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Canadians shrug off the Amaranth meltdown


Date: Monday, October 2, 2006
Author: David Clarke, InvestmentNews.com

TORONTO - The problems of Amaranth Advisors LLC began in their country, but Canadians have taken them in stride.

The Greenwich, Conn.-based hedge fund saw more than 60% of its assets vanish last month because of investments in natural gas made by Brian Hunter, an Amaranth trader based in Calgary, Alberta.

Nick Maounis, Amaranth's founder and chief executive, was so proud of Mr. Hunter's natural-gas trading strategy that he told investors in August: "We believe opportunities in the natural gas market remain attractive."

Then the weather changed and, with it, natural gas prices. Last month, Mr. Maounis warned investors that the firm's "multistrategy funds sustained significant losses in their energy-related investments following a dramatic move in natural gas prices."

Amaranth's woes affected U.S. investors more directly than the collapse last year of now-bankrupt Portus Alternative Asset Management Inc. of Toronto. Indeed, the Securities and Exchange Commission is on the case. "From an enforcement perspective, it's really whether investors received misleading information," SEC member Annette Nazareth said last Monday.

There has been no reaction from Canadian regulators.

Unlike their U.S. counterparts, Canadian hedge funds have to register with regulators. And even after Portus, Canadian regulators have "pretty much decided that hedge funds do not require their own separate regulatory regime," said David Wilson, chairman of the Ontario Securities Commission in Toronto (InvestmentNews, March 10).

"We have a full group of rules that apply to all those sorts of vehicles," he said. "So we think the existing rules, by and large, if they are properly used and properly implemented and complied with, will do the job."

In general, Amaranth "is very much a one-off where the strategy has gone wrong for one individual trader rather than any kind of systemic problem," said Gordon McAra, a spokesman for the London-based Alternative Investment Management Association Ltd.

"Well, Amaranth is certainly leading to discussion," said Jim McGovern, chairman of AIMA Canada, a Toronto-based chapter of the global association. He also is president and chief executive of Toronto-based Arrow Hedge Partners Inc.

Although Mr. McGovern declined to comment directly about the SEC probe, he did say: "Arrow Hedge didn't invest in Amaranth. They were very volatile, and they made no secret of it. "Anyways, registration would have made no difference in this case."

Fortunately for hedge funds, they still have fans.

"We don't need to reduce our exposure to hedge funds," Henri-Paul Rousseau, chief executive of Caisse de depot et placement du Qubec, a Montreal-based pension fund that invested with Amaranth, told reporters after a speech Sept. 21.

"We are satisfied with the percentage we have. We have a very diversified portfolio," Mr. Rousseau said.

As of Dec. 31, the fund had about $3.5 billion (U.S.) in hedge funds out of total assets of $109.4 billion. The figure includes $72.5 million invested with a unit of Amaranth.

Industry experts think that other large Canadian pension funds have substantial investments in hedge funds. Few acknowledged any dealings with Amaranth, however.

Officials at the Ontario Teachers' Pension Plan and the Ontario Municipal Employees Retirement Board, two Toronto-based pension funds, declined to comment to reporters about whether they had any holdings with the hedge fund.

"When there are events in the market, it generally brings discipline. I'm convinced that people in the industry don't want overregulation, and I would think they will start policing themselves very quickly," Mr. Rousseau said.

"Hedge funds are an institutional sector," he said.

"It's necessary to have regulations that govern funds sold to individuals, and most countries have them. When you talk about hedge funds, institutions should be responsible for their own activities," Mr. Rousseau said.

"I think the sophisticated institutions are capable of regulating themselves, so the concern should be on the retail end of the market," said Mark Rosen, co-founder of Accountability Research Corp., a Toronto-based forensic-accounting firm.

Are retail investments in Amaranth the adviser's fault? "It was hardly the stock for widows and orphans," Mr. McGovern said.

"If there's anything we've learned to this point, it's that Canada seems to think it's immune to the vices that plague the U.S. market, and we generally refuse to take heed," Mr. Rosen said.

"We can't even properly address our homegrown fiascos like income trust accounting," he said, "so the chances of a regulatory reaction here to Amaranth are virtually nil."