May 19 (Bloomberg) — A commodities hedge fund advised by Brian Hunter returned 17 percent last month using a strategy similar to one the energy trader relied on at Amaranth Advisors LLC and that led to its collapse in 2006.
The Peak Ridge Commodity Volatility Fund, which seeks to profit from price differences in the natural-gas market, has gained 138 percent since starting on Nov. 13, according to an investor letter obtained by Bloomberg. The HFRX Global Hedge Fund Index fell 2.4 percent during the same period, according to Hedge Fund Research Inc. in Chicago.
Peak Ridge Capital Group Inc., a private-equity firm in Boston, hired Hunter last year as a consultant after his bets on natural-gas price spreads triggered $6.6 billion of losses at Amaranth, the most by a hedge fund. In 2005, his trades generated $1 billion in gains for the Greenwich, Connecticut- based firm.
“To have lost that amount of money and get back into the market with a similar-type trade takes a lot of confidence, if not arrogance,” said Kent Bayazitoglu, an analyst at energy- consulting firm Gelber & Associates in Houston.
Peak Ridge Chief Executive Officer Michael McNally declined to comment, as did Brian Maddox, a New York-based spokesman for Hunter.
The fund uses options contracts, which give users the right to buy or sell a security at a future date and at a preset price. It bet in November that natural-gas contracts for March 2008 would settle at a “small” discount to April because inventory was adequate to meet winter demand, according to the investor letter.
The March contract traded in New York settled at $8.93 per million British thermal units on Feb. 27, a 1.5 percent discount to the April contract, according to data compiled by Bloomberg. The March contract traded at an average premium of 27 cents over April in November, meaning Peak Ridge was betting the market would turnaround.
Natural-gas prices have risen 56 percent so far this year, making them the best-performing commodity.
In 2006, Hunter had bet that the difference between the price of natural gas for 2007 March and April contracts would widen. Instead, the spread narrowed, creating losses for Amaranth.
Peak Ridge uses Hunter, 33, to devise trading models and strategies. The company also bought the assets of Solengo Capital Advisors, a hedge-fund firm that Hunter tried to start six months after Amaranth’s collapse in September 2006.
Hunter also is the target of a $30 million fine proposed by the Federal Energy Regulatory Commission on July 26 in connection with alleged manipulation of natural-gas prices in 2006. A federal judge last December rejected a bid by Hunter to prevent FERC from taking enforcement action against him for trading in natural-gas futures markets.
Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.
To contact the reporter on this story: Saijel Kishan in New York at firstname.lastname@example.org
Last Updated: May 19, 2008 00:01 EDT