranth, Dow Jones Newswires on Thursday reported. It quoted a person familiar with the matter whom it did not identify. Such a move would shore up the fund’s capital.

Amaranth’s founder and chief executive, Nick Maounis, told the hedge fund’s investors in his letter that selling off some assets in the fund’s other portfolios, along with the transfer of its energy portfolio, “helped us avoid the termination of our credit facilities and the risk of a consequent forced liquidation by our creditors.”

He added: “Our major financial counterparties have confirmed that they are now comfortable with our portfolio and overall liquidity position.”

The hedge fund’s officials plan a conference call Friday with investors and will schedule one-on-one discussions, the letter said.

Hedge funds are aggressive investment vehicles often used by pension funds and wealthy investors.

The funds have much higher minimum investments than mutual funds and typically are much more active traders and take greater risks. Amaranth lost billions because of aggressive — and incorrect — bets on natural gas futures prices, which recently dropped.

The repercussions are beginning to be felt around the country, including among municipal governments and pension funds.

San Diego County invested $175 million last year with Amaranth.

New Jersey’s pension fund could lose $16 million of its $25 million it invested with Amaranth, said Orin Kramer, the chairman of the New Jersey State Investment Council. The pension fund made the investments through a private account at Goldman Sachs Group Inc. and two “fund of funds,” which are funds that invest in multiple hedge funds.

Kramer said the state’s losses in Amaranth would total less than .04 of a percentage point.

Also potentially affected is 3M Co., maker of Scotch tape and other products. Company spokeswoman Jacqueline Berry said Thursday about 1 percent of the company’s $9.2 billion pension portfolio was invested in Amaranth.

Filings with the Securities and Exchange Commission in Washington, D.C., showed that several large financial companies had invested in Amaranth, including Goldman Sachs, Credit Suisse Group and the Morgan Stanley Institutional Fund of Hedge Funds LP.

The hedge fund industry has come under fire in the past for risky investments, and the SEC has moved unsuccessfully to adopt regulations. Last month, the SEC announced it will not challenge a federal appeals court ruling that overturned new SEC rules for oversight of hedge funds.

SEC Chairman Christopher Cox said the SEC would instead introduce a new anti-fraud rule and consider increasing the minimum asset and income requirements for hedge fund investors.

Those who oppose regulations have long argued that hedge funds attract sophisticated investors. They say the government should focus its limited resources on mutual funds that serve far more investors of modest means.

Connecticut Attorney General Richard Blumenthal, who has supported regulating the industry, promised to investigate the company’s holdings and losses. Southwest Connecticut plays host to numerous hedge funds because of its proximity to financial centers in New York.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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