US-based hedge fund Amaranth Advisors LLC has reportedly lost nearly $5 billion in natural gas futures trading during the last one week. The firm has reportedly told its investors that it is aggressively reducing its natural gas exposure to prevent further loss of capital.

Amaranth was one of the largest US hedge funds with assets of around $9.5 billion. Investors in Amaranth's funds include investment funds managed by Deutsche Bank, Credit Suisse and Morgan Stanley.

The fund had heavy exposure, reportedly more than 50 per cent of total assets, in the energy markets. Analysts say that the fund was betting on a sustained rise in natural gas prices because of hurricane-related supply disruptions and other factors.

Energy prices have declined significantly in the last one month. The last one month has seen a sharp fall of nearly 20 per cent in crude oil prices. Natural gas prices have also followed a similar trend, declining more than 10 per cent over the last week alone. The severity of the fall has taken most traders by surprise and many have reportedly made heavy losses.

Hedge funds are not open to the public for investment and are not required to disclose their investments or trading strategies. In earlier days they used to hedge their long positions with short positions in the same or different instruments and hence the name hedge funds.

Investment strategies of hedge finds have become much more diverse now. They are heavy traders in commodity futures and other derivatives. They also buy bonds and assets of financially troubled companies and sometimes even buy out entire companies and attempt to turn them around.

Hedge funds based in the US are estimated to have more than $1 trillion in assets under management. Top names include Bridgewater Associates, DE Shaw, Goldman Sachs Asset Management and Farallon Capital. Incidentally, Farallon is a major investor in Indian stock brokerage IndiaBulls - including its real estate venture.