Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
AM EST Tuesday, September 19, 2006: Start with a story
by Matthew Goldstein at TheStreet.com. Remember, I don't make this stuff
up. This story is a reflection of the desperation among hedge funds to perform
-- at any cost.
a big hedge fund, suffered huge losses last week on bad bets on natural gas
trading. Observers said the revelation may explain some of the recent volatility
in energy markets.
our year-to-date losses might be in excess of 35% as we near completion
of the disposition of our natural gas exposure," the hedge fund said
in a letter to investors obtained by TheStreet.com. The letter is signed by
the hedge fund's founder, Nicholas Maounis.
A person familiar
with Amaranth says the fund was up a little more than 20% for the year
as recently as mid-August.
Using that figure,
a back-of-an-envelope calculation means Amaranth at one point was up $1.5
billion for the year. But in recent weeks it may have lost as much as $4
billion. The fund, assuming it is down 35% for the year, now has about
$5 billion in assets under management.
A person familiar
with Amaranth says the fund lost about 60% of its value in a single week
because of the bad natural gas bets. The losses were magnified by the
fact that Amaranth's bets were leveraged, using borrowed money. This source
says the natural gas trade was levered at a ratio of 5-to-1.
A trader with
another hedge fund says the news of the big loss at Amaranth may explain some
unusual trading in certain stocks last week. The trader speculated that Amaranth
may have been liquidating positions in some of its equity holdings to satisfy
the margin calls from its prime broker. Amaranth wouldn't comment beyond its
letter to investors.
trading expert says the big trading loss at Amaranth shows what can happen
when natural gas trades are conducted through the so-called over-the-counter
marker rather than a monitored exchange such as the New York Mercantile Exchange.
a professor at the University of Maryland Law School and former director of
the division of trading and markets at the Commodity Futures Trading Commission,
says that if the trades conducted by Amaranth had gone through the Nymex,
regulators probably would have stepped in and questioned the activity. Greenberger
says the speculation is that Amaranth may have conducted most of its trading
away from the Nymex in a bid to "corner" the long contract on natural
the case, it amounts to manipulating the market," says Greenberger. "It
has nothing to do with supply and demand. It's playing games in the opaque
Based in Greenwich,
Conn., Amaranth employs more than 360 people, including 115 traders. The fund's
Web site tabs its assets at $7.5 billion, and the firm has offices
in Houston, Toronto, London and Singapore. Sources say assets under management
may have been more than $9 billion going into September.
met every margin call to date," the letter continues. "We are in
discussions with our prime brokers and other counterparties and are working
to protect our investors while meeting the obligations of our creditors."
The hedge fund
reported having $2.3 billion invested in U.S. stocks as of the end
of June. Several of Amaranth's big investments were Humana (HUM), Goldcorp
(GG) and Sprint (S).
A broker gives
a margin call when an investor or trader does not have adequate collateral
to support the amount of money it has borrowed.
Even if Amaranth
has been able to satisfy all of the margin calls, the big loss at the fund
could have ramifications for others on Wall Street, especially institutional
investors who bet on hedge funds. Some of the Wall Street firms with so-called
hedge fund fund-of-funds that reported having big stakes in Amaranth include
Morgan Stanley (MS) and Credit Suisse (CSR).
Amaranth is a six-year-old multistrategy fund that specializes in energy trading,
merger arbitrage, convertible bond trading and regular long/short trading.
is the head of energy trading at Amaranth. The fund employs about 21 energy
traders. The hedge fund gets its name from the Greek word amarantos, which
means unfading. Even before Amaranth released a copy of its investor letter
Monday, Wall Street traders were buzzing that the hedge fund had lost a ton
of money on natural gas trades.
The energy markets
have been particularly volatile this year. Many funds have made a great deal
of money riding the spike in oil prices to new heights this summer. But a
number have been caught on the wrong side of trades, especially since energy
prices have turned on a dime.
MotherRock, a two-year-old fund that once had nearly $450 million in
assets, shut its doors in late July after losing nearly half of its value.
Led by former New York Mercantile Exchange President J. Robert "Bo"
Collins, MotherRock also bet wrong on natural gas prices.
But unlike Amaranth,
MotherRock got caught betting that natural gas would fall at a time that the
commodity was soaring to new heights. The irony is that if MotherRock could
have held on for another few months, it might have recovered much of its losses.
Last week, MotherRock
told investors it was unlikely they would get back any money of the fund.
Here are charts
on the three stocks Amaranth was allegedly holding big positions in:
I am not an Amaranth
investor. There are lessons for all of us:
1. Don't borrow money to gamble.
make huge concentrated short-term bets that are basically gambles.
I have money in a commodities fund I have written about. Until recently it was
up for the year. Now -- as of September 15 -- it's down 1.7%.
It's a broad fund with holdings in everything from nickel (up 98%) to
natural gas (down 66%). It's also not leveraged. It doesn't borrow money
to increase the riskiness of its commodities bets. I'm guessing it will be up
for the year.
Three things affect
the price of commodities:
1. Actual short-term seasonal demand. Gas prices typically go up in summer
when we drive, drop after Labor Day when we come back to work and then rise
again when it gets cold in the winter.
2. Speculation. Hedge funds used to mess only with equities but now they
mess with everything that moves -- whether they understand it or not. That means
they likely mess up markets. Natural gas is probably a good buy today.
3. Long-term demand from consumers. My long-term optimism on commodities
stems from (a) continuing world economic growth --especially China whose growth
is running at its fastest pace in 12 years, according to Friday's Wall Street
Journal and (b) the increasing expense of finding and producing new commodities.
The big gainers in my commodities fund this year have been nickel, copper, silver,
platinum and gold, in that order.
like a big basket of commodities. I won't make the money that Amaranth
would have made, had its leveraged gamble on natural gas paid off. But I'll
sleep at night.
Sleep is good. For more on hedge funds, see yesterday's column. Click
time to be a landlord: According to the New York Times:
1. Landlords are
enjoying booming times these days as more people are choosing to rent.
2. The supply
of rental units is tight, as many rental units were sold off as condominiums.
REITs are outperforming all other REIT sectors.
This is the New
York Times's chart:
+ Enter saves time on browsers. Type Google, WSJ or whatever. Press
the Ctrl and Enter keys together. Bingo, your browser has added
the www and the com. Neat.
were they thinking? -- Part 1: According to today's Wall Street
Journal, a computer-crimes specialist (and ex-FBI agent) with Hewlett-Packard
Co. emailed his superiors this year warning that the company's investigation
of board leaks -- then still in progress -- was being conducted in a manner
that could be illegal. Specifically, Fred Adler, an official in H-P's global
security office in Roseville, Calif., wrote that acquiring people's phone records
through false pretenses could be against the law. H-P has since admitted that
investigators working for the company used such a method, known as pretexting,
in obtaining phone records of its directors, two H-P employees, nine journalists
and an unspecified number of outsiders. H-P and its contractors are being investigated
by the FBI and California's attorney general for the use of pretexting in the
probe to identify the source of internal board leaks.
What were they thinking? -- Part
2: ABC blew virtually $30 million on its 5-hour mini-series "The Path to
9/11," which ran without commercials. The mini-series was originally conceived
as a documentary, but so much of it was simply made up by the writer that it
became a a "docudrama." The show also annoyed a lot of people for
showing Clinton and Bush as being weak on terrorism. For the entire incredible
story , click
bother with movie downloads -- yet. The computer
trade press is full of the horrors of downloading movies from Amazon and Apple.
Writes one reviewer, "The
shortfalls of Apple and Amazon's ventures are the same as ever: a maddeningly
thin selection, uncompetitive prices, middling video quality and no DVD-burning
My preference for movie viewing is Netflix. They have a huge inventory to choose
from. You'll always find your favorite movie. They deliver quickly. Their service
is exemplary. I've never copied a Netflix movie I rented. But why should I?
I've seen the movie and I have enough junk in the house without cluttering it
with stolen movies I'll never watch again.
I've never written to you before, but I really need your advice on
what could be a crucial decision.
for some time now that my wife has been cheating on me. The usual signs...phone
rings, but if I answer, the caller hangs up. My wife has been going out with
the girls a lot recently, although when I ask their names she always says, "Just
some friends from work, you don't know them."
I sometimes stay
awake to look out for her cab coming home, but she always comes walking up the
drive as I hear the sound of a car leaving, around the corner, as if she has
gotten out and walked the rest of the way.
I once picked
up her cell phone, just to see what time it was. She went berserk. She snatched
the phone out of my hand and cursed me, screaming I should never touch her personal
property, then she accused me of trying to spy on her.
Anyway, I have
never broached the subject with my wife. I think deep down I just didn't want
to know the truth, but last night she went out again and I decided to really
check on her. I decided I was going to park my Harley Davidson next to the garage
and then hide behind it so I could get a good view of the street when she came
home. It was at that moment, crouching behind my motorcycle that I noticed a
small amount of motor oil leaking through the gasket between the rear head and
rocker arm cover.
So... is this
something I can easily repair myself or should take it back to the dealer?
An object of great beauty -- the bike, not me.
This column is about my personal search
for the perfect investment. I don't give investment advice. For that you have
to be registered with regulatory authorities, which I am not. I am a reporter
and an investor. I make my daily column -- Monday through Friday -- freely available
for three reasons: Writing is good for sorting things out in my brain. Second,
the column is research for a book I'm writing called "In Search of the
Perfect Investment." Third, I encourage my readers to send me their
ideas, concerns and experiences. That way we can all learn together. My email
address is .
You can't click on my email address. You have to re-type it . This protects
me from software scanning the Internet for email addresses to spam. I have no
role in choosing the Google ads. Thus I cannot endorse any, though some look
mighty interesting. If you click on a link, Google may send me money. Please
note I'm not suggesting you do. That money, if there is any, may help pay Claire's
law school tuition. Read more about Google AdSense, click
here and here.