Thursday, September 21, 2006

Hedge Funds On The Wrong Side Of A Trade

Natural gas and oil are down significantly from their highs. Some naive souls believe this is due to supply and demand, but could it possibly be a result of hedge fund liquidations (see article below)?

Hedge funds have the ability to use huge amounts of leverage. Forget margin requirements...through derivitives and bank borrowing, they can establish positions with less than 10% equity (and evade short selling rules!). This works great when momentum is on their side, but when it's not, watch out!

I only mention this because it is common knowledge that some funds have established short positions in the satellite radio space. Even with their great contacts, Wall Street access, research and pools of capital, hedge funds can be wrong, too, and one day, they will indeed have to cover!

Hedge Fund Sheds Assets in Energy
By JENNY ANDERSON. The New York Times, Sept 21. 2006

Amaranth Advisors, the hedge fund that lost $5 billion betting on natural gas prices, sold its book of energy trades to J..P. Morgan and the Citadel Investment Group, according to two people briefed on the negotiations.
The sale leaves Amaranth, once a well-regarded $9.25 billion fund, with $3.4 billion, down 55 percent from the beginning of the year and down 65 percent for September, according to a letter sent to investors late last night.
The energy portfolio holds what remains of Amaranth’s disastrous trades on price differences in the natural gas market. Multibillion-dollar losses on those trades caused banks to recall large loans to Amaranth, in turn forcing the fund to sell significant holdings to pay the loans to avoid default...READ MORE: HERE

9/21/2006 01:24:00 PM

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