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February 3, 2014

Banging the Close

In 2006, energy trader Brian Hunter was a star inside Amaranth Advisors, but a series of risky and ethically challenged trades brought the Connecticut hedge fund to its knees. In Scott E.D. Skyrm's forthcoming book "Rogue Traders"-his follow-up to "The Money Noose"-the author, a former trader, takes us inside the world where betting on the weather can bring down the house.

By Scott E.D. Skyrm

Brian Hunter was Amaranth Advisor's rock-star energy trader. A self-described "numbers guy," he was also a family man who never missed an opportunity to talk about his two sons. But he claims to be a very private person, and if someone rings his doorbell and asks to speak to Brian Hunter, he'll tell that person himself the Brian isn't home. On top of all that, the Calgary, Canada, native is adamantly opposed to having his photograph taken.

Hunter first became famous for an enormous bullish bet on natural gas prices in 2005. Had he been wrong, this story might be drastically different, but Hunter knew what he was doing, and two hurricanes later, he had made in excess of a billion dollars for Amaranth. Hunter reportedly took home between $75 million and $125 million for himself that year. One magazine, in fact, listed him as one of the top 30 highest-paid traders of 2005.

Having a high-flying trader is good for business, and by the end of April 2006, Amaranth's assets under management swelled from $6 billion to $8.7 billion. And that growth was entirely due to Brian Hunter.

 

THE WINTER AND SUMMER STRATEGY

When it came to Amaranth's natural gas trading strategy, the public line the Greenwich, Conn., hedge fund advertised was pretty simple. They sought "to hold winter month positions and short summer month positions." In just a few quick lines, it summed up Hunter's entire strategy, and it was completely true. Hunter liked being long winter natural gas and short the summer contracts.

One reason Hunter liked the strategy so much-aside from the fact that it worked so well-was that, in his mind, it was a pretty safe bet. The typical narrow spread between the winter and summer prices would widen considerably if winter natural gas prices suddenly increased. If there was some type of weather event (hurricanes to you and me), even if it occurred in the summer, winter natural gas would generally spike higher than the summer price.

However, Hunter did have another trading strategy that worked pretty well too. It involved the idea that given enough volume, a trader could push around the market for a very short period of time. Especially right before the expiration of a futures contract. Suppose there was a massive sell-off in a futures contract at the end of the day. Now, suppose that sell-off happened on the last trading day of the New York Mercantile Exchange natural gas futures contract. The bigger the sell-off during the last few minutes of trading, the bigger the price drop.

There's a name for this trading strategy-what might be better termed a manipulation strategy. It's called "banging the close." Technically, it's illegal. Those who get away with it typically hide their intentions very well and disguise their trades. However, Hunter, despite his intelligence and experience-or perhaps because of his intelligence and experience-didn't feel the need to disguise what he was doing.