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Amaranth Updates

Date: Wednesday, September 20, 2006
Author: Bloomberg.com

Amaranth Hedge-Fund Losses Hit 3M, San Diego County (Update1)

By Jenny Strasburg

Sept. 20 (Bloomberg) -- Amaranth Advisors LLC, the hedge fund that lost about $4.6 billion in the past month, has left 3M Co., San Diego County's retirement fund and Goldman Sachs Group Inc. with investment declines.

The $9.2 billion pension fund of 3M, the maker of Post-it Notes as well as electronics and cleaning products, put less than 1 percent of its assets in Amaranth, according to Jacqueline Berry, a spokeswoman for the St. Paul, Minnesota-based company. The $7.2 billion San Diego County Employees Retirement Association invested $175 million in 2005.

``There are a lot of issues here,'' Dan McAllister, San Diego County's treasurer and a pension-fund board member, said today in an interview. ``This will spark activity by Congress, or by regulators, for some oversight of an area that has not been watched.''

Amaranth, which earlier this year managed $9.5 billion, was hurt by wrong-way wagers on natural-gas prices, the largest hedge-fund meltdown since Long-Term Capital Management LP in 1998. The setback left the Greenwich, Connecticut-based fund manager down about 35 percent, or $2.6 billion, for the year.

Investors in Amaranth included fund-of-funds managed by Wall Street banks including Goldman Sachs Group Inc., Morgan Stanley, Credit Suisse Group and Deutsche Bank AG, according to U.S. Securities and Exchange Commission filings.

Morgan Stanley's $2.3 billion Institutional Fund of Hedge Funds had about $126 million, or 5.48 percent of its assets, invested in Amaranth as of June 30, according to regulatory filings. Goldman Sachs Dynamic Opportunities Ltd., a London-based fund that invests in other hedge funds, yesterday said losses from an investment whose description fits Amaranth would cut as much as 3 percentage points off its return this month.

Max Re Capital

Max Re Capital Ltd., a Bermuda-based reinsurer, may also be a casualty. The company said today third-quarter earnings will be reduced by $35 million because of losses from hedge-fund investments. Max Re didn't disclose which hedge fund caused the losses, and spokeswoman Sheila Gringley didn't respond to a phone message seeking comment.

Connecticut Attorney General Richard Blumenthal said he's examining Amaranth's losses.

``We are taking some initial steps to investigate what went so terribly wrong, whether there was a truthful and accurate disclosure to investors,'' he said today in an interview.

Tom Carson, a spokesman for U.S. Attorney Kevin O'Connor in Connecticut, declined to comment, as did Bryan Sierra, a spokesman for the Justice Department in Washington.

Natural Gas Selloff

Natural gas futures have plunged 17 percent this month. The losses may have been exacerbated by Amaranth's attempt to exit bets on rising prices, said Robert Van Batenburg, head of research at Louis Capital Markets LP in New York.

``The whole debacle has left Amaranth trying to unwind its positions,'' he said.

MotherRock LP, a $400 million fund run by former Nymex President Robert ``Bo'' Collins, shut last month after unsuccessful bets on the direction of natural gas.

Both funds attempted to profit from spreads, or discrepancies in price, between different gas-futures contracts.

Shares of companies in which Amaranth invested have also been hurt.

The stock of Cinram International Income Fund, a Toronto- based maker of digital-video discs, fell 5.4 percent earlier this week on concern that Amaranth would sell its 15 percent stake. The shares rose 55 cents to C$22.15 at 1:15 p.m. in Toronto after the Globe and Mail reported Amaranth had received bids for its holdings.

`Too Good'

Counsel Corp.'s stock has dropped 6.9 percent this week. The investment firm, also based in Toronto, said in a Sept. 18 filing with Canadian regulators that Amaranth proposed selling its 34 percent stake.

The San Diego County pension board invested in Amaranth based on recommendations from Norwalk, Connecticut-based Rocaton Investment Advisors, board member McAllister said.

``We are aware of the Amaranth situation, and we are in dialogue with our clients,'' Rocaton spokesman Todd Miller said, declining further comment.

Hedge-fund investors should take Amaranth as a warning to do more and better homework before trusting money with a fund, Robert Schulman, chief executive officer of Tremont Capital Management Inc., a Rye, New York-based investment firm.

``Investors need to understand the risks,'' he said.

McAllister said the pension fund was led to believe by Rocaton that the Aramanth investment would reduce its risk.

``If it looks too good to be true, maybe it is,'' he said.

To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net

Amaranth Transfers All Energy Trades to Third Party (Update2)

By Katherine Burton and Matthew Leising

Sept. 20 (Bloomberg) -- Amaranth Advisors LLC, the hedge fund whose wrong-way bets lost about $4.6 billion this month, reached an agreement to transfer all of its energy trades to an unidentified third party, according to a letter sent to investors.

Nicholas Maounis, Amaranth's founder, said in his letter, a copy of which was obtained by Bloomberg News, that more details will follow ``shortly.'' The Greenwich, Connecticut-based firm was in negotiations with Citadel Investment Group LLC as of late yesterday, two people with knowledge of those talks said.

Amaranth was forced to unload the trades after swings in natural-gas prices last week turned it into the biggest hedge fund meltdown since Long-Term Capital Management LP's 1998 collapse. By transferring the bets, Amaranth would stem its losses and the new investor would be at risk of any further declines in the gas market.

``Potentially, they bought at a very good price,'' said Mark Williams, a finance professor at Boston University and former risk manager of electricity trader Citizens Power. ``If they have longer time horizon and they can withstand the volatility and the short- term fluctuations, they then have a good chance of making some serious cash.''

Amaranth spokesman Shawn Pattison declined to comment. A call to Scott Rafferty, managing director at Citadel, wasn't immediately returned.

`Risky Business'

Some of Amaranth's energy investments consist of positions in gas futures, options and over-the-counter contracts that would gain in value as prices rise, according to one person with knowledge of the situation.

Amaranth, which made so-called spread trades that aim to profit from price discrepancies among different contracts, was at least the second hedge fund to be rocked by bad investments in natural gas. MotherRock LP, a $400 million fund run by former New York Mercantile Exchange President Robert ``Bo'' Collins, closed last month.

``It's certainly a reminder that investing in certain hedge funds is a risky business,'' Securities and Exchange Commission Chairman Christopher Cox told reporters yesterday. ``It's not for mom and pop.''

So-called funds of funds that invested with Amaranth may bear much of its losses. Goldman Sachs Dynamic Opportunities Ltd., a London-based fund, reported yesterday that it sustained losses on an investment whose description fits Amaranth. The fund's shares fell 3.7 percent yesterday and are down 1 percent today.

Amaranth's Investors

Morgan Stanley, Credit Suisse Group, Bank of New York Co., Deutsche Bank AG and Man Group Plc. all run funds of funds that had investments in Amaranth as of June 30.

The $9.2 billion pension fund of 3M Co., the maker of Post-it Notes as well as electronics and cleaning products, had less than 1 percent of its assets in Amaranth, said Jacqueline Berry, a spokeswoman at the St. Paul, Minnesota-based company. The $7.2 billion San Diego County Employees Retirement Association invested $175 million in Amaranth in 2005.

Amaranth was founded by Maounis, a University of Connecticut finance graduate. After working at Greenwich-based Paloma Partners for 10 years, Maounis, 43, left to found Amaranth with 27 employees and $450 million in 2000.

The firm occupies a beige, four-story office next to a pond and manicured lawn with a fountain in Greenwich, home to more than 100 hedge funds, private pools of capital that allow managers to participate substantially in the gains on clients' investments. The building houses a gym and a game room, with pool tables for employees.

After starting in convertible-bond trades and betting on stocks of merging companies, Maounis expanded into energy, hiring former Deutsche Bank trader Brian Hunter. As of June 30, energy trades accounted for about half of the capital in Amaranth's funds and generated about 75 percent of their profit.

Controls Needed

Earlier this month, Amaranth bought a portfolio of gas trades from Amsterdam-based ABN Amro Holding NV, which itself had taken them over from MotherRock. It was Hunter, 32, who orchestrated the bets that triggered Amaranth's losses.

``If one is speculating in that kind of market, there's going to be some downside risk,'' said Shannon Burchett, who traded oil for JPMorgan Chase & Co. and Citigroup Inc. in the 1990s and now runs an energy consulting firm in Dallas. ``They should have the controls and risk management strategies in place to mitigate those kind of outcomes.''

To contact the reporters on this story: Matthew Leising in New York at mleising@bloomberg.net ; Katherine Burton in New York at kburton@bloomberg.net