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Amaranth's Losses Top $6 Billion

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Amaranth Advisors LLC, the hedge fund firm that stumbled over massive wrong bets on natural gas futures, said late Wednesday that its losses had climbed to more than $6 billion, or 65 percent of the assets it claimed at the end of August.

In a letter to investors, Amaranth founder Nicholas Maounis said the Greenwich, Conn., firm had handed over its energy portfolio to outside firms to "avoid termination of our credit facilities and the risk of a consequent forced liquidation by our creditors."

The letter shed new light on the turn of fortune for Amaranth and Maounis. According to hedge fund executives, Maounis had attended a Goldman Sachs-sponsored golf weekend less than two weeks ago in Arizona, where they said he was chatting about buying a private plane, seemingly oblivious to any imminent implosion.

The next week, Amaranth came undone. Natural gas prices plunged 12 percent during the week of Sept. 11 in the absence of a hurricane and with storage tanks brimming. As a result, Amaranth suffered what Maounis called "significant" losses in its positions -- big enough to trigger margin calls, he said. Margin calls are repayment demands from creditors that come when a firm's equity falls below certain thresholds.

To avoid default, Amaranth scrambled to raise cash, but given the size of its natural gas positions, that was difficult to do without driving down the value of its assets even further. So Amaranth was forced to transfer its entire energy portfolio to a "third party" at a deep discount, the letter said.

Maounis did not say who the third party was, but energy hedge fund managers say the portfolio was taken over by New York-based J.P. Morgan Chase & Co. and Chicago-based hedge fund Citadel Investment Group LLC.

Amaranth was also forced to sell off other securities "to avoid defaults" with trading counterparties, Maounis said in the letter. He said that for the year, the fund's assets were down 55 percent.

The forced sales succeeded in scaling back the firm's debt. Maounis said it had $1.30 in borrowings, or leverage, for every dollar of equity, down from the approximately $4.30 the fund reported in June. Both numbers are far below the more than 50-to-1 debt-to-equity ratio the hedge fund Long Term Capital Management LP had when it collapsed in 1998.

Amaranth must still face demands from its unhappy investors, many of whom have been trying to pull out of the shriveling fund. Maounis said he would hold a conference call with investors today and meet with others one-on-one next week. Monday, the day Amaranth revealed its losses, was the deadline for investors to request October redemptions, and Maounis said the firm was "evaluating" the requests received.

Many people in the hedge fund industry speculated that Amaranth would need to be taken over by another firm to avoid crippling withdrawals by investors. Maounis said his firm was "determined to earn back its investors' trust."