Amaranth Hedge Fund Equity Portfolio - A Quick Look
This spreadsheet was posted yesterday by stock guru Bill Cara and shows Amaranths equity portfolio as of 6/30/06. While this was not the section of the portfolio that Brian Hunter controlled an review of the buys and sells that took place in the past week show how bad the liquidity crunch at Amaranth had become.
First we took a look at the top ten holdings as % of the portfolio on 6/30:
SPY US - 127.23
GG US - 30.22
S US - 19.99
HUM US - 53.70
RAIL US - 55.51
SEA US - 10.16
IMA US - 28.23
FE US - 54.21
OKE US - 34.04
UNH US - 44.78
STJ US - 32.42
DADE US - 41.64
The top ten positions accounted for 23% of the entire equity portfolio of about 1,600 total positions. The SPY we can ignore, it’s just an index.
They bought GG a gold mining operation when gold was at $600. The stock had no serious moves even as gold peaked. As the metal fell back down the stock started to decline. Although there were no serious volume spikes (they didn’t hold enough to cause them) if they had to sell out of this position, it would have been at a big loss. They bought at $30 and stock is bottoming out at $23 right now.
Most of the top ten it would be just speculation as to what they did with the positions. A spot check of volume doesn’t show anything obvious for: S, HUM, FE, UNH, STJ, and DADE. Likely they would have sold off HUM (bought at $53 currently at $67) if they were still holding it because of the large gain on that position. The volume of the above stocks in high enough that even if Amaranth dumped it would be a small blip.
Some of the other stocks were more thinly traded and we can see from them what Amaranth dumped and when. RAIL a railcar manufacturer, it had an average daily volume of 355K but on September 15th, volume jumped to a little over 1m.
This is the pattern we see from most of the Amaranth dumpings, they took place on the 15th and the 18th when the letter to investors was sent. They may have sold on the 15th to get some breathing room once the energy disclosures hit. If that’s the case they grossly misjudged the amount of liquidity they would need to survive once the letter was made public and then were forced to sell even more frantically on the 18th to survive.
SEA, Star Maritime Acquisition, a speculative firm without significant operations was an obvious dump. With average daily volume of 92k, Amarmath dumped 2.5m shares on the 18th at a slight loss.
The other top ten holdings that showed an uptick in trading volume on those days are IMA and OKE, which may not have been related to Amaranth.
The liquidity crunch was so severe that Amaranth had to not only get rid of the profitable position but several break evens and losers just to survive.
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As investors hurt by Amaranth this month sort through the damage, here are some principles they may want to have in mind:
It goes without saying that a good hedge fund investor has to pick good funds to invest in. The key, though, to success in this business, is not to choose the best performing managers, but actually to evade the frauds and blowups.
Frauds in this business can take on the form of a misappropriation of funds, as in the case of Cambridge, run by John Natale out of Red Bank NJ, or a misreporting of returns as in the case of Lipper, or Beacon Hill, or the Manhattan Fund, or a host of others.
Blowups usually occur when a single person at the hedge fund has the power to become desperate and "bet the ranch" with leverage. The classic example of this week of Amaranth. Amaranth’s investors will be seeking answers to questions including: to what extent did leverage and concentration play a role in recent out-sized losses.
With both frauds and blowups, contrary to public opinion (and myth), size does NOT matter: Beacon Hill was $2 Billion, Lipper was $5 Billon, Amaranth was $9 Billion).
How do we avoid these two pitfalls of investing in hedge funds?
The answer is long and complex. It takes years to walk on the high wire and not fall off. If you're a long term hedge fund investor and you haven't been burned by one or both of these, you've been either incredibly skilled or incredibly lucky. I should know, for I have been burned by both of these. We have invested billions of dollars in hedge funds over the last ten years in this business. We have done well despite our battle scars and thankfully we have been blessed with a lot of good luck from above.
Suffice it to say that this should be the main question investors should be focused on as they interview and select hedge funds to entrust their dollars to.
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