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8:30 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.

Amaranth, 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.

"We anticipate 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.

One commodities 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.

Michael Greenberger, 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 gas futures.

"If that's 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 markets."

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.

"We have 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.

Brian Hunter 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.

Most notably, 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.
2. Don't 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.

Personally, I 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 here.

Good 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.
3. Rents are rising.
4. Apartment REITs are outperforming all other REIT sectors.

This is the New York Times's chart:



Control + 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.

What 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 here.

Don't 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 option."

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.

Dear Abby,
I've never written to you before, but I really need your advice on what could be a crucial decision.

I've suspected 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.
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