Late night procrastination bears fruit. This morning that's a Wall Street Journal article on the mostly orderly wind-up of Amaranth's energy position. The surprise is the speed and motivation for Citidel and J. P. Morgan to pick up the scraps of the wayward hedge fund. Sayeth Gregory Zuckerman of the Journal (subscription required):
Citadel and J.P. Morgan employed their risk-management systems to estimate the investments' value. Their conclusion: Once transferred from Amaranth, the trades would be more valuable than the market assumed. The new owners would be able to hold them until they proved to be winners, in part because each was bigger than Amaranth and so could afford to wait. J.P. Morgan and Citadel also felt they could hedge, or reduce the risk of the trades, through other investments.
What entrances me about this passage (aside from the lateness of the hour, of course) is the exploration of investment horizon and valuation. Unleveraged, unburdened by margin calls, Amaranth's bets might yet pan out, particularly now that they have been picked up for pennies on the dollar.
This is an important point that should be considered by the doom-sayers. There are established players out there who can and will play salvage team for blown short term bets that, but for timing, could have proved winners. The Journal continues:
To reduce some of their risk, the partners immediately moved to sell some of the investments after concluding that the energy market wasn't buckling, despite worries about ripple effects from Amaranth's woes. Willing buyers quickly emerged. Some were J.P. Morgan's investor clients. Others were traders on the other side of Amaranth's bets eager to cash out and pocket their winnings.
Within days, the firms had sold enough of the portfolio to shift more than 50% of its risk to others, according to someone close to the matter.
The article takes up a subject I will revisit in the belated second part of my long-winded discourse on private equity and hedge funds: timing and its effect on investment decisions. Take note my fellow late-nighters: There are risk hungry players in the market who can ride out the storm. The last sentence of the Journal article is a real keeper.