Amaranth reportedly gets help

Citadel, JPMorgan agree to take over ailing hedge fund's energy positions, say sources

September 21, 2006|By Bloomberg News

Hedge-fund operator Citadel Investment Group LLC and JPMorgan Chase & Co. agreed to take over energy-trading positions from Amaranth Advisors LLC, the hedge fund whose wrong-way bets lost about $4.6 billion this month, two people with knowledge of the decision said.

Separately, Citigroup Inc. is in talks to buy a stake in Amaranth, two people involved in those discussions said.

Amaranth, which had $9.5 billion in assets in August, was forced to unload the trades after swings in natural-gas prices last week turned it into the biggest hedge fund meltdown since the near collapse of Long-Term Capital Management LP's 1998. Transferring the bets would stem Amaranth's losses, freeing the firm to seek the cash infusion it may need to stay in business.

Amaranth founder Nicholas M. Maounis told investors Monday that the two hedge funds lost 50 percent this month, leaving them down 35 percent for the year.

Among those who appear to have lost significant amounts of money with Amaranth are the pension fund of 3M Co. and the public pension fund of San Diego County, Calif.

"Normally, you would want to try to manage yourself out and improve it, stop the bleeding and then sell it in three months or something, once the crisis has passed," said Mark E. Haedicke, the former general counsel for Enron Corp.'s trading unit and now an energy consultant in Houston. "To sell it in the middle of a crisis to me indicates a greater disaster."

Citadel, the $12 billion hedge fund group in Chicago led by Kenneth C. Griffin, and JPMorgan, the No. 3 U.S. bank by assets, will assume the portfolio's risk of further losses.

Officials at Citadel, JPMorgan, Citigroup and Amaranth declined to comment before a public announcement.

A stake in Amaranth could give Citigroup a share of the firm's management and performance fees. The stake would be part of Citigroup Alternative Investments, the division that runs its hedge fund, private equity, real estate and structured-product holdings, according to the people familiar with the bank's discussions with Amaranth.

Some of Amaranth's energy investments consist of positions in gas futures, options and over-the-counter contracts that would gain in value as prices rise, according to one person with knowledge of the situation.

Last year, Amaranth's energy and commodities bets gained 72 percent. They were up 52 percent through June of this year, according to marketing documents for a new fund it planned to raise.

"If one is speculating in that kind of market, there's going to be some downside risk," said Shannon Burchett, who traded oil for JPMorgan and Citigroup in the 1990s and now runs an energy consulting firm in Dallas. "They should have the controls and risk management strategies in place to mitigate those kind of outcomes."

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