Morgan Stanley is suing private equity and investment firm Peak Ridge Capital, alleging the firm failed to cover more than $40 million in losses from its commodities hedge fund, Reuters reported. Morgan Stanly contends that suffered the losses due to bad bets Peak Ridge placed on natural gas, and that the firm did not maintain proper margin requirements. Peak Ridge and the fund in question – Peak Ridge Commodities Volatility Fund Series – are both operated by Boston-based private equity firm Avolte, Reuters reported.
(Reuters) – Morgan Stanley on Monday sued Peak Ridge Capital Group’s commodities hedge fund, alleging that the fund failed to cover more than $40 million in losses stemming from bad bets on natural gas.
Morgan Stanley contends it suffered the losses in connection with the Peak Ridge Commodities Volatility Master Fund, after Peak Ridge failed to maintain proper margin requirements and went into default.
The suit could stir memories of the collapse of the multibillion-dollar Amaranth fund in 2006. Brian Hunter, the natural gas trader behind the $6 billion loss that buried Amaranth four years ago provided trading strategy advice to Peak Ridge as the fund was starting out.
The lawsuit filed in the U.S. District Court in Manhattan said Morgan Stanley had tripled the margin requirements for Peak Ridge over just 10 months due to the increasing level of risk the fund had taken on since starting to trade through the broker-dealer in Sept. 2009.
Natural gas prices surprised many by soaring by 20 percent in June of this year, catching many traders on the wrong side of the market.
Morgan Stanley said that on June 4 alone, the account lost $9.8 million, or about 39 percent of its value. This forced a final increase in margin requirement that Peak Ridge failed to meet.
Morgan Stanley said it took control of the fund’s positions from June 10 and undertook several transactions in the following two weeks “in order to reduce risk and stabilize the book in an orderly fashion”.
The bank estimates its eventual losses from backstopping the trades to be $40.6 million, before it sold the fund’s remaining positions, hedges and cash balance to “a Morgan Stanley affiliate in an arms-length transaction.”
Peak Ridge was not immediately available to comment.
ECHOES OF AMARANTH
The head of a fund-of-hedge-funds that specializes in investing in natural gas trading funds said Peak Ridge had been very successful in 2008 but had been losing money since then.
“They made a lot of money one year, then lost it all and then some the next year,” said the manager, who asked not to be identified.
Hunter of Amaranth fame worked as a consultant for Peak Ridge — devising trading models and strategies — after it purchased the assets of his Solengo Capital Advisor hedge fund firm in 2007.
The Canadian trader had struggled to establish his own fund after regulators launched investigations alleging market manipulation during his time at Amaranth. Hedgefund.net reported in February that Hunter had stopped working with Peak Ridge at some point in 2008.
The fund of funds manager said Peak Ridge’s assets under management never exceeded $1 billion, adding that Hunter is back in his native Calgary investing in physical oil and gas assets with his own fund.
The National Futures Association was unable to confirm if Peak Ridge has closed its commodity funds. On the NFA’s website the Peak Ridge Commodities Volatility Fund Series and Peak Ridge LLC are both registered as being operated by Avolte LLC — a private equity fund in Massachusetts.
Avolte was not available for comment.
SHORTS CAUGHT SHORT
Even by the volatile standards of the natural gas market, many traders were shocked by the price movements in June.
Funds that were betting natural gas
SandRidge Capital, a $1 billion natural gas fund led by Texas-based trader Andy Rowe, fell by around 15 percent in the first two weeks of June according to performance estimates from a hedge fund tracker.
After hitting their surprise peak in June, natural gas prices then slid by almost 40 percent to a low of $3.20 mmBtu last month.
By Jonathan Stempel and David Sheppard
(Additional reporting by Barani Krishnan; Editing by David Gregorio)