How Giant Bets on Natural Gas
Sank Brash Hedge-Fund Trader

Up in Summer, Brian Hunter
Lost $5 Billion in a Week
As Market Turned on Him

A Low-Profile Life in Calgary

By ANN DAVIS
September 19, 2006; Page A1

CALGARY, Alberta -- Of all the traders gambling big sums on energy, a 32-year-old Canadian named Brian Hunter made some of the brashest bets and the fastest money.

Last week, he fell hard, proof of how quickly fortunes can reverse in gyrating commodities markets.

Here in this bustling new energy frontier, Mr. Hunter headed the energy desk for a Connecticut hedge fund called Amaranth Advisors. At the end of August, trading natural gas, he was up approximately $2 billion for the year. Then Mr. Hunter lost roughly $5 billion, in about a week.

His losses savaged returns for Amaranth, dragging its assets under management down to $4.5 billion from $9 billion at the start of September. In disclosing the losses to investors in a letter yesterday, the fund said it was "aggressively reducing" its natural-gas bets, though Mr. Hunter remains at the fund. (Even as Amaranth was losing, some gas traders were winning)

What hurt Mr. Hunter is what he had ridden to glory for the past year or so: volatility.

Though unknown in public, he had created a buzz on Wall Street -- a wunderkind to some, a ticking bomb to others. From a cramped trading desk here, he thrived on big price swings, reaping billions of dollars on price declines and surges alike. But late last week, he watched with growing alarm as gas prices took a steep dive, particularly in futures contracts for delivery of gas for this coming winter. His losses mounted in after-hours trading last weekend.

"The cycles that play out in the oil market can take several years, whereas in natural gas, cycles take several months," Mr. Hunter said in an interview late in July, when his returns were looking rosy. "Every time you think you know what these markets can do, something else happens."

At that time, Mr. Hunter had more than $3 billion of bets outstanding, investors familiar with the funds' holdings say. Soon thereafter, a heat wave caused gas prices to go haywire, then soar. Many traders took hits. One energy-trading firm, MotherRock L.P. in New York, imploded and decided to close shop. The lanky Mr. Hunter, however, came out hundreds of million of dollars ahead in August, Amaranth investors say, and continued taking positions some other traders had abandoned as too risky. He declined to be interviewed yesterday.

An increasing number of big commodity players are bypassing the geopolitics of oil for the most-volatile major commodity: natural gas. The blue-burning fuel heats 52% of U.S. homes and runs many power plants in peak air-conditioning season. It also is a raw material in industries from fertilizers to chemicals.

Unlike oil, gas can't readily be moved about the globe to fill local shortages or relieve local surpluses. Forecasts of freezing U.S. temperatures in winter or heat and hurricanes in summer can send prices jumping, while forecasts of mild weather can do the opposite. Last December, amid a cold snap, gas soared to a record $15.378 a million British thermal units on the New York Mercantile Exchange, or Nymex. This month, prices fell below $5 in the absence of major hurricanes and with forecasters talking about another warm winter. Yesterday, gas for October delivery settled at $4.942 a million BTUs on Nymex, off four cents.

Backed by borrowed money and a deep-pocketed fund, Mr. Hunter took on more exposure to certain futures contracts than do some big investment banks employing more than 100 energy traders, say several traders and ex-colleagues. He sometimes held open positions to buy or sell tens of billions of dollars of commodities.

He was up for the year roughly $2 billion by April, scoring a return of 11% to 13% that month alone, say investors in the Amaranth fund. Then he had a loss of nearly $1 billion in May when prices of gas for delivery far in the future suddenly collapsed, investors add. He won back the $1 billion over the summer, only to lose that and much more last week.

The whiplash trading in these markets could work to the detriment of energy consumers. Some consumer advocates, utilities and federal officials say speculation in the energy markets accentuates the volatility of this staple fuel and that the increased volatility, in itself, hurts consumers. Volatility makes it harder for utilities and municipalities to determine the best time to buy gas for their operations. Many utilities made gas purchases over the past year that proved to be poorly timed. They passed on those costs to electricity and heating customers, even as futures prices were dropping.

'A Typical Mistake'

While energy consumers have seen their bills rise, many traders' paychecks have soared. Mr. Hunter is estimated to have taken home $75 million to $100 million last year.

His swift reversal calls into question how well some hedge funds grasp the risk they are taking in the now-popular energy markets. Vince Kaminski, a risk-management expert who protested chancy trades while at Enron Corp. and until recently was at Citigroup Inc.'s commodities desk, said yesterday that it is dangerous to take giant positions in relatively shallow markets, which certain months are in gas futures. "This is a typical mistake of inexperienced and aggressive traders," he said. Mr. Hunter "appeared to have a position that the entire market knew about. The markets are very cruel." Citing a well-known epigram, Mr. Kaminski added, "'The market can stay irrational longer than you can stay solvent.'"

Nick Maounis, Amaranth's founder and chief executive, said in August that more than a dozen members of his risk-management team served as a check on his star gas trader. "What Brian is really, really good at is taking controlled and measured risk," Mr. Maounis said. Mr. Maounis declined to comment yesterday.

When Mr. Hunter began trading gas eight years ago, it was far less volatile, hovering under $2 a million BTUs. Mr. Hunter had grown up in farm country near Calgary, but his knowledge of gas was limited to summer work on a rig in northern Canada. He knew markets, though: Unable to afford skiing while in college, he poured himself into math at the University of Alberta. A graduate professor of his was a leader in the emerging field of financial modeling and derivatives.

Mr. Hunter joined TransCanada Corp., a Calgary pipeline company that was becoming a player in the growing business of trading energy, rather than simply transporting it. The company would help customers like gas producers lock in prices for some of the fuel it shipped for them.

Mr. Hunter, then 24, came armed with fresh theories about options pricing and impressed his bosses with his ability to spot price anomalies. They gave him increasing amounts of money to trade with after early successes. Among them: He convinced them that options in Canadian gas were underpriced as a pipeline from Canada to Chicago was set to open and create a greater market for it.

"He helped us prove that mathematically...and it paid off hugely," says Shondell Sabad, a former colleague there who now trades for a Calgary bank.

Traders like Mr. Hunter make complex wagers on gas at multiple points in the future, betting, say, that it will be cheap in the summer if there is a lot of supply, but expensive by a certain point in the winter. Mr. Hunter closely watches how weather affects prices and whether conditions will lead to more, or less, gas in a finite number of underground storage caverns. Roughly akin to counting cards in bridge, a trader keeps track of how much gas is injected into storage and how much might have been withdrawn for various uses.

Mr. Hunter moved to Wall Street to do the same work for more pay. He joined Deutsche Bank's energy desk and gained a name trading U.S. gas futures -- where his wide profit and loss swings provoked a stormy face-off with superiors.

Mr. Hunter personally generated $17 million in profit in 2001 and $52 million in 2002, according to a complaint he later brought in state court in New York. By 2002, he pulled down more than $1.6 million in salary and bonus and began supervising the gas desk in 2003.

In December 2003, just as his group was close to ending the year up $76 million, he claimed in the suit, things went awry. In a single week, they had losses of $51.2 million, he said in the suit. He blamed "an unprecedented and unforeseeable run-up in gas prices" along with "well-documented and widely known problems with" Deutsche Bank's electronic-trade-monitoring and risk-management software, which he said hurt traders' ability to extricate themselves from bad trades. Deutsche Bank denied its systems were to blame.

Mr. Hunter argued that even though the desk as a whole posted a loss, he personally made trades that netted the bank $40 million that year. He and his natural-gas colleagues got no bonus. By February 2004, relations had soured to the point that supervisors locked him out of the trading system and made him an analyst, moving him off the desk. Mr. Hunter left in April and subsequently sued over the withheld bonus and claimed Deutsche Bank defamed him. It denied the allegations. The suit is pending.

Mr. Maounis, the head of Amaranth, took a chance on Mr. Hunter. Amaranth was one of the first hedge funds to build an energy desk soon after the demise of Enron, under the leadership of former Enron energy trader Harry Arora. Messrs. Arora and Maounis hired Mr. Hunter and initially kept him on a tight leash. Mr. Maounis says the firm knew of Mr. Hunter's history at Deutsche Bank but did extensive checks and found "nothing that made us uncomfortable."

Mr. Arora was relatively conservative and sought to make diversified commodities investments. He brought Mr. Hunter along and the energy group posted steady annual returns of 20% to 40%.

Mr. Hunter wanted to make bigger bets in his main market, gas. He had an ability to keep calm with huge bets on the line and markets were going berserk. In July 2005, for instance, he was in Calgary at Stampede, a rodeo festival, when the gas market began moving erratically. Mr. Sabad, his former TransCanada colleague, says Mr. Hunter got on the phone a few times but didn't panic or trade from his hotel room. "He asks himself, 'Do I still like my position?' If he does, he adds more," Mr. Sabad says.

Around that time, Amaranth agreed Messrs. Hunter and Arora could separate their trading "books," each controlling his own trades. Then late last year, the double-whammy of Hurricanes Katrina and Rita made Mr. Hunter a hero at Amaranth and a minor legend on Wall Street, as he made $1 billion for Amaranth.

Mr. Hunter trolls for what he calls mispriced options -- that is, the chance to buy or sell something at a price that appears farfetched to the market but that Mr. Hunter sees as a distinct possibility. Leading up to the hurricanes, his bets included a complex portfolio of options based on the idea that gas could get extremely expensive in the early fall. An option to buy gas at, say, $12 cost very little in summer 2005 because gas was then trading at only $7 to $9. When it surged past $13 after hurricanes ravaged Gulf of Mexico production, such options, which he had been buying, jumped in value.

His success was a rebuke to his ex-colleagues at Deutsche Bank, where lawyers were wrangling with him over his request to take depositions from former superiors, even as he was banking big profits. It also was hard for Mr. Arora, still his boss but not the main rainmaker. Mr. Arora eventually left to start his own hedge fund.

It was vindication for Mr. Hunter. In its annual Christmas card, Amaranth referred to its energy-market winnings by quoting Benjamin Franklin: "Energy and persistence alter all things." It sent out toy gasoline pumps.

Amaranth agreed to let Mr. Hunter trade from his hometown of Calgary, where he began with the fund's blessings to build an even bigger portfolio. A world away from New York gridlock, he zoomed to work in his new gray Ferrari, or occasionally a Bentley, which he tells friends is better in snowy Calgary winters. Besides the cars and a house he is building, he keeps a low profile. Some of his pickup-basketball buddies don't even know what he does. Though he consented to several interviews for this article, he wouldn't allow a photo.

From his desk on a trading floor, Mr. Hunter monitored dozens of "instant messaging" tabs from brokers and pored over weather screens. Six traders were there on one day this summer, in a space crammed with boxes of KitKats and Hershey bars, microwave popcorn and bags of running clothes. The only fancy touch was a basketball signed by Michael Jordan encased in Lucite.

'A New Level of Liquidity'

Bruno Stanziale, a former Deutsche Bank colleague now at Société Générale, works with energy companies that need to hedge their production. In an interview in July, he contended Mr. Hunter was helping the market function better and gas producers to finance new exploration, such as by agreeing to buy the rights to gas for delivery in 2010. "He's opened a market up and provided a new level of liquidity to all players," Mr. Stanziale said.

Mr. Hunter saw that a surplus of gas this summer could lead to low prices, but he also made bets that would pay off if, say, a hurricane or cold winter sharply reduced supplies by the end of winter. He also was willing to buy gas in even farther-away years, as part of complex strategies.

Buying what is known as "winter" gas years into the future is a risky proposition because that market has many fewer traders than do contracts for months close at hand. Deals for those far-away months are often done in over-the-counter transactions that can be hard to exit. In May, his team's position fell nearly $1 billion when the prices of far-forward gas contracts took a steep dive -- much as they did last week. In this case, a number of gas producers suddenly sold more gas than Mr. Hunter expected.

By summer, Mr. Hunter appeared to be proving doubters wrong. Amaranth's overall fund gained around 6% in June, was roughly flat in July and rose 6% in August, according to investors.

Although Mr. Hunter had fared well, many traders say he was acquiring positions that were too large to get out of if the market turned -- including a bullish bet on winter gas. Amaranth won't detail its positions or his trading strategy, so it is unclear exactly what hurt Mr. Hunter so badly last week. In recent weeks, people familiar with the transactions say, Amaranth bought MotherRock's gas positions in an attempt to cancel some of its trades and reduce its market exposure.

Expectations of a warmer-than-average winter are rising. Last week, the National Oceanic and Atmospheric Administration said the El Niño weather phenomenon has formed in the Pacific Ocean. That typically means warmer winters in the U.S. and lessens the threat from hurricanes in the Gulf of Mexico. All this, and the recent fall in crude oil, helped to batter gas prices.

Amaranth has scrapped plans relayed only a month ago to investors to offer them a separate energy-only portfolio.

Congress, meanwhile, is jumping into the debate on whether hedge funds exacerbate volatility. The Commodity Futures Trading Commission argued in a 2005 report that hedge-fund trading didn't increase volatility and even improved the functioning of the markets by giving energy firms more trading partners. A recent report by the Senate Investigations Committee contended energy markets were badly underpoliced. It cited an explosion of trading on electronic-trading systems and over-the-counter platforms over which the CFTC has no authority -- and in which Mr. Hunter and other big traders are extremely active.