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Tale of two hedge funds: Short & caught and long & wrong

One hedge fund blew up and lost a reported $400 million after getting caught short. The other lost $4.5 billion after finding itself long and wrong. At first glance, the only connection the two companies have is that both were hedge funds, and both were punting in the highly volatile natural gas market.

The tale of two hedge funds caught out in the natural gas market.

The first company, MotherRock, a fund set up by former Nymex president Robert ‘Bo’ Collins, went belly up in August after basically speculating that the natural gas market had reached its peak. This was followed by more spectacular losses at Amaranth Advisers. The Connecticut-based company told investors that its two main funds had lost close to about 50% of their values after the gas market peaked and started to come off rapidly. Amaranth then found itself holding a massive spread position, which moved rapidly against it.

But besides trading in the same market, there is another connection between the two funds. Amaranth bought MotherRock’s portfolio from ABN Amro after the Dutch bank found itself responsible for the failed fund’s positions because of its role as its clearer on Nymex. As a result of MotherRock’s losses, the sale of ABN Amro’s futures arm to UBS has been delayed, although it is expected to go through around the end of this month.

Even though MotherRock’s losses are relatively modest, especially compared with Amaranth’s, they have highlighted something many investors, especially those in commodities, will do well to take on board.

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