Losing $7 billion in a week requires significant effort
The Big Dog And The Fox
You have to work pretty hard to lose almost $7 billion in a week.
Brian Hunter managed to do just that. Although he was coldly indifferent to the devastation his activities had wrought, it was an agonizing experience for Amaranth’s remaining investors, such as county pension funds representing teachers and public servants and others far removed in both geography and understanding of what was happening to their quickly evaporating money. But, once again, as seems to be the mantra of the trading and brokering business, their pain was our gain. The day after Hunter flew back from a golf outing, for example, the hosting broker received a call calmly instructing him to sell tens of thousands of one-year-out strips of call options. And these phone calls and instant messages from Hunter and his assistants were going out all over the broker community. One broker was paid a million dollars in fees for one day’s work … somehow, even though the fund lost billions, they managed to scrape together the money to pay the commissions.
As lucrative as it was to be a broker in the Big Dog’s pound, being one of the traders on the other side of Hunter’s epic collapse was a far better deal … if you had the deep pockets and diamond-hard testicles to stay the course in the face of his attempts to artificially squeeze you out of your fundamentally correct position in natural gas spreads and other derivatives by relentlessly buying and pushing the market up in your face until you were compelled by margin calls to turn the paper loss into a real one. This happened to one well-respected fund manager who got the trade right but entered just a little too big and a tad too early to withstand the paper losses he was incurring due to Hunter’s Banzai charge of nonstop buying, especially of the March/April spread, known in energy trading circles as “the widow-maker” for its propensity to gyrate wildly with the slightest weather events. Eventually the fund manager’s investors couldn’t take the heat and bailed on him, forcing him to buy back his shorts and lock in his losses in a liquidation to meet a wave of redemptions.
Down in Houston, John Arnold was also taking heavy paper losses as Hunter dug his own grave deeper and deeper by buying gas that no one with any fundamental understanding of the supply/demand dynamic in play would want anywhere close to these inflated prices once he stopped his artificial short squeeze. But Arnold had made his investors a mint already, and they’d learned to trust his judgment. So the ever-calm trader patiently waited for Hunter’s inevitable tumble from the mountaintop once he ran out of bullets and had to turn around and offload his position … to no one. When Amaranth initiated a fire sale of their non-energy positions just to meet Hunter’s rising margin calls, The Street knew there was blood in the water.
Cover design: Cody Corcoran/Post Hill Press
The besieged Canadian’s problems only worsened when on August 29, 2006, the expiration day of the September 2006 contract, he decided to make a huge play by selling more of the September futures and buying the October throughout the course of the day. Since he owned the more expensive leg, he was effectively long the September/October spread starting at 36 ticks October over. By noon, his selling of September and buying of October had pushed the spread to as wide as October trading 50 over September … meaning what Hunter was short (September) was falling more than what he was long (October). The trade was moving in his favor. Or, more correctly, he was muscling it his way.
Given the sheer size Hunter was trading, he inevitably widened the differential between
What factors allowed the fund manager to maintain his position despite the mounting losses and the challenging period?
Ather disturbance. The fund manager, who had built a solid reputation over the years, had never experienced such intense pressure before. He knew that he was right with his trade, but the relentless buying from Hunter made it difficult to maintain his position.
As the days went by, the losses piled up, taking a toll on the fund manager’s nerves. He could see his once-promising profits turn into significant losses. The pressure was becoming unbearable, and he could feel the weight of his responsibility towards his investors. The thought of jeopardizing their hard-earned money was agonizing.
Despite the mounting losses, the fund manager held on, convinced that the market would eventually correct itself. He knew that Hunter’s attempts to squeeze him out were nothing more than temporary tactics. He believed in his fundamental analysis and had the courage to stay the course, even when it seemed almost impossible.
It was a challenging period, both mentally and financially, for the fund manager. Sleepless nights and constant monitoring of the market became the norm. He questioned his decision-making abilities and wondered if he had overestimated his trading skills. But deep down, he knew that giving up was not an option.
And then, finally, the tide began to turn. Hunter’s relentless buying started to subside, and the market began to reflect its true value. The losses that had haunted the fund manager transformed into profits once again. It was a vindication of his convictions and a testament to his resilience.
This story of the big dog and the fox is an example of the volatility and unpredictability of the financial markets. It portrays the struggle between those who try to manipulate the market for their own gains and those who stay true to their principles and beliefs.
While Hunter’s actions may have caused havoc for many, they also presented opportunities for those who were willing to stand their ground. The fund manager in this story exemplifies the determination and courage required to weather such storms.
In the end, it is a reminder that success in the financial world requires not only knowledge and skill but also the strength to stay true to one’s convictions in the face of adversity. The big dog may have initially seemed invincible, but it was the fox’s unwavering determination that ultimately prevailed.
And so, as the markets continue to fluctuate and test the mettle of traders and investors alike, it is essential to remember the lessons taught by this tale – to remain steadfast, to trust in one’s analysis, and to have the resilience to withstand even the most challenging of circumstances.
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